First of all, wow, our economy was on the verge of surging this year. Then the housing bubble burst. The bursting has not stopped the economy at this point. Can you imagine what it would have been like if another 250,000 houses were being built, furnished, landscaped and filled with new exciting toys! I believe the housing issue will take more than 1% from GDP this year, yet we grew at 4.9% last quarter, that is an economy ON FIRE!
However, we do have the housing issue and the Fed needs to act more aggressively so we can turn the corner. I hear many talking heads saying lower interest rates is what caused the problem. LOW INTEREST RATES DID NOT CAUSE THE PROBLEM. The problem was caused by widespread loan fraud by
un-licensed loan officers no longer in the business. It was not only their fault, we all owe a little responsibility. Why is the loan fraud the major cause? Buyers bought homes they could not afford. People that should not be investors, became investors. Demand swelled, thus driving prices higher. Lenders then made it easier to get wacky financing. Appraiser, the supposed check and balance, gave ridiculous valuations. Even after the peak in 2005, appraiser let homes continue to appreciate. It was over but some buyers and their real estate team ignored the end, stretching the bubble even further. As it stretched into 2007, I thought wow we made it, 2006 was the slow down. "We are 18 months from the peak, supply was dropping demand was increasing," I too was fooled. Then the first sub-prime blow up in March! It was an eye opener. But most people would not fully grasp what was happening. It was hard for me to
convence people, after being the naysayer through most of 2006.
Today there are new steps being taken to stop the growth of demand. Too bad this wasn't done in the peak, instead they waited till we were on the way down to make it worse. However, appraisers have stricter guidelines, lenders have new guidelines, many of the loan products available before are just gone and demand is down with supply growing.
I was talking with one of the commercial experts at the office yesterday, Tim
Theiss. Our discussion was about investors and what was then and where we are today. We both heard many investors say, "let's do $0 down or very little down" for our investment property. You see, a real investor has 20-30% to put down and understands that is needed to keep the cash flow positive. The new guidelines are putting the real investors back in the saddle for investing. No more low down investor lending.
I started this blog off with the Fed needs to lower further. They do. Many talking heads are saying that was the problem, it wasn't. It was loan fraud and ridiculously eased guidelines that was the problem. You see today, we have a supply and demand imbalance. To fix that we need to decrease supply and increase demand. The way to decrease supply is to stop the foreclosures (another day), stop building new homes and rent those vacant properties. To increase demand we need to lower prices, lower interest rates and create stability in the marketplace.
By lowering prices and lowering interest rates demand will jump. Both of these will bring more buyers into the pool of available buyers for a specific product by increasing what they can buy and how much they can spend. By making those two changes, buyers will step back into the market and make purchases. As demand picks up, stability will begin to regain strength in the market place.
Why will this not restart the problem? Because these buyers will not be getting teaser rates. I believe most will opt for the 30 year mortgages, since the pricing is close to the same as 3, 5 and 7 year pricing. Thus giving them long term comfort in the loan. Now, the lending side will be more
strict, also keeping buyers from getting into the wrong loan or over paying for a home.
Lower interest rates is not the problem, it is the answer!
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