I'm Not Whining About 'Declining' - A Contrarian's View Of The Adverse Real Estate Market

One of my favorite real estate bloggers had a post featured today on the Active Rain Social Network. This real estate professional is smarter, more experienced and more widely-read than most of us on the network. The post was well-written, incisive and thought-provoking.

So I think it's only natural that I disagree.

Lenn Harley calls the "Declining Market" policies so much blather.

I'm having a hard time understanding some of the logic in the post and in the "Amen" chorus of comments. After leaving three long-ish comments, I decided to avoid hijacking her post and to post one myself. That will give Lenn and other smart people the opportunity to publicly humiliate me...or at least just educate me. So, let me try my hand at what Lenn calls Hard Core Real Estate Talk.

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First, let's go the post that started it...

The always excellent Janet Guilbalt posted about a deal that went sideways because the investor changed the guidelines to require another 10% down from the buyer of a $1,300,000 home. Then Janet says this:

"Fewer people who can get loans = fewer buyers = more unsold houses = declining values. And there you have it...what is really causing our industry to remain at a standstill."

Huh? Our industry isn't "at a standstill". Prices are dropping, foreclosures are increasing...that's not standing still.

That's a contraction.

Nobody was complaining when record numbers of buyers were qualified to buy. Nobody was complaining when houses would have multiple offers within one hour. Nobody was complaining when home prices were skyrocketing.

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Wait a second! Lenn might have offered something in the way of complaint as recently as last June:

"We need for prices to go DOWN.  We need the housing prices to depreciate, deflate, lessen, lower, recede, slash, truncate, GO DOWN."

That's what's happening. The real estate market is like everything in life...it has seasons. There are times where the flowers bloom and there are times when the leaves fall. This isn't armageddon...this is just the other side of the hill.

Lenn reminisces in her post of the late 90's, when a Realtor could rely on any buyer that had good FICO scores. She then builds an arguments that people with great credit histories shouldn't be affected by the 'declining market' policies and lower loan-to-value ratios.

She's right...kind of. The FICO system has been a great predictor of a borrower's ability to pay since it was created...

BUT NOT ANYMORE.

There's evidence that LTV is the new FICO. Check out these quotes from Calculated Risk's recent interview of Wachovia bigwigs:

• "...when equity in the home approaches zero, behavior changes..."
• "their propensity to just default and stop paying their mortgage rises dramatically and I mean really accelerates up and it's almost regardless of how they scored, say, on FICO or other kinds of character, credit characteristics." (emphasis mine)

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I'm experiencing it first hand as the Hemet Home Loan Guy. I've seen ordinarily good people, even law enforcement officers, use their excellent credit as a free pass. Great credit is being used like medieval indulgences, and it goes like this:

• Make an offer to buy the home across the street that is WAY less expensive than the model match you bought three years ago.
• Get a friend or relative to sign a lease agreement saying that they'll be renting out the home you live in now.
• Move.
• Stop paying on your old house.

Turns out a high FICO pales in comparison to a good, old-fashioned downpayment in predicting a person's future behavior. Let's not be too wistful about a FICO score being the major criteria in getting a loan. That credit score system hasn't been tested by the sort of real estate downturn we're facing now.

That's why I am shocked when Lenn and her readers start turning on "The Institutions" for causing this mess. Like I said in my comments there, we're Americans...we like to let our institutions do our sinning for us. That doesn't mean we're not complicit.

Most of these same people would have cried bloody murder while the bubble was inflating if our institutions intervened, and if the government took action to stave off the rapid appreciation. (Most real estate professionals made enough money during the build-up to last an eight year recession...if they didn't blow it.)

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"I believe that the 'Declining Market Syndrome' is an obfuscation invented to give cover to lenders who suffered massive losses through loose lending standards."

If Lenn really believed that then she would lend out her own money to high FICO, high LTV buyers. Yes lenders suffered massive losses through loose lending standards. Cutting back is what ALL of us would do if careless spending got us in a heap of trouble. Anybody have a better idea?

To twist one of Lenn's passages:

THE INSTITUTIONS HAVEN'T FAILED ME.  

• Congress didn't fail me.
•      Fannie Mae didn't fail me.
•           Freddie Mac didn't fail me.
•                The mortgage companies didn't fail me.
•                     Wall Street didn't fail me.

Nobody has a responsibility to throw good money at risky investments. Janet's example is sad, but an exception. Most of the declining market value guidelines have been publicized well in advance and most people aren't buying $1,300,000 homes. And if they are, I can't feel all that bad that they have to have another $130,000 in their savings account to afford it...otherwise, why are they buying a $1.3 million dollar home?

In most California cities, the declining policies are very simple and make sense:

• 5% reduction in total Loan-to-Value. If it was 100%, now it's 95%.
• The appraisal must include 2 recent comparable sales in the last 90 days.
• The appraisal must include 2 active pending sales.

Do those changes seem like Draconian laws bent on destroying our economy, or does that sound like 'makes-sense' investing aimed at protecting consumers?

To top it all off, FHA doesn't even have a declining market policy...and has even increased their loan limits!

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The slowdown is not just a season, it's a healthy and good season.

Here are the benefits of the current real estate market contraction:

• Houses are affordable again for first-time buyers
• Investors can rent a home at a profit
• The fly-by-night real estate 'professionals' are quitting in droves
• The real pros, who care for their clients for the long haul, are gaining market share

I'm not saying it's easy. I'm not saying there aren't some awful stories out there of fraud, mortgage deception, and people losing their homes.

Heck, I'm upside down on my house, too!

But I'm NOT complaining. Real estate has been good to me. And to the smart money investors that held off for the last several years. And to the simple folk that just couldn't afford until now. They are out there and they need my help.

It's a great time for real estate.

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Related Articles:

• What's the Interest Rate Today? It's on your Cell Phone.
• California and the Terrible, Horrible, No Good, Very Bad Real Estate Market
• Investing in Hemet Real Estate...Good News and Bad News
• 7 Steps to Fix Your Credit

Looking to buy a home?

Joey Aszterbaum is the Hemet Home Loan Guy and a member of the Active Rain social network of real estate professionals. To buy or refinance your home in Hemet, Riverside County, or California visit www.HemetHomeLoans.com or call 951.571.5751