Nicole Lahti, Austin Texas Mortgage

I received another wave of emails last week from my investors announcing an increase to their minimum credit score requirement on government loans to a 600 FICO. Unlike small product differences amongst my investors, I refer to this sort of a change as a "mass exodus" as the flee of investors from certain loan products affects mortgages offered industry-wide. See below my description of a "mass exodus".

Recognizing this market shift, I called a Broker I work with who has a client (587 FICO) writing an offer to build a home. I explained I could easily write a prequalification letter for the client; however, the loan available for her today may not be around four months from now when the house is complete; and if it is, the lending requirements may be tougher to meet. Therefore, it may be smarter (and easier) to buy an existing home sooner.

His first question to me was, "Why aren't investors buying these loans if they're within FHA's underwriting guidelines?" And to that question, I offered my "mass exodus" answer.

Now, I'm not saying its impossible to buy a home if you have a FICO below a 600; however, these loan programs will become increasingly scarce and difficult to qualify for in the near future. Therefore, if you're sitting on the sidelines, now may be the time to move.

Banks Admit to Tighter Lending

The Federal Reserve noticed this tightening in its January 2009 Senior Loan Officer Opinion Survey of Bank Lending Practices. The survey found residential lending requirements have actually tightened over the last three months despite receiving plenty of taxpayer funds to stimulate lending.

Of the banks surveyed, 47.1% of banks indicated a tightening of prime loan lending standards; 48% indicated a tightening of non-traditional lending standards; and 50% indicated a tightening of subprime lending standards. Interestingly, not one bank indicated an ease in their credit standards on residential mortgage loans, or loans to large or mid-sized commercial or industrial firms.

Banks are not only hoarding TARP funds to pad their balance sheets, but also because lending during a recession is riskier as people and businesses find it harder to meet financial obligations. JP Morgan Chase economist Michael Feroli stated, "Most banks are tightening not just because of balance sheet constraints, but because credits are going to be less solid during this environment."

So What's a Bank Supposed to Do?

Sounds like banks are in a Catch 22 -- they're supposed to ease credit to stimulate the economy, but doing so could mean lending unwisely. Surely, Washington was smart enough to see this coming, right? New Treasury Secretary, Timothy Geitner, plans to unveil an overhaul of the financial bailout next week. I look forward to more accountability with how our taxpayer funds are being allocated (I've been pretty impressed with Citi's transparency); I'm just a little concerned that a bigger push for more lending could flood the market with more false liquidity. In my opinion, that's what happened post 9/11, which combined with Wall Street's irresponsibility, caused the bubble that's bursting today.

But hey, that's just my humble opinion. One thing is for sure, the more we evaluate how we're supposed to stimulate lending during these tough times, the more we realize there's no easy answer. All you can do as a player in real estate is see the writing on the wall of where the industry is headed, and shift how you do business accordingly.

Nicole's "Mass Exodus" Scenario

1. We start off with a good number of investors purchasing these "less attractive" loans on the secondary market.

2. For whatever reason (including risk), investors decide this pool of loans is no longer attractive and halt purchases of these loans on the secondary market.

3. The number of investors left to purchase these loans decreases.

4. The "lone ranger" investors begin absorbing all the market's risk as Loan Originators send them all these loans.

5. Investors realize absorbing all the market's risk isn't good way to manage their portfolios' risk, and they halt purchases of these loans as well.

6. With nobody buying these "less attractive" loans on the secondary market, originations stop.

I’m realizing more during this tough economic time the truth behind the age-old adage, “It’s not what you know, but who you know.” Last week I spoke with two clients looking for jobs in Austin in two different industries. In both conversations I realized I had great connections to aid in their job search, and made a warm introduction for them. Who knows if my introduction will end in jobs, but I can be assured my clients statistically have a better chance of landing a job through a warm introduction than if they contacted the company cold.

Enriching my network by connecting people wasn’t my “Ah-ha!” moment of the week, if it were, I’ve been sitting under a rock while everybody else took Little Black Book of Connections to heart. Rather, my light bulb moment came when I realized how being a Mortgage Advisor enriches my network faster because it allows me to be a people connector across industries.

Why Real Estate Professionals are Great People Connectors

The people I connect with the most in my job do not practice mortgage or real estate in Austin. My clients have jobs that span IT, education, hospice care and more. Therefore, during this tough economic time when many are searching for jobs, I (and other real estate professionals) can be a good contact for jobs in and outside of real estate for past clients, prospects, friends and family. Scrubbing my list of contacts for job descriptions and openings would be too cumbersome of a project; however, I regularly keep in touch with my clients and personal contacts, and know what they do for living, via my database and the social networking sites I use to connect with them. This makes it pretty easy to remind myself of the resource they are next time I connect with them or they run across my mind. I’m not trying to become a headhunter in Austin, but while many people I know are looking for work, understanding and engaging in what my contacts do for a living should become part of my daily life.

A Call to My Real Estate Friends

I encourage anyone in the mortgage or real estate business to make a more concerted effort to understand what past clients and personal contacts do for a living – you’re a better resource than you think when it comes to connecting people, especially now that conventional methods of searching for jobs aren’t as fruitful. Engage in conversations by not merely offering the obligatory “Good luck,” when people say they’re looking for a job; rather, jog your memory for a contact you have that may help in their job hunt. Even if you know your contact has no job openings, provide an introduction anyways and let them determine that – you never know what can come of a conversation between two people. One of the introductions I made for a client last week didn’t result in an opening with my contact’s employer, but did offer a lead on a job not yet posted with another company.

Advice for Job Seekers

For all you job hunting during this tough time, give your Realtor, Mortgage Advisor, Insurance Agent, Financial Advisor, etc. a call – we know a lot of people across various industries. Not to mention, we’ve all benefited from your business at some point in time, and should be available to help you now however we can.

I truly believe to whom much is given much is expected; therefore, if you’re blessed enough to have work during these tough times, serve others by supporting those who are trying to maintain their livelihood. Not just because it enriches your network, but well, because it’s the right thing to do.

State Farm announced yesterday it will no longer write new insurance policies or re-new any of their existing insurance policies in Florida. This change affects nearly 1.2 million customers in Florida who carry the following policies: homeowners, renters, condominium unit owners, personal liability, boats, personal articles, and business property and liability. This change will not affect auto insurance, life insurance, health insurance or financial services customers in Florida.

This decision comes after State Farm filed a request with Florida's Office of Insurance Regulation a 47.1% rate increase to their insurance premiums. The filing was disapproved on January 12th by Insurance Commissioner Kevin McCarty and the OIR.

State Farm cited a "significantly weakened financial position" caused by its inability to obtain approval for rate increases. Jim Thompson, president, State Farm Florida, said the insurer was left without options in the state. "Faced with steeply declining resources to cover future claims and expenses, State Farm Florida has little choice. This is not an action we wanted to take, but one we must take given the realities of the Florida property insurance market. We regret the impact this will have on our customers, employees and agents in Florida," he said in a statement. Thompson also cited state-mandated discounts also contributed to their decrease in revenue.

Florida residents insurance options are now domestic private insurers (currently hold 39% of the market), out-of-state carries (currently hold 24% of the market) and state-run Citizens (currently holds 18% of the market). State Farm Florida currently holds 19% of Florida's market.

Is there an insurance agent or attorney out there that can explain why the state mandates what carriers charge for premiums? Perhaps my opinion is too simplictic, but if my carrier increased my premium 47%, I'd find a new one. I know its more difficult finding insurance coverage in Florida, but it seems to me the state just made it the problem even worse.

It seems like not too long ago the buzz was vacancies were down and rents up as less people were qualifying to buy a home. This probably would've remained true had our economic woes contained themselves to just the housing sector. This was our original hope, and obviously not what has ensued. Now people are changing their living patterns as they begin to feel the effects of our recession.

A recent article in BusinessWeek stated landlords are being forced to offer steep discounts to fill their increasing vacancies. With unemployment currently sitting at 7.2%, roommates and families are beginning to move-in together to save money during our recession. This is a dramatic change as just recently the United States was reaching record lows in its average household size.

I can attest to this change, as I recently had my personal 4 bedroom duplex on the market for rent and had tribes of people interested in the unit -- the majority of prospects had 7-8 people living together. Knowing the wear-and-tear this would cause my property, I dropped the rent and marketed the unit as a 3 bedroom to get the vacancy filled quickly. The rent decrease was also brought on by the stiff competition apartment complexes offered with no credit checks and free month's rent.

The hardest hit with vacanies are high-rise luxury apartments. My guess is this has to do with their location in business districts suffering from higher unemployment, and because Americans are starting to reconsider the extra expense of luxury living.

AXIOMetrics, a Dallas-based apartment data company, assembled a list of the 25 large metros where the rate of rent declines accelerated most in the fourth quarter of 2008. Their study only included apartment rentals, not single-family rentals.

**Note: metro areas are ranked by "rent drop," the change in the absolute rate of rent growth. For example, if rental rates increased by 1% in the fourth quarter of 2007 compared to the third quarter of that year and fell by 2% in the fourth quarter of 2008 compared to the previous quarter, then the "rent drop" would be -3%. Confused? So was I at first, and it still doesn't make too much sense why they figure it like this. Nonetheless, here are the stats:

Metros with the Biggest Rent Drops

1. Salt Lake City -5.7%

2. Nassau-Suffolk (Long Island, N.Y.) -4.7%

3. Raleigh-Cary, N.C. -4.0%

4. New York-Wayne-White Plains, N.Y./N.J. -3.7%

5. Seattle-Bellevue-Everett, Wash. -3.5%

6. Portland-Vancouver-Beaverton, Ore./Wash. -3.2%

7. San Jose-Sunnyvale-Santa Clara, Calif. -3.0%

8. Charlotte-Gastonia-Concord, N.C. -2.9%

9. Oakland-Fremont-Hayward, Calif. -2.9%

10. Boston-Cambridge-Quincy, Mass. -2.8%

11. Santa Ana-Anaheim-Irvine, Calif. -2.8%

12. Los Angeles-Long Beach-Glendale, Calif. -2.7%

13. Oklahoma City -2.6%

14. Austin-Round Rock, Tex. -2.6%

15. Nashville-Davidson-Murfreesboro, Tenn. -2.5%

16. Atlanta-Sandy Springs-Marietta, Ga. -2.3%

17. San Francisco-San Mateo-Redwood City, Calif. -2.3%

18. Jacksonville, Fla. -2.2%

19. Minneapolis-Saint Paul-Bloomington, Minn. -2.2%

20. Memphis -2.1%

21. Las Vegas-Paradise, Nev. -2.1%

22. San Diego-Carlsbad-San Marcos, Calif. -2.0%

23. Birmingham-Hoover, Ala. -2.0%

24. Sacramento/Arden-Arcade/Roseville, Calif. -1.9%

25. Richmond, Va. -1.9%

Curious where Austin ended in 2008, and where we're headed? Well, keep these statistics in your back-pocket for the frequent economic conversations we are all experiencing.

Housing

December 2008 - Single Family Homes

• 1,299 was the number of homes sold, a 21 percent decrease as compared to December 2007
• $182,000 was the median price, a 4 percent decrease from December 2008
• $320,542,539 was the total dollar volume of properties sold, a 22 percent decrease from December 2007

2008 Year-End Totals

• $5,004,647,938 was the total dollar volume of single-family properties sold, a 21 percent decrease from 2007
• $189,500 was the median price, a 2 percent increase from 2007
• 20,199 single-family homes were sold, a 20 percent decrease from 2007

Vacancies and 2006 vs. 2008 Statistics

• Overall vacancies at 18% (office & industrial hit the hardest)
• November 2008 was the worse home sales month in 8 years
• Austin has lost almost 40% of its Realtors in the last 2 years
• Home listings increased 25% from 2 years ago
• Home sales decreased 26% from 2 years ago
• 2008 housing starts down 50% from 2006 (8,000 in 2008, 16,504 in 2006)

Employment

• 2008 unemployment ended at 4.8%
• Austin/Round Rock area expected to loose 2,800 jobs in 2009, taking unemployment to 6.1%
• Expected 90% decrease in job growth in 2009 (29,100 jobs added in 2008, only 2,100 to be added in 2009)

When Will the Local Economy Turnaround?

Nobody really knows yet, but here are a few projections:

• 2010 will add 11,000 jobs to the local economy
• 2013 will see a 5.81% increase in housing permits over 2008, and a 3.35% population increase over 2008

What's Great About Austin?

If you live in Austin you already know this, but the area has a great personality and ability to perserve its culture. Experts agree these qualities will continue to make Austin an attractive area, and help us fare better during this economic downturn than other areas.

Resources

December 2008 Multiple Listing Service report by the Austin Board of REALTORS® (ABoR)

Housing Crunch Reaches Austin, KXAN. January, 2009

U.S. Metro Economies, Global Insight. January 2009.

Forecast: Job Growth Down More Than 90%, KXAN. January 2009.

The Perryman Group, January 2009.