Ask the Expert: Howe


What a Virtuous Cycle Looks Like

We have spent so much time in the past several years talking about and hoping for a virtuous cycle that we felt it was important to clarify exactly what this cycle is.  For years we have been stuck in a vicious cycle. Real estate collapsed. This caused the job market to collapse. Job losses led to further housing declines. Vicious cycles are tough to break and this is exactly why our recovery has been so slow. It has been a step-by-step recovery.

In a virtuous cycle, real estate is strong. Builders build more homes. That creates more jobs and thus more demand for real estate. Because home values are strong, lenders want to finance real estate and they adopt aggressive standards. Of course, the next question is, when can we move into a virtuous cycle? We have seen some evidence in the past few months that the tide is turning. For one, real estate values are up. This means that real estate and loans secured by real estate are becoming a better investment. Theoretically, this will make lenders more confident in loosening their own standards.

Along with this, defaults on newly originated home loans are down significantly. Though the nation is still dealing with a shadow inventory of homes that need to be sold, these are mostly older defaults and this inventory is shrinking because newer loans are not being added as quickly. Finally, builders are again building more homes because of a shortage of inventory.

Most prognosticators feel that the slow recovery will continue step-by-step. However, we feel that there will be a tipping point in which all the stars align behind recovery and thus the process will speed up. It will be interesting to see whether the effort by central banks all over the world to purchase more securities and thus keep rates down will give us the final push to reach that tipping point.

This push will have to overcome the uncertainty that hovers over the elections and budget negotiations in our country. It should be a very interesting fourth quarter. The U.S. housing industry – crucial to any jobs recovery – showed more signs of strength, according to two reports issued last week. The Census Bureau said housing starts and permits rose substantially in August. Separately, sales of previously occupied homes climbed 7.8 percent from a year ago, according to the National Association of Realtors. Builders started on new homes at an annual rate of 750,000, up 29.1 percent compared with a year earlier. They applied to build another 803,000 new homes on an annual basis, a 24.5 percent jump compared with August 2011.

Homebuilders have become increasingly bullish – a confidence index from the National Association of Home Builders reached its highest level since June 2006.

If sales continue to gain steam, that could help the nation break out of its economic doldrums. Home building provides many good-paying jobs, about three hires for every home built in a year, according to the National Association of Home Builders.

A rebound would create other jobs too: factory jobs at carpet and furniture makers, for example. Truckers get work transporting all those goods. Most housing markets around the nation have reached a good balance between sellers and buyers, according to the Realtors’ chief economist, Lawrence Yun. There’s a 6.1 month supply of homes on the market at the current pace of sales. That’s down from 6.4 months in July and 8.2 months a year earlier. The lower supply provides some support for prices.

Prices are on the upswing as well. They have benefited from a change in the mix of homes sold with distressed properties –repossessed homes and short sales — accounting for only 22 percent of total sales, down from 31 percent last August. Source: CNN/Money


How can borrowers snag the best rates available? Basically, they need to prove to lenders they are less risk: Lenders offer the best rates to those who they perceive as low-risk borrowers. Here are ways for consumers to show lenders that they are low-risk borrowers, according to a recent article at The New York Times:

Credit score: Ideal borrowers nowadays have a FICO score of 740 or higher to qualify for the best pricing.

Property types: Buyers of a duplex, four-unit building, or condo may have a rate premium added. Also, lenders will charge borrowers more if they plan to rent out the property rather than live there.

Down payment: Borrowers who put down at least 25 percent will most likely attract the best pricing, lenders say. Lenders offer different breaks on rates if equity is higher, so you should ask what is available. At least 20 percent down will enable borrowers to avoid paying mortgage insurance on conventional loans. Source: The New York Times

Bob and Katie Howe can be reached at 949-734-6844 or