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2010-01-28 16:27:30

The Day After, Part 1


Surprise, surprise: Home sales plummeted in December 2009. Certainly, this isn’t news to the consumer, although housing economists seem to be surprised at how fast and far the month-over-month numbers declined. Now the worry is about a potential second market collapse this year. If the housing market fell nearly 17% the month after the original housing tax credits were supposed to end, what’s going to happen when they really do come to an end? Are REALTORS ready for the Day After?

On May 1, 2010, we’re going to see what two massive collapses in five years looks like in a commodity market. Make no bones about it: we’re talking a whole new housing wasteland when Uncle Sam takes the real estate industry off life support. 

And there’s little chance it’s not going to happen: FHA has begun tightening the screws this month. The White House is looking for a fight with banks – and it just proposed a moratorium on all non-defense-related spending. Even Barney Frank, Patron Saint of Fannie Madoff and her relatives Freddie and Ginnie are about to be disowned. According to the Wall Street Journal, Frank was quoted as saying, “As I believe, this committee will be recommending abolishing Fannie Mae and Freddie Mac in their present form and coming up with a whole new system of housing finance.” A bit late, considering the government poured more than $100 billion into the dysfunctional funding family.

Of course, nobody should really be surprised. There is no free lunch, even if Uncle Sam is paying. Consumers are learning this the hardest of ways in the recession, even though it’s crocodile tears for the loss of equity for the sub-prime set. Yet the ancillary damage to neighbors, businesses and jobs caused by the housing bubble – an inflation-fiction everyone knew was a fantasy – is why the housing industry needs to be preparing now for the Day After.

Because it’s going to be a very cold Spring.

On the Day After, there will be no more gimmicks to gin up the housing market. Already, credit is drying up for all but the absolute best borrowers. Big banks, berated but able to make money overseas or in stocks aren’t going to make real estate lending their recovery centerpiece. Attempts to regulate them back into the plain vanilla lending business will simply cause them to shed their lending operations, leaving small banks to pick up the slack. Without Fan/Fred/FHA backing them up, minimum standards for small banks to lend into a further-declining housing market will be draconian. So the real estate’s industry will finally get what it’s wanted for the last decade:

To keep banks out of real estate.

Maybe it will become a cash market. Unfortunately, most real estate agents have no idea how to work in a cash commodity market. During the boom little or no qualification of buyers was needed; any buyer with a pulse would do. After the crash, buyers were backed by the government. More than 25% were made with only 3.5% down. Once that pyramid collapses, buyers are going to need real money – hard cash, not a temporary loan until their tax rebate comes in.

Finding cash-ready customers isn’t something REALTORS have had to do in decades; and most never have.

Equity is also going to be a necessity. Owners will need to have real equity or no mortgage, the case for more than 50% of owners in America, to become qualified candidates for selling their homes. But finding sellers with equity is a far cry from the “take any listing, no matter how poorly priced” practices that dominate the real estate industry today. Again, how will agents target-market owners with equity when their standard practice is mailing street-alphabetized postcards to neighborhoods?

Most concerning is the current march of the lemmings: A “get it while you can” attitude that’s leading agents like moths to the flame, except on the Day After, it’s going to be a mushroom cloud. Look at their advertising – it’s all about getting the tax credit, putting as little as 3.5% down – any trick in the book – except, finding buyers who can really afford to buy a home and sustain a mortgage during the greatest recession in decades. The industry has been busy with the 300,000 extra sales that the November-near-end to the tax credits created. But have they simply been adding fuel to the fire? Ask FHA, who says nearly 15% of its mortgages entered delinquency after only one payment last year.

So buy today; foreclose tomorrow. But at least the agent got a check in the meantime.

This is no way to run an industry. No way to plan the seeds of a real recovery, or create the conditions for sustained long-term growth. And it’s really no way to treat customers, who, in the end, will barely be unpacked before they are thrown out of their new house. On the Day After, when all of the “extra” sales that would have occurred in the second and third quarter of 2010 have been rushed through in the first quarter of the year before the money runs out, just what to real estate professionals expect to be doing?

Hopefully it’s not listening to its economists, especially the puffery coming from the National Association of REALTORS‘ chief economist Lawrence Yun who claims that, “By early summer the overall market should benefit from more balanced inventory, and sales are on track to rise again in 2010. However, the job market remains a concern and could dampen the housing recovery – job creation is key to a continued recovery in the second half of the year.” At least he got the job market part correct: With long-term unemployment reaching 17% and without easy government money, just how does he expect the market to benefit from “more balanced inventory”?

Have we forgotten the millions of foreclosures Fannie and Freddie have been hiding in their pockets – or was RealtyTrac’s announcement that 2.1 foreclosures in 2009 was up 21% from 2008 and 120% from 2007 not in the NAR’s spin-cycle? Even if Yun is correct and housing inventory stabilizes, that only means prices are going to rise. It’s already happening in some areas of California. Sounds nice, doesn’t it, for housing prices to rise – unless, of course,  you’re a marginally-employed buyer with shaky credit and not more than 3.5% down payment.

Does the Day After have to be a wasteland? Probably not – but it won’t get better with real estate agents sticking to the current script. Simply lowering listing prices until they can get a government-subsidized buyer to qualify and make an offer before they lose their job isn’t the solution. But like the last time the market collapsed, simply going around saying we know it’s coming, but doing nothing about it, isn’t either.

What should be done, to prepare for the Day After the government takes the housing industry off life support? Those answers will come in our next installment. In the meantime, the most important thing real estate professionals can do is take the first step: Look ahead, over the horizon, more than just the next few days or few weeks. It’s coming – we’ve already seen the signs – the first shots across the bow. Whether it’s an Administration berating banks for not lending or the Congressional Finance Committee Chairman suggesting they scrap the housing subsidy system, the signs are clear. For a while now we’ve been worrying about a “W” shaped recovery in the housing market.

It seems more likely that rather than just another “little dip” then a rising recovery, we’re heading into a nuclear winter that always starts on the Day After.

(Matthew Ferrara is CEO of Matthew Ferrara & Company, a technology organization that delivers training, consulting and technical support to real estate companies worldwide, including their new "Support on Demand" REALTOR help desk service available at 866-316-4209.)   

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