Financial Cents: Banks tighten as the data rolls In
By Jason Glisczynski
Can you relate to this story?
A house goes on the market, and 20 showings are scheduled within the first hour. Five written offers come in from buyers that have not toured the property yet, three of which are for over the asking price. BOOM! The seller accepts an offer for 20 percent over their asking price with no inspection contingency from someone that has only viewed the property from Google Maps.
If I told you in 2009 that this is how the housing market would behave 10 or so years later, you most likely would have laughed and told me to shove off. We all learned a valuable lesson from the housing and financial crisis of 2008: we easily forget what history tells us.
According to the Census Bureau, Bureau of Economic Analysis, and Mortgage Bankers Association, housing affordability is plummeting, hitting extreme levels never seen in history and exceeding the 2008 financial crisis levels. According to the Bureau, 30-year mortgage payment for the selling price of a new home today exceeds 70 percent of the average income.
It’s worth noting, however, that the lenders have not forgotten the lessons of 2008. Back then lenders would borrow out as much as 120 percent of the appraised value, putting the borrower and the lender “underwater” which means the debt owed on the home exceeds the value. Not the case today, only the borrower is drowning not the lender.
Lenders are now requiring borrowers to bring cash to the closing table to make up for the shortfall if the appraisal doesn’t meet the purchase price. So here we go again. Homeowners, particularly newer homeowners, are over-extended in real estate and are in a negative equity position.
Personally, I view real estate equity as a tremendous way to build wealth. However, when mishandled it can become an anchor that severely impairs your ability to get ahead. If you pay $350,000 for a piece of real estate that is valued (appraised) at $300,000, you are now in a negative $50,000 equity position. Paying $350k for the house doesn’t magically make it worth that much, and the banks know this hence they require the buyer to bring cash to the transaction.
Right now, the smart money is waiting for this emotionally driven wave of phantom equity to disappear, folks that are over-extended will be forced to sell and they will not be able to sell for the same amount they paid and when that happens a significant amount of real estate will be changing hands. Warren Buffet once said, “the stock market is a device for transferring money from the impatient to the patient.” I firmly believe the same philosophy applies to real estate.
Jason Glisczynski is co-owner and principal advisor for Silvertree, LLC. Investment Advisory Services offered through Brookstone Capital Management (BCM) LLC, a Registered Investment Advisor. Silvertree, LLC, and BCM are separate companies. Visit www.silvertreeplan.com for more information.