Two articles this morning lead me to conclude that housing still has no upside. The first from the NYT the other from Bloomberg.
The Times reports on what I (and others) have been warning about for some time. The lending limits for the GSEs and FHA are scheduled to be cut on 9/30/2011. Bloomberg reports on a growing trend, seller financing.
The GSE lending limits were increased as part of the 2008 HERA (bailout) package. Housing was in free fallback then; there were no private lenders. It (sort of) made sense to increase the limits in the overall effort to stop the economy from tanking.
The limits have already been extended once (end of last year). I’m sure that there is going to be a push by some in Congress to extend them again. I think the effort will fall flat. Fannie and Freddie have cost hundreds of billions. Extending the limits just keeps them alive and helps them grow. That is not a very popular position to take one year before an election. The additional argument will be made that the higher limits just support rich people. To some extent that is true.
The big change in limits will come from the areas that have the highest home values. These are pretty significant drops:
Monterey Co., CA down $247,000 (34%)
Monroe Co., FL down $201,000 (28%)
Hawaii Co.,HI down 250,750 (41%)
Some interesting changes. Blaine Co. ID (home of Sun Valley) has its limit cut by $272,000 (37%) while Eagle Co. Co (Vail) gets a haircut of only $104k (14%). The new limit for Vail will be $625,000 while the poor people up in Sun Valley will be capped at a lousy $458k. Look for the folks up in Idaho to make a stink over this.
In my neck of the woods the very toney Fairfield Co. Ct (home of very-very toney Greenwich) gets whacked by $195k down to a max of $514k while neighboring (and much less toney) Westchester has it’s limits cut by a more modest $104k keeping the lid at $626k. I assure you that there is not logic to this.
There are 88 counties across the country that will see their limit cut by more than $100,000.
The Bloomberg bit on seller financing is an interesting development. I have been seeing this in action in S. Florida. These are not the distressed properties owned by banks that go for auction. Those are cash buyers. There is a separate market for higher end (and Uber high-end) properties that have been trying to get sold for several years. Finding buyers is very hard. Prices have come down a bunch. As much as 50%; but there is still too many properties. Sellers who are looking to distinguish their home are offering cheap financing to lure buyers. Low interest rates and a five-year bullet are common terms. These are million dollar notes. By definition, there is no liquidity in these notes. In reality this type of financing is just a rental with an option to buy. Depending on the size of the down payment there is a very good prospect that these “sold” homes are going to revert back to the original owner in the not too distant future.
My conclusion from these two reads is that the availability of mortgages is going to shrink quite substantially in a few months. That there is already an evolving ‘solution’ to the problem called ‘seller financing’ is like we are reverting back to the stone ages of mortgage finance.
I think the steps to downsize Fannie, Freddie and FHA are necessary. I hope the cries to keep the ‘emergency’ limits are ignored. But there most certainly will be consequences from this. High-end real estate is going to fall a fair bit in the next year. It will continue to act as a dead weight on the broader economy.
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