The Impact of Sept. 11 on Home Sales and Mortgages

By Jim Woodard

The tragic events of September 11 are having a profound impact on the housing and mortgage market, along with other major segments of our economy.

There are some striking similarities between today’s economic environment and that of eleven years ago, it was noted in a report from the Meyers Group, a real estate research and consulting firm.

In August, 1990, the U.S. was on the verge of recession when Iraq invaded Kuwait. We subsequently became involved in the Gulf War, a conflict that ended quickly in February, 1991.

“While the recent disaster was much different than the Gulf War, that scenario of a decade ago might help us prepare for housing market conditions over the next year”, the report stated. Our conclusions are more positive than much of the news now seen and heard via the media.

In late 1990, the housing market was already having a difficult time. Today, the housing market has been slowly declining for about two years. But unlike some economists, the Meyers Group does not believe there will be a significant crash in the housing market.

“Expect more negative headlines and a sharp decline in consumer confidence, but be prepared for housing demand to remain strong in many markets,” the report said. Some local markets particularly those dependent on the airline industry, business travel and consumer travel can expect significant short-term job losses to hurt housing demand. This could result in distress sales in the home resale market.

Those distress sales will put pressure on home prices, and homebuilders will have to be priced more inline with the resale market than they have been in the last few years. However, homebuilders will not contribute to price discounting in this cycle, as they did eleven years ago, because speculative inventory levels are very low, the report noted.

With today’s strong homeownership demographics, and very low mortgage rates, it’s highly unlikely the overall sales volumes of home resales will decline anywhere close to the levels seen 11 years ago.

It’s those low mortgage interest rates that are the key savior for the housing industry. Entry-level homes in markets with continued job growth should continue to sell well. Discretionary housing, such as vacation homes, is likely to be impacted the most by the recent events.
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The day may be soon coming when mortgage lenders cannot charge a fee for preparing documents. A recent court case in Michigan determined a lender is illegally practicing law when charging such a fee.

This was so ruled in the state’s Court of Appeals. It involved a case where a bank charged $400 to prepare documents for a mortgage loan. Whether the ruling will save consumers money in fees or actually cost them more to cover the price of lawyer intervention in the mortgage process is still not determined.
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A new home mortgage financing program called “Choice” is being considered by federal legislators. As now proposed, the plan would be particularly helpful for individuals and families who are first-time home buyers and have less than 20 percent of the purchase price for a down payment.

Also targeted as beneficiaries of the plan would be those with marginal qualifications and credit records. Participants in the program could save from 1 to 1.5 percentage points off their mortgage rates, along with hundreds of dollars in loan fees.

To implement the program, a third federally-chartered mortgage investor organization would be set up to handle these special loans. Ginnie Mae (Government National Mortgage Association) would join Fannie Mae and Freddie Mac in purchasing conventional mortgages. Up to this point, Ginnie Mae has only purchased mortgage loans that are insured by FHA or guaranteed by the Veterans Administration.

The new category of home loans could be as high as $275,000, and carry down payments as low as 3 percent of the purchase price. We’ll be watching the development of this new plan, and will report to you.
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As millions of investors in the stock market watch their portfolios shrink, they feel especially thankful for the growing equity in their home. That equity is growing at a dramatic rate.

The annualized rate of appreciation for the average home during the first half of this year is 7.8 percent. That’s more than twice the rate of inflation. As historical data shows, owning a home is the best long-term and most secure form of family investment.

Many economists and reporters are puzzled by the current strength of the housing market. They can’t seem to comprehend why housing statistics continue to be outstanding while the rest of the economic news is so sour.

“What they will find is that mortgage rates have an enormous impact on the housing market, and that demographic conditions are outstanding for the new home construction industry,” it was stated in a report from The Meyers Group, a real estate research and consulting firm.

Interest for mortgage loans remain at almost historic low rates, thus providing a strong incentive for families to purchase a new or previously owned home.

The rising number of unemployed persons is a major factor in dragging the stock market down. But that should be viewed in the proper perspective, according to the Meyers Group report.

“The U.S. now employs 531,000 more people than one year ago. That’s a figure that has been steadily dropping and worth monitoring, but is not the disastrous results reported by some media,” the report noted. During our last recession in 1991, the U.S. lost more than 1.5 million jobs. Additionally, 4.9 percent unemployment (current rate) is still very low unemployment.

Prices generally (excluding home-related costs) are rising at an annual rate of about 3.7 percent. Compare that with the rate of rising home values (7.8 percent) and you’ll see why an increasing number of consumers are convinced that purchasing a home is the best of all investments.

Home price appreciation is still at 10 percent or above on an annualized basis in 49 of the 180 largest metro markets, according to a report from the Office of Federal Housing Enterprise Oversight. In many of the fastest-appreciating markets (like those in Ventura County) average gains are well over 1 percent per month.

The FHEO report also noted that the average house nationwide has gained 34.8 percent in resale value since 1996. Another interesting observation made in the report is that many smaller real estate markets are racking up home value gains that are just as dramatic as in the large metro markets.

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