North Sound Property News

The news in real estate this week is the implosion of the lending market, with American Home Mortgage and now Novastar forced to shut down on margin calls.  Of the two, the decision by AHM to close is the more surprising, because unlike many of the other lenders that have been affected by this spring and summer’s bad news in lending, AHM is not a sub-prime lender but rather, was active in the “Alt-A” market.  This is an indication that the house-cleaning in mortgage lending will not be limited to those lenders that wrote “bad loans,” but that the effects are likely to be more widespread.  What we are seeing is a vote of no-confidence in the lending market by Wall Street that is gaining momentum and probably won’t end until there is a return to more conservative lending practices.

 So, in the midst of all this, what to do?  Depends on your situation.  As a general rule, buyers should probably be planning to be fairly conservative.  However, they are going to be sitting in the catbird seat with their choice of the best properties and more leverage than they’ve had with sellers in years.

The bad news is that as the pendulum swings away from some of the more “exotic” lending practices of the past few years, and Wall Street penalizes lenders with more risk-based pricing, increased lending costs will trickle down to the consumer and some loan programs will become more difficult to get. Negative amortization will be one of the hardest hit–but that isn’t necessarily bad.  I personally don’t like neg-am and to the extent that I have any influence over such things as a real estate agent, I’ve always told my clients that I’d rather see them buy less house with a more conservative loan program and be exposed to less risk.

 I understand there is a reason and a time when such loans might make sense, but I tend to be more risk averse as are most of my clients, and I just don’t think they are right for most people’s primary residence. 

The ideal buyer client right now has good credit and is looking to spend no more than 35% of take-home on housing.  He or she is realistic about appreciation over the next few years, and is planning to be in the home for 3 to 5 years. 

He or she understands that a home is not an ATM machine, and that equity can be earned in two ways–through appreciation and also through paying down principal.  Now is the time to focus on the latter.  Most people need to be looking at paying off debt anyway. We all got lucky the last few years with appreciation and I think a lot of people have forgotten that the point of owning as opposed to renting is that when you pay it off, you own it outright and that is your ultimate goal.

Today’s smart buyer is also not unduly freaked out by the news coming out of the lending market.  He or she understands that the reason this is happening is that the market is correcting itself by returning to the more conservative lending practices of the past, and that isn’t a bad thing.  The market will correct but in areas such as Seattle where the overall economy is doing well and where there are high levels of in-migration I would not expect to see major declines.  Reason being, most sellers won’t take a loss unless they have to, and since our overall economy is good, most won’t have to.

If I were a seller right now, I would also not be unduly freaked out.  Most sellers can still get a great price for their house and reap the benefits of the last few years gains in equity, unless they have been in their home less than a year. 

However, if I were a seller I would be asking myself the following questions:

1. Is my home the best home available in its price range?
2. Is my home staged and presented in such a way that buyers will choose it over the competition?
3. What is my reason for selling?  Am I putting my home on the market as an experiment to see what kind of price I can get, or am I really motivated to sell?

If the answer to these questions is no, I would expect to see that seller have some difficulties in getting their price.  However, from what I have seen, sellers who are truly ready for the market can still get a price up to 10% over what they would have gotten last year if the home is really priced correctly compared to the competition, and if it looks the very best it can.  I am probably biased, but I do believe that staging can make a big difference in a weak market.

Overall, I think the time has come for the housing market to correct, but that’s actually good news.  A healthy real estate market is one where people can afford to buy a home, where neither supply nor demand is too far out of whack, and where people are not putting their homes and savings at risk in order to fund a lifestyle they can’t afford.  As a real estate professional, I am actually glad to see the market responding to the excesses of the last few years. 

I’d be much more concerned if it didn’t.

About the Author: Sandy Kaduce is Associate Broker of Gallery Homes Real Estate. She serves buyers and sellers in North King and South Snohomish counties. She is 2009 Board President of the Mukilteo Chamber of Commerce, as well as Vice President of Site Selection for Habitat for Humanity of Snohomish County. For more information, visit Sandy on the web at www.sandykaduce.com! Read more from this author