richardhowe.com

Yesterday’s national unemployment figures provide further evidence that our nation’s economic “recovery” may be sputtering. The performance of the local real estate market over the first half of 2010 tends to confirm that conclusion. For the ten communities in the Middlesex North Registry District (Lowell and nine surrounding towns), the number of deeds recorded from January through June was up slightly from the same period in 2009 (2420 in 2009 t0 2698 in 2010, an increase of 11%), but the number of mortgages recorded was down substantially, dropping from 8021 in 2009 to 5374 in 2010, a decline of 33%. At the same time, the number of foreclosure deeds recorded rose from 195 to 345, an increase of 77% and the number of “orders of notice” (the document that signals the commencement of a new foreclosure), more than doubled, climbing from 298 to 655, a jump of 120%.

Several factors contribute to this bleak picture. The most immediate is an extreme tightening of lending standards by banks and mortgage companies. What’s happening now is a classic example of over reaction in an industry. From 2003 to 2008, the only criteria needed to receive a loan of more money than you even asked for in the first place was to be breathing. Income history, repayment ability, credit worthiness – none of that mattered. Now it seems that the pendulum has swung way over in the other direction with hardly anyone being able to receive financing. There was much talk earlier this week about the need for Congress to extend the deadline for closing a purchase to be eligible for the Federal home buyer tax credit beyond June 30. Incredibly, Congress acted and pushed the deadline to September 30. But that extension will make little difference if buyers are unable to obtain the financing they need in the first place.

The second negative factor is the imbalance of current values versus outstanding mortgage amounts. An incredibly large number of people – it’s difficult to quantify exactly how many – simply owe more on their homes than the property is now worth. This is not necessarily a result of recklessness on the part of the homeowner. Prices in 2005-07 were just historically (and perhaps irrationally) high, but everyone has to live somewhere and with banks not only willing but anxious to lend (back then) substantial amounts of money, it’s easy to understand how so many wound up in this situation. Now, high foreclosure rates and a scarcity of buyers able to obtain financing continue to drive down values, putting more and more people into this hole. Many homeowners are trapped, with the only options being to keep paying monthly payments that will never translate into equity in the home or walk away and face foreclosure and the devastation of one’s credit rating. Most people choose to sit tight, but that’s dependent on a continued stream of income to provide for the payments. A few years ago when anyone asked me “what’s going to happen with real estate?” my answer was “what’s going to happen with unemployment?” and that remains the case today. When a homeowner loses a job, it’s likely another foreclosure will result. (That’s just one of the reasons why the US Senate’s recent failure to extend unemployment benefits was such a bad decision).

Sorry to be so pessimistic on this holiday weekend, but that’s the way I see it.