Those who have been usual readers and participant to this site, know that I'm very "bearish" on both RE and Stock markets. So this next prediction will come as no surprise to most. Within in the next 12 months, as the housing market continues to deteriorate and the credit crisis worsens, we will see a dramatic shift in bank behavior. Banks all over the country are now reassessing their risk. They... [more]
Those who have been usual readers and participant to this site, know that I'm very "bearish" on both RE and Stock markets. So this next prediction will come as no surprise to most.
Within in the next 12 months, as the housing market continues to deteriorate and the credit crisis worsens, we will see a dramatic shift in bank behavior. Banks all over the country are now reassessing their risk. They have started dramatically reduce credit on all levels. In most of this country, it is to little, to late. Most of this country has seen major decreases in home value. One of the areas that has not seen such decreases as large, has been right here in NYC. The banks are in the process of assessing debt and rating the risk levels. It's looking for potential problematic areas or locations that might be a ticking time bomb.
Caught in the cross hairs of this dilemma, is the NYC RE market. What makes this, the biggest risks to banks in the next 12 months, is exactly the "bulls" argument. NYC as lagged the rest of the country, however the banks are starting to realize, that NYC is an enormous risk. Continuing to write mortgages, for an area that is poised to see 30% declines in the next 12-24 months, is not the best business model.
Sometime within the next 12-18 months, you will see or hear that major banks have, stopped or tightened even greater, lending standards for the NYC RE market. The risk is much to high and potential for loses to great.
If you think getting a mortgage is tough now, just wait. For the first time, I'm actually going to encourage people, who want to buy, to act quickly. If you want or need to buy and you will require a mortgage, I suggests you do so earlier rather then later.
Good Luck.
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Response by babsie02
over 17 years ago
Posts: 139
Member since: Mar 2008
Good question. Also, what will happen to lending practices if Fannie/Freddie are taken over the gov't and possibly the gov't either 1) has higher standards; or 2)cuts back on the amount of mortgages it will buy? Many of the mortgage banks, that don't have the capital to support a mortgage, rely on being able to sell it upstream into the market. So too with some of the smaller banks and other banks that do have some mortgages in its portfolio may consider them too risky or only lend to the best borrowers.
If no one can get a mortgage, how will that affect the RE market in NYC?? We may see alot more of listings going in and out of contract than we do now due to the borrower not being able to get a mortgage.
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Response by dco
over 17 years ago
Posts: 1319
Member since: Mar 2008
"If no one can get a mortgage, how will that affect the RE market in NYC?? We may see alot more of listings going in and out of contract than we do now due to the borrower not being able to get a mortgage."
This is exactly what has started to happen, particularly when it comes to New Construction.
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Response by Topper
over 17 years ago
Posts: 1335
Member since: May 2008
Is there any way to track statistically what percentage of listings "in contract" do not make it to actual closings? Is there any sort of available time series on this? Thanks.
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Response by rationalobserver
over 17 years ago
Posts: 19
Member since: Sep 2008
See it from the banks perspective - they are in the business of lending at a spread slightly higher than the cost at which they borrow. So whom do they lend to - corporations or consumers? lending to corporations is looking riskier by the day given the drop in profitability. Lending to consumers is even tougher given they cant securitize those loans any more. So the short answer is they will lend, but at a higher rate such that its commensurate with the risk. I am bearish as well, very bearish in fact.... but it doesn't mean I expect banks to stop lending. Expect greater due diligence, more % down, higher mortgage rate. Fannie/Freddie's move will only increase the interest rate as treasuries suffer...NYC will suffer from that, but it will suffer even more so from the lack of demand at such inflated prices.
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Response by NYRENewbie
over 17 years ago
Posts: 591
Member since: Mar 2008
People will still buy even though interest rates will rise. I bought my first house in the 80's when interest rates were 17%. That's right, 17%! The problem is that real estate values had to decline so people could afford them at such high interest rates. This bubble has to burst, but the cycle will start all over again once the market has corrected itself.
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Response by stevejhx
over 17 years ago
Posts: 12656
Member since: Feb 2008
Here's what spunky thinks will happen:
spunky: "It's going to be a whole new ball game with if the FED takes over Fannie. More than half the mortgages are held by Fannie. The government will be handing all kinds of candy and free taxpayer money to it's new mortgage holding tapped out customers."
That's right. Throw fuel onto the fire!
"Like reduce mortgage payments, extended terms going up to 45 years."
In other words, increase risk again.
"New tax incentives for new home buyers and buyers of foreclosed property will also be a new gift."
What "new tax incentives"? Buyers of foreclosed homes already (usually) get them at a great price.
"I doubt foreclosures will continue to occur at the current rate now that the tax payers are footing the bill."
Exactly the opposite will happen. The correction process will speed up because Fannie and Freddie no longer will have to cook their books to make them look solvent. And Fannie and Freddie do not own the mortgages; they merely guarantee them. They are not the ones to decide on foreclosure; the holders of the notes do.
"Thanks to people like stevejhx and other taxpayers (tax paying renters included) for helping those who couldn't afford the monthly mortgage to begin with."
Funny, I don't recall ever approving a loan for anyone who could or could not afford a monthly mortgage. In fact, I recall, being a renter, that I specifically avoided buying in an overheated market where people were holding open outcry auctions for apartments, as prices doubled in 4 years. Well, now they're going to fall right back to where they should be: equal to rents, and affordable on Manhattan's newly diminished income pool.
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Response by serge07
over 17 years ago
Posts: 334
Member since: Aug 2008
Just to throw another variable out there, what effect will a new administration have on all of this? Hate him or love him, the Bush administration has been a huge friend to Wall Street. Bush adopted very aggressive laissez faire policies towards the US economy and specially the financial community namely, very low restrictions, non-existent regulation/oversight & wild west sort of attitude. There is also a troubling attitude of privatizing profits & socializing risk/losses in the current administration which I have never seen before, not to this extent.
Who knows how a Senator Obama or McCain administration will handle this financial mess but both seem to be far more on the side of the little guy/small business and not so much in the pockets of WS. Either way, we will see increasing regulation and an unwillingness by both to bail out those poor firms or institutional investors that seem to rely on the absurd theory that the US taxpayer is there to back-stop credit risk.
In the mean time, financial firms will continue to de-leverage their over bloated balance sheets as their capital base has been severely impaired. Loans will always be possible to obtain but it will take a darn strong balance sheet, significant down payments and a very good record of employment stability, just like the good old days. RE prices are simply adjusting to reflect the new credit realities and this adjustment will take some time.
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Good question. Also, what will happen to lending practices if Fannie/Freddie are taken over the gov't and possibly the gov't either 1) has higher standards; or 2)cuts back on the amount of mortgages it will buy? Many of the mortgage banks, that don't have the capital to support a mortgage, rely on being able to sell it upstream into the market. So too with some of the smaller banks and other banks that do have some mortgages in its portfolio may consider them too risky or only lend to the best borrowers.
If no one can get a mortgage, how will that affect the RE market in NYC?? We may see alot more of listings going in and out of contract than we do now due to the borrower not being able to get a mortgage.
"If no one can get a mortgage, how will that affect the RE market in NYC?? We may see alot more of listings going in and out of contract than we do now due to the borrower not being able to get a mortgage."
This is exactly what has started to happen, particularly when it comes to New Construction.
Is there any way to track statistically what percentage of listings "in contract" do not make it to actual closings? Is there any sort of available time series on this? Thanks.
See it from the banks perspective - they are in the business of lending at a spread slightly higher than the cost at which they borrow. So whom do they lend to - corporations or consumers? lending to corporations is looking riskier by the day given the drop in profitability. Lending to consumers is even tougher given they cant securitize those loans any more. So the short answer is they will lend, but at a higher rate such that its commensurate with the risk. I am bearish as well, very bearish in fact.... but it doesn't mean I expect banks to stop lending. Expect greater due diligence, more % down, higher mortgage rate. Fannie/Freddie's move will only increase the interest rate as treasuries suffer...NYC will suffer from that, but it will suffer even more so from the lack of demand at such inflated prices.
People will still buy even though interest rates will rise. I bought my first house in the 80's when interest rates were 17%. That's right, 17%! The problem is that real estate values had to decline so people could afford them at such high interest rates. This bubble has to burst, but the cycle will start all over again once the market has corrected itself.
Here's what spunky thinks will happen:
spunky: "It's going to be a whole new ball game with if the FED takes over Fannie. More than half the mortgages are held by Fannie. The government will be handing all kinds of candy and free taxpayer money to it's new mortgage holding tapped out customers."
That's right. Throw fuel onto the fire!
"Like reduce mortgage payments, extended terms going up to 45 years."
In other words, increase risk again.
"New tax incentives for new home buyers and buyers of foreclosed property will also be a new gift."
What "new tax incentives"? Buyers of foreclosed homes already (usually) get them at a great price.
"I doubt foreclosures will continue to occur at the current rate now that the tax payers are footing the bill."
Exactly the opposite will happen. The correction process will speed up because Fannie and Freddie no longer will have to cook their books to make them look solvent. And Fannie and Freddie do not own the mortgages; they merely guarantee them. They are not the ones to decide on foreclosure; the holders of the notes do.
"Thanks to people like stevejhx and other taxpayers (tax paying renters included) for helping those who couldn't afford the monthly mortgage to begin with."
Funny, I don't recall ever approving a loan for anyone who could or could not afford a monthly mortgage. In fact, I recall, being a renter, that I specifically avoided buying in an overheated market where people were holding open outcry auctions for apartments, as prices doubled in 4 years. Well, now they're going to fall right back to where they should be: equal to rents, and affordable on Manhattan's newly diminished income pool.
Just to throw another variable out there, what effect will a new administration have on all of this? Hate him or love him, the Bush administration has been a huge friend to Wall Street. Bush adopted very aggressive laissez faire policies towards the US economy and specially the financial community namely, very low restrictions, non-existent regulation/oversight & wild west sort of attitude. There is also a troubling attitude of privatizing profits & socializing risk/losses in the current administration which I have never seen before, not to this extent.
Who knows how a Senator Obama or McCain administration will handle this financial mess but both seem to be far more on the side of the little guy/small business and not so much in the pockets of WS. Either way, we will see increasing regulation and an unwillingness by both to bail out those poor firms or institutional investors that seem to rely on the absurd theory that the US taxpayer is there to back-stop credit risk.
In the mean time, financial firms will continue to de-leverage their over bloated balance sheets as their capital base has been severely impaired. Loans will always be possible to obtain but it will take a darn strong balance sheet, significant down payments and a very good record of employment stability, just like the good old days. RE prices are simply adjusting to reflect the new credit realities and this adjustment will take some time.