U.S. News

'New-Old' Rules Drive Real Estate Market

Steve McLinden, Bankrate.com
Gordon Banks

Another spring, another dormant season in real estate?

Maybe yes, maybe no.

In 2008 alone, the housing bust wiped out an estimated $2 trillion in home values. But for the first time in a long time, we are finally seeing an upside.

The same falling home prices that wreaked so much havoc in the economy are queuing up as the end-solution to the bust.

With prices down about 25 percent from their 2006 peaks, homes and buying incentives are tempting bargain hunters once again. Many economists agree that we've seen the bottom of the market and can see a faint but discernible light at the end of the long, dark tunnel. Sale volumes are up in many parts of the country, but prices aren't.

In early April this year, the average 30-year, fixed-rate mortgage loan dropped under 4.8 percent to historic lows, according to Freddie Mac, prompting some qualified buyers to buy and others to refinance.

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At a spring speech, Harvey Rosenblum, executive vice president and director of research for the Federal Reserve Bank of Dallas, said the economy will improve markedly in 2010 and should be back on track by 2011. Housing, which led the country into this economic mess, could well lead it out, he said, partially because of the Obama administration's $75 billion mortgage relief plan.

The stimulus plan, in part, is offering first-time homebuyers a tax credit up to $8,000, plus a refinancing program that gives much-needed help to owners who are struggling with mortgages and incentive to their lenders.

Credit is finally starting to flow again, and prudent families with a reasonable down payment are for the most part getting the go-ahead to buy. Ian Shepherdson, chief U.S. economist at High Frequency Economics, noted this spring that falling housing prices are likely to slow heading into the summer months and possibly show improvement, cautioning that "foreclosures are weighing heavily on prices."

A history lesson
There are some important lessons to learn from the bust, lest we be doomed to repeat them. In a nutshell, here's what happened:

Years of robust health in the housing market prompted overinvesting, quick-flipping, overbuilding and credit overextension, enabled by cheap financing. Homes began to exceed their brick-and-mortar and land values vastly, and owners started borrowing against hoped-for run-ups in future values. Meanwhile, builders cranked into high gear to accommodate zealous investors and builders.

Caught up in the frothy market, lenders and buyers alike bucked basic risk-management principles by implementing unsustainable mortgage arrangements, zero-down deals and other dubious lending programs, many with upward-adjusting ARMs -- adjustable-rate mortgages that would later cut the legs out from under them.

Meanwhile, some financiers read aggressive federal anti-redlining guidelines as a green light to lend to everyone with a pulse. Lenders pushed these and other mortgage risks onto institutional investors the world over via mortgage-backed securities and bonds, which even some of the world's best financial minds failed to identify as ticking time bombs.

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