THE OTHER SIDE OF THE STORY
It doesn’t take a rocket scientist to know that 2007 was quite a year for both our local Hatteras Island market as well as real estate markets across the country. All of us have been inundated with reports of market declines, and we have been introduced to a new vocabulary of terms including sub-prime borrowers, Alt-A mortgages, and exotic loans. There is every indication that we will be hearing similar reports well into the New Year. As we are exposed to these reports, it is important to understand that there really is another (positive) side of the story that is not being heard. For perspective, here are some thoughts to keep in mind:
The difficulties facing the mortgage market are primarily related to “sub-prime” loans, and they are the most severe in a relatively few states. More specifically, sub-prime Adjustable Rate Mortgages (ARMs) are at the heart of the problem. It should also be noted that not all sub-prime loans were made to borrowers with poor credit. In our resort area, a substantial number of well-qualified applicants voluntarily chose sub-prime over traditional loans for a variety of reasons, including ease of underwriting.
- A little over 13 percent of all mortgages are classified as sub-prime by the Mortgage Bankers Association. About 11 percent of the sub-prime loans are more than 90 days past due or are in the process of foreclosure. This means that roughly 89 percent of the sub-prime category of loans are being paid on time or are less than 90 days delinquent.
- Looking at the broader mortgage market, the Mortgage Bankers Association recently reported that the delinquency rate for all outstanding loans during the 3rd Quarter of this year was 5.59 percent. Loans in the process of foreclosure added another 1.69 percent for a total of 7.28 percent. In other words, 92.7 percent of all mortgage loans were not delinquent or in the process of foreclosure.
- As a point of reference, at the end of September, only 29 out of an estimated 8,600 privately owned real estate parcels on Hatteras Island were in foreclosure – about three-tenths of one percent.
- Foreclosure problems are most pronounced in seven states – California, Florida, Nevada, Arizona, Michigan, Ohio and Indiana. The foreclosure troubles appear to be greatest in states that had the highest levels of speculative activity during the boom years and those in the Midwest with significant unemployment related issues.
- The relativities associated with the mortgage market issues also need to be appreciated. According to the Mortgage Bankers Association, “While subprime ARM delinquencies and foreclosures are climbing in all states, in most states the actual number of loans involved is fairly modest. For example, the number of subprime ARM foreclosure starts in California during the third quarter equaled the starts in 35 other states combined.”
- According to the U.S. Census Bureau’s 2005 housing survey, there were 74,931,000 occupied residential units in the country. One-third of these properties (24,776,000) were owned free and clear with no mortgage debt.
- With regard to the second home market, a survey conducted earlier this year by the National Association of Realtors estimated that 25 to 30 percent of vacation and investment properties did not have any mortgage debt.
We will be keeping a close watch on the real estate market reports that come out this year, and we will do our best to help you understand both sides of the story.
January 3rd, 2008 at 1:28 pm
As usual, knowledgeable comments and some statistics worth consideration. Thanks!