By The Natural State Hawg on 11:53 PM
Filed Under: TheNaturalStateHawg
As a lot of you folks know, I've been the director of media relations for the Arkansas Realtors Association for the past three years.
In that capacity, I've seen both state and national markets go from the heights of 2005 to the slow markets that we've got going on right now. One of the questions I get a lot from the press, of course, is "just what the heck is going on?"
That topic has been rather beaten to death, but here it is in a nutshell. As we've learned, money was too readily available. That easily available cash served to inflate home prices and we've seen what happened when it became apparent that a lot of folks found themselves in a position where they simply couldn't pay their mortgages.
That's right. We got a lot of foreclosures and those drove down property values by adding a bunch of discounted homes to the housing inventory in markets around the nation. Furthermore, the death of the subprime market took a lot of that easily available cash from the market, so we saw even more downward pressure on home prices.
That situation led to the present where a lot of people are upside down on their loans -- they owe more than their homes are worth. It's been a hell of a mess, of course, but a common question is "how did we get here?"
The simple fact is, the federal government -- starting with the Community Reinvestment Act of 1977 -- has had a nasty habit of messing around in the free market and twisting bankers' arms into issuing mortgages to people that probably shouldn't have them. Why? Well, it was an issue of fairness -- some people, particularly low income people, were left out in the cold when it came to getting a conventional mortgage, so why not make it easier for them to get homes?
The government meddled, meddled, and meddled some more until the subprime lending industry was born. Those nasty little things generally led to "no money down" loans which offered wonderful initial interest rates, but contained terms that kicked in after, say, five years that jacked those monthly mortgage payments through the roof.
In other words, if someone is barely paying their mortgage even under the favorable initial rates in an adjustable rate mortgage (ARM), what happens when the introductory period has run and those monthly payments shoot through the roof? Well, you get a lot of foreclosures and what-not.
Of course, some of those loans were outright predatory, whereas others were taken out by people who wanted more "house" than they could afford and they simply ignored what was coming down the road or figured they could sell their homes for a profit before they had to pay under the decidedly unfavorable terms.
Meanwhile, home values were artificially inflated everywhere, and why not? Money was cheap and plentiful, and the impact on home prices were obvious. Furthermore, builders started emphasizing pricier homes as there was a huge market for them. People who could legitimately afford, say, a $150,000 home under a conventional mortgage found themselves able to get subprime and "exotic" loans for homes that cost twice as much.
At the first of 2007, it was very obvious the whole system was crashing down as people found themselves unable to afford the terms of their mortgages and couldn't sell their houses because prices were dropping and inventories were increasing at the time. So, they started defaulting and the number of foreclosures went up substantially. In fact, we're still dealing with people struggling with their subprime mortgages.
The result of all that, of course, is downward pressure on homes due to both increased inventories of discounted, foreclosed properties and the lack of easily available mortgages. Banks aren't handing loans out to everyone with a job and pulse anymore, so it generally costs more to get a mortgage because down payments are required for most of them.
Here's the good news for Arkansas -- we've certainly been impacted here in the Natural State, but we haven't been hit as hard as in other states. Why? The National Association of Realtors tells us that, nationally, 9 percent of all homes are covered by subprime mortgages. That's significant as 54 percent of the foreclosures nationally involve subprime mortgages.
In Arkansas, however, only 5 percent of all homes are covered by subprime mortgages and, as a result, foreclosures have been reduced accordingly.
However, the availability of mortgages has hit us in Arkansas just as it's hit everywhere else, albeit to a lesser extent. That means that list prices are dropping and you can read all about that phenomenon and how the availability of mortgages play into it by clicking right here.
As for home values, we've been pretty fortunate here in Arkansas. Through August this year, for example, the average price of a home here was $152,400, down 1.3 percent from an average of $154,422 through the first eight months of 2007.
Yes, that's a drop, but not nearly as severe as the double-digit reductions in values in the rest of the country.
So, does that mean that there aren't any concerns in Arkansas housing markets? Not exactly. Sales have dropped 19.2 percent through the first eight months of 2008 -- 17,723 single family residences sold by Realtors as opposed to 21,931 through August 2007.
That means that buyers are in a very good position to find some bargains out there as inventories are still relatively high. Furthermore, Federal Housing Administration (FHA) mortgages are still available, but require 3.5 percent of the purchase price for a down payment and closing costs. Those FHA loans, by the way, cover most homes in Arkansas.
Sellers, meanwhile, are still selling their homes, but there's a problem of perceived value as opposed to actual, fair market value. Sellers, still used to the hot markets of a couple of years ago, tend to overvalue their homes.
Regardless, Realtors in Arkansas tell me that sellers willing to price their homes fairly will usually make a profit if they've been in their homes a few years. They just might have to wait a bit longer to sell those houses than they did just a couple of years ago.
What's the good news? I'll put it this way -- I picked up my house in Benton, Ark., two years ago for about $30,000 less than what it appraised for this year. In other words, I got a bargain and my home is worth considerably more than I paid for it. When the market comes back around -- and it certainly will -- I could make a tidy profit, indeed, if I chose to sell.
A major problem over the past few years is that people started to view homes as short term investments -- buy one, sit on it a couple of years and make a profit. That's never worked out very well in Arkansas, but real estate remains a solid long term investment in this state.