As we move into the second half of 2011 there are Five Factors that we are tracking that we refer to as The New Normal;  Unemployment; Qualifying For A Mortgage;  Short Sales and REOs;  Renting A Home; and, Savings and Debt Reduction.  Here are some thoughts to consider on each of them as we identify trends in East Bay Real Estate.

Unemployment: In simple terms, economic growth = labor force growth x growth in productivity. As the Baby Boomers retire and the U.S. population’s growth rate slows to a crawl employment will continue to stagnate. And, dramatic increases in productivity could take up the slack,  however that may be too much to ask of a generation whose education, for the first time in American history, ranked in the bottom third of developed nations. And who, for the first time, went to college in lower proportions than their parents.  So, corporate America is delivering stunning results without creating the needed 255,000 new monthly jobs for the next two years to get us back to an unemployment rate of 8%.  We are currently at 9.2%.  However, the number that needs to be considered most important is the Under-Employed = 16.2% 8.6 million people who would like to be fully employed.  Jobs, Jobs, Jobs are what will take care of our housing crisis.

Qualifying for a mortgage: Not only are the Jumbo mortgage rates changing October 1, 2011, but lenders are changing their rules regarding credit scores and what it takes to qualify for a loan today.  FICO scores range from 300 to 850. Pre-crisis, a score of 700 to 725 was deemed solid and a borrower could expect to get a conventional mortgage at the lowest rates.  From 2003 through 2006, 82% of Fannie Mae mortgages were for borrowers with a score between 700 and 750, according to data compiled by RBS. So far in 2011, only 13% of Fannie Mae mortgages carry that score, and just 1.7% have a score of 700 to 725, according to RBS. This year, 75% of Fannie Mae mortgages are for FICO scores of 750 to 775, up from less than 5% before 2005.  Almost 50% of the mortgage borrowers are out of the game today compared to 2006.  And, if you want a mortgage with lower FICO scores you will pay by having an increased interest rate of up to 1.5%!

Short Sales and REO’s: You probably won’t be surprised to learn that starting the second quarter of 2011 there were 14.3 million homes vacant year-round! This would take up to 13 years to eliminate given the current annualized rate of home sales of 551,000.  Remember, that all real estates are local so the East Bay real estate market has generally fared well through the past five years. However, the economic impact on our Nations recovery of this one factor of vacant house inventory could add to the lenders’ write-offs and to our country’s debt.

Renting A Home: The U.S. HomeOwnership Rate is headed down . as more people choose or have no choice but to rent.  As of the end of the first quarter of 2011, it stood at 66.5%, the lowest point since 1998 – a combination of people not being able to qualify for a mortgage, and/or people who have had their credit ruined because of defaulting on their mortgage or selling it short.  Renters will be the first to feel any recovery in the housing market — in the form of higher rents, which they will not like at all.  Rental investors and landlords are reporting the lowest vacancy rates they’ve seen in more than ten years.  Most surveyed report they’re planning significant rent hikes in the second half of 2011.  Homes rent make up almost a third of the Labor Department’s consumer-price index.  So, the housing rental market has the potential to produce a highly undesirable economic combination: a drag on growth and a boost to inflation.

Saving More and Borrowing Less: Families went into the financial crisis in 2007 with more debt than at any time in U.S. history. They have to dramatically lower their debt ratios by either paying down from savings or by defaulting – currently over $50 billion not paid for mortgages owed. Neither of these choices helps economic growth. Government debt is also at levels not seen since the end of World War II. Our leaders can either commit to years of austerity to pay it down or ignore the problem and let inflation and devaluation solve the problem. Again, neither will help economic growth.

Remember, ALL economic news is micro-local.  CONTACT ME for information as to how these factors are effecting your real estate decisions.  Until next time…Jim Walberg

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