Alumni College, Free Fall or Recovery: The American Housing Market
David DeSantis '88, broker and owner of Tuft, Taylor & Rankin Sotheby's International Realty recounted the recent ups and downs of the American housing market in the Alumni College Free Fall or Recovery: The American Housing Market. He described his own home buying process during the irrational exuberance of the early decade. "There were seven offers on the house. I paid $100,000 over asking price, and I had to write a check on the spot, no questions asked," he recalled. Only a few years later, the subprime mortgage crisis would contribute to a housing market meltdown and quash such excessive optimism.
DeSantis said that between 2003 and 2005, banks and mortgage companies came up with new products targeted at "subprime" customers. These "subprime" loans typically went to borrowers whose credit was mediocre (typically a FICO score of under 620, when 700-800 is a "good" score), and the loans came with onerous terms and conditions. Unfortunately, borrowers obtained mortgages that were beyond their means, spurred partly by over-enthusiasm at lending institutions that often did not bother asking their customers about their incomes and assets. At the same time, speculators entered the market to buy four or five homes, flip them, and sell them at a profit.
Yet everything came crashing down when home prices declined rather than rising. Because of these falling values, subprime borrowers could not refinance and speculators took a loss, leading to massive defaults. At present, 8.8 percent of all homes and 19 percent of subprime homes are delinquent or in default, which is higher than usual, according to DeSantis. Of all foreclosures, more than half were subprime. DeSantis explained that while borrowers are partly to blame, they were "swindled by dishonesty" on the part of the lenders, who often did not explain clearly the risks that came with a mortgage.
DeSantis went on to explain the situation at the city level. He noted that cities with many subprime mortgages are also those with huge drops in home prices, to the chagrin of troubled borrowers in such markets as Detroit and Phoenix. Prices have fallen so severely in some markets, in fact, that some lenders refuse to issue mortgages for property purchased within those markets. Yet DeSantis also expressed optimism, giving several reasons for his sunny outlook on housing. Ninety-one percent of homeowners do not have subprime loans, and 77 percent of homeowners have seen no price decline. Additionally, the rate on adjustable mortgages has fallen because the Federal Funds Rate is now lower. The Federal Housing Administration is refinancing some with subprime loans, speculators have largely left the market, and lenders are once again more willing to offer "Jumbo Loans" (loans over $417,000) at reasonable interest rates.
Although the "irrational exuberance" during the early part of this decade also led to overbuilding, DeSantis predicted that we might soon face a housing shortage. As subprime loans disappear, "Jumbo Loans" become affordable, and jobs and population increase, we should expect the need for new homes to spike as well, he explained. Although the rate of new housing starts per year is now 700,000, the National Association of Realtors estimates an eventual need for 1.6 to 1.8 million. This might lead to price increases, and DeSantis said that 99 percent of markets will have higher values in five years than they do today.
In closing, DeSantis gave some tips to buyers and sellers. Buyers should know why they are buying: rather than speculating or attempting to make a profit, they should make a home purchase because they want to live inside the house. They must be sure that they can get financing and afford the mortgage, and they should make their home purchase contingent upon an inspection. Sellers should understand why they are selling, as "houses do not take the place of a 401k," according to DeSantis. These sellers should "be the buyer" and try to understand what a potential purchaser might want in the home. As reasonable buying and selling practices grow more prevalent, the housing market will become more stable, DeSantis predicted.
-- by David Foster '10
David DeSantis '88, broker and owner of Tuft, Taylor & Rankin Sotheby's International Realty recounted the recent ups and downs of the American housing market in the Alumni College Free Fall or Recovery: The American Housing Market. He described his own home buying process during the irrational exuberance of the early decade. "There were seven offers on the house. I paid $100,000 over asking price, and I had to write a check on the spot, no questions asked," he recalled. Only a few years later, the subprime mortgage crisis would contribute to a housing market meltdown and quash such excessive optimism.
DeSantis said that between 2003 and 2005, banks and mortgage companies came up with new products targeted at "subprime" customers. These "subprime" loans typically went to borrowers whose credit was mediocre (typically a FICO score of under 620, when 700-800 is a "good" score), and the loans came with onerous terms and conditions. Unfortunately, borrowers obtained mortgages that were beyond their means, spurred partly by over-enthusiasm at lending institutions that often did not bother asking their customers about their incomes and assets. At the same time, speculators entered the market to buy four or five homes, flip them, and sell them at a profit.
Yet everything came crashing down when home prices declined rather than rising. Because of these falling values, subprime borrowers could not refinance and speculators took a loss, leading to massive defaults. At present, 8.8 percent of all homes and 19 percent of subprime homes are delinquent or in default, which is higher than usual, according to DeSantis. Of all foreclosures, more than half were subprime. DeSantis explained that while borrowers are partly to blame, they were "swindled by dishonesty" on the part of the lenders, who often did not explain clearly the risks that came with a mortgage.
DeSantis went on to explain the situation at the city level. He noted that cities with many subprime mortgages are also those with huge drops in home prices, to the chagrin of troubled borrowers in such markets as Detroit and Phoenix. Prices have fallen so severely in some markets, in fact, that some lenders refuse to issue mortgages for property purchased within those markets. Yet DeSantis also expressed optimism, giving several reasons for his sunny outlook on housing. Ninety-one percent of homeowners do not have subprime loans, and 77 percent of homeowners have seen no price decline. Additionally, the rate on adjustable mortgages has fallen because the Federal Funds Rate is now lower. The Federal Housing Administration is refinancing some with subprime loans, speculators have largely left the market, and lenders are once again more willing to offer "Jumbo Loans" (loans over $417,000) at reasonable interest rates.
Although the "irrational exuberance" during the early part of this decade also led to overbuilding, DeSantis predicted that we might soon face a housing shortage. As subprime loans disappear, "Jumbo Loans" become affordable, and jobs and population increase, we should expect the need for new homes to spike as well, he explained. Although the rate of new housing starts per year is now 700,000, the National Association of Realtors estimates an eventual need for 1.6 to 1.8 million. This might lead to price increases, and DeSantis said that 99 percent of markets will have higher values in five years than they do today.
In closing, DeSantis gave some tips to buyers and sellers. Buyers should know why they are buying: rather than speculating or attempting to make a profit, they should make a home purchase because they want to live inside the house. They must be sure that they can get financing and afford the mortgage, and they should make their home purchase contingent upon an inspection. Sellers should understand why they are selling, as "houses do not take the place of a 401k," according to DeSantis. These sellers should "be the buyer" and try to understand what a potential purchaser might want in the home. As reasonable buying and selling practices grow more prevalent, the housing market will become more stable, DeSantis predicted.
-- by David Foster '10
