Where do we go from here in Tucson real estate?

It seems to be the question flogging every one's mind these days- where is the Tucson real estate market headed? Let's face it, we are all affected by this down real estate market- whether we're looking to buy or sell a home in today's market or not. It affects consumer spending and consumer confidence, which in turn affects job creation and the overall economy. It's become an ongoing downward cycle, which is further perpetuated by sensationalized articles being churned out by our local media- whose goal is not to state the facts, but to sell newspapers. Yes folks, the real estate market (both nationally and locally) is a topic that's weighing heavily on most people's minds these days.

Consider this scenario, then consider the ramifications of it when you multiply it by the many homeowners here in Tucson (and nationally) who are faced with very similar predicaments. Joe (not his real name) bought his first house in the summer of 2005. It seemed to be a great time to buy. All his friends told him that owning a home was about the best investment decision a person could make. They also told him how easy it was to buy the home with no money down- he could even finance his closing costs. Why would he be so naive as to keep renting, when buying was a golden opportunity? His credit wasn't the greatest, but he could still qualify for 100% financing with a stated income, no doc, sub-prime loan. Even if something changed in the next few months, and he decided that the payment was more than he could handle- he could flip the home and make a lot of money. Everyone was doing it. It was so easy to buy and sell real estate.

So, as the story goes- Joe bought his first home. He paid $240,000 for it, which everyone said was a steal, considering that the house next door, which was the same floor plan just went under contract for $248,000. Joe's house was a 3BR/2BA, about 1,400 square feet in a popular neighborhood on Tucson's Northwest side. Prices were going up at the rate of about $5,000 a week with all the out of town buyers and investors from California. These real estate investors were coming by the bus load to buy 'investment properties' in Tucson- many of them utilizing 100% financing that was so ubiquitous. Joe saw himself as just plain lucky to get in on the action when he did.

Flash forward three years. Joe's 3/1 Adjustable Rate Mortgage (ARM) just kicked up to 10.5% a few months ago. In addition to his mortgage, Joe's expenses have gone way up, as inflation has caused prices to rise faster than wages. It's March of 2008 and Joe is in a bind. He can no longer afford his monthly mortgage payment. He talks to a real estate agent, only to discover that his house would fetch about $190,000 in the current market, and it could take six months to a year to sell it even at this price- given the huge inventory of homes on the market. This puts him in the hole $50,000 from what he owes on the house. Not to mention the closing costs and commissions involved in selling the home. How could this happen? How will he pay for this? What are his options? Who can he turn to? Joe is a very sad predicament, but a seemingly common one these days, as runaway interest rates and declining home prices are sending huge numbers of homeowners into a desperate downward spiral. These homeowners are upside down on their mortgages, many of them with no place to go- except foreclosure, and then personal bankruptcy. It's a horrible and sad spiral that is threatening to derail many homeowners, both here in Tucson and nationally.

Going from the microscopic to the macroscopic realm, nationally some estimates predict that mortgage losses may reach as high as $400 billion dollars over the next two years. It seems that about 40% of all people who did 100% financing between 2005-2007 are either in some stage of foreclosure or are behind on their mortgages. $400 billion may sound like a huge overestimate, but to put it in perspective, consider that there is a total of about $11 trillion in US mortgages that are outstanding. Our national and local economies are very threatened by this fact. The methods of this madness are detailed in a recent report stemming from the US Monetary Policy Forum's Conference on February 29, 2008. The title of this report by David Greenlaw et al. is, "Leveraged Losses: Lessons from the Mortgage Market Meltdown." The report basically arrives at the projected losses of $400 billion by using several different models. The first looks at the loan performance of certain sub-prime and other mortgage loans, adjusted for declines in home prices. A second model uses market prices to obtain a loss estimate based on current real estate values. While a third model looks to historical data in areas that have previously been hit hard by big real estate declines, i.e. California, Texas, and Massachusetts. The most noteworthy item about this report is that all three models arrived at almost the same prediction for losses- $400 billion.

There are many financial and economic implications here, but the biggest one, and the one that has the possibility to affect the market the most is that the rising tide of lender losses will further erode lender capital, and this will inevitably cause lenders to trigger further 'belt tightening' out of pure necessity. This means that it is going to become more difficult for buyers to get a mortgage, but also that lending institutions are going to be a lot tighter fisted with their lending practices then they ever were. Anticipation of this necessary belt tightening is one of the main reasons why last week FHA (a government backed loan product that requires only a 3% down payment) increased their conforming loan limits to $316,250. FHA is responding to the tightening and restrictiveness of mortgage lenders to try and prevent the economy from going into a tailspin. If lenders make it harder for borrowers to borrow money to get a mortgage, then the buyer pool is going to shrink. The Federal Reserve has been trying to step in with a remedy of appealing to banks to borrow money from the Fed to stimulate the economy. Many banks are not responding, and that's causing already stalling markets to stagnate.

How does this affect today's home buyer, and to answer the question posed in the title of this post, "Where do we go from here?" In a March 9, 2008 Wall Street Journal article geared to first time home buyers entitled, "A Good time to buy a house- if you can," it states that today's mortgage lenders want borrowers to have no more than 28% of their income towards paying their mortgage payment and are expecting down payments of at least 5%. Some experts predict that in many markets, a first-time buyer will require as much as a 10% down payment. These changing standards are pulling many would be buyers out of the mix, creating what the Federal Reserve terms an 'adverse feedback loop,' or intensification of the factors causing the decline of investments and consumer spending . The Fed is meeting again on March 18th, and is expected to lower the funds rate by as much as 50 basis points to hopefully curtail an adverse feedback loop. Mainly, today's buyer needs to know- how does this affect me? So here goes- my two cents...

A few things to keep in mind if you are in the market to buy a home in Tucson right now.

1) Home prices have come down, in some areas as much as 20% from their 2005 peak, making buying a home in Tucson a lot more affordable than it was two to three years ago.

2) Interest rates are still relatively low, helping to keep your payment more affordable.

3) There is a massive selection of homes to choose from (both new homes and resales). The supply of homes on the market has the possibility to help you to get a better price and terms on your new home.

4) If you're buying the home to live in (your primary residence), and don't plan on selling it for 3 to 5 years, home ownership may make a lot more sense to you then renting, as you can take advantage of the tax savings on writing off your mortgage interest. You are not throwing away money on rent, and it will be your home, to furnish and stylize as you see fit.

5) Most importantly, get a professional Realtor to help you sort through the home buying maze!

In my opinion, it is a great time to buy a home, if it makes sense financially to you, and you're not trying to see your home as an investment. Remember, your home is a roof over your head. It's a place to live. It's not a piggy bank, nor should it be the only egg in your nest egg basket.

Please don't hesitate to call me with any questions about this posting, or about the Tucson market in general.

Written by Sarah Ley
BSBA, ABR, CRS, CNHSA
Tucson Realtor with
Long Realty Company
(520) 404-0544
sley@longrealty.com
http://www.sarahley.longrealty.com/