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YOUR BOTTOM LINE
A Review of the Housing Sector, Foreclosures; Jobs, Consumer Confidence are Key to Recovery in Housing
Aired July 23, 2011 - 09:30 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
CHRISTINE ROMANS, CNN ANCHOR, YOUR BOTTOM LINE: The housing market has changed, and so have you. What you need to know if you own a home, want to buy one, or rent.
Plus is it ever okay to walk away from that mortgage even if you can afford to pay? Let's start with the American dream of owning a home. You're a buyer it's a dream market but only if you can get the loan. With the 10 of the nation's largest mortgage lenders denying almost 27 percent of loan applications last year, that's up from 23.5 percent in 2009, this is according to "Wall Street Journal" analysis.
If you're a seller it's a nightmare. Home prices rose slightly for the first time in eight months, this according to the most recent S&P/Case Schiller 20-city Index. But don't get too excited. Prices are down 32 percent from their peak set in 2006. The chart tells the picture, there. Homeownership also is at the lowest level now since 1998.
Chris Mayer from Columbia University School of Business
Chris, is the worst behind us here?
CHRIS MAYER, COLUMBIA UNIVERSITY SCHOOL OF BUSINESS: It depends where you live. I think in some of the coastal markets in Coastal California, the Northeast, I think we really are starting to see things turn around. And, you know, places like Atlanta, but if you're in Florida, if you're in Nevada, if you're in parts of California, you know, Arizona, it's hard to say that the worst is behind us.
ROMANS: All real estate is local. You're absolutely right. Taking the average home price in America is like taking the average temperature in America. It's different depending on where you live. And I get that.
When we look at the way homeownership has declined to 1998 levels, not necessarily bad news, really, because maybe homeownership was bumped up too high for false reasons.
MAYER: Yeah. I think we now understand what I think we didn't understand for a long time which is not everybody should be a homeowner. And, you know, eventually between 80 percent and 90 percent of Americans will own a home. But I think many of us in our 20s either we move around a lot. Maybe we took on too much debt, student loans, other things, aren't in a position to own a home. We shouldn't put some of those people into homes that they are owning, we should find ways for them to rent.
ROMANS: We're looking at a chart right now that shows recent recessions and then shows how homeownership has fared. And really for 10, 20, 30 years, no matter what, home ownership levels will continue to move higher until that peak in the 2000s, amid very, very easy credit.
Do you think more people are going to continue to shy away from buying a house either because they can't get a loan, as we saw in other statistics, or because they've changed their view of the American dream?
MAYER: I think that one of the interesting facts is if you look at people who went through the Great Depression and owned stocks, people who owned stocks in the Great Depression and lost all their savings, invested less in stocks for the rest of their lives.
MAYER: So there is a little bit of, you know, risk I think that some of the people that have been really burned in housing are going to sort of think they just don't want to own a home for a long time. There's a big "but" there, which is, at the same time, you know, owning a home is really a sign of financial stability, if you're able to do it. So, I don't think it's going to be as bad as, you know, the Great Depression evidence of people who just never invested in the stock market again. But hopefully people will be more responsible about that decision.
ROMANS: We can only hope. Jim Carr, from the National Community Reinvestment Coalition, you know, communities need the housing market to recover, Jim. I mean, state and local governments, they are expected to shed more than 100,000 jobs in the third quarter. Without those property tax revenues, they can't fund operations. Communities are facing an uphill battle if people can't buy homes, Jim.
JIM CARR, NATIONAL COMMUNITY REINVESTMENT COALITION: Right. You're absolutely right. The problem is not as if somehow things are leveling out. We're en route to another 2 million foreclosures this year and probably have at least another 2 million in the pipeline on top of that. So, despite the good news that you talked about earlier at the top show, the reality of it is that more likelihood is that home prices will continue to slide through the end of this year. One good note is nice, but it doesn't make a song. And so I think there's real trouble in the housing market in the years to come.
ROMANS: Margaret Kelly you're the CEO of RE/Max. You know real estate from the front lines. Do you think there is real trouble for the housing market to come, or do you think that we're reaching a bottom here?
MARGARET KELLY, CEO, RE/MAX: I think we're reaching a bottom. Right now we call it kind of a saw-tooth recovery. You are going to see it up and down, kind of bump along the bottom for the next year or two. Unlike the Case Schiller report, RE/Max does a housing report. And Case Schiller, it is a three-month average, the data we're looking from them is for April. RE/Max looks at current data and what we have seen is the last three months, that we've seen an increase in the prices in three of the last four months, and increase in transactions, month to month. That's great signs.
ROMANS: All right. Jim, Chris and Margaret stick with us because we have so much to talk about, about housing. Because the big question in an unhealthy housing market is do you rent or do you buy? What to do and which makes sense for you and your family. That's next.
ROMANS: Can a home be a man's or woman's castle even if he or she done own it? Yes. If the latest wave of renters is any indication. Even those who can afford to buy are opting out and renting instead. People like Xander Clarke.
XANDER CLARKE, RENTER: If I owned my own home I would not have any of these amenities.
ROMANS (voice over): Like a full service building and an outside pool. But amenities aside, 23-year-old Xander Clarke is at an age when some people consider buying their own homes.
CLARKE: I though about investing and purchasing a home, my father purchased a home when he was my age. So, when I knew I was going to move to Baltimore I looked at properties, but I just knew that in my line of work I would need to be re-locatable.
ROMANS: And as the housing market sinks, Xander has seen friends who own homes, struggling.
CLARKE: It has been on the market for a year. They are not getting the price they are asking for. That's scary to think that you have to keep lowering the price.
ROMANS: The numbers tell the story. Home ownership has dropped steeply from its peak rate above 69 percent in 2004, to just above 66 percent. Home ownership is now at the level it was in 1998. But even those who have the money and can with stand the tougher credit checks are opting not buy, but to rent instead. Chris Mayer researches housing for Columbia University Business School.
MAYER: I think a lot of people are looking and saying, you know, even if I can make the down payment, even if I have the income and credit, is this really the best time to jump into the market?
Doug Bibby is president of the National Multi-Housing Council.
DOUG BIBBY, PRESIDENT, NMHC: We're seeing some opting not to buy right now, even though they can afford it. Because some are betting on housing prices falling further. There are some predictions they will fall more. There are others who are betting on the ability to change.
(END VIDEO CLIP)
ROMANS: With the jobless rate at 9.1 percent, being able to pick up and go where the jobs are is critical.
CLARKE: I prefer to rent. I like the flexibility that comes along with renting.
ROMANS: The face of a new generation of renters, and perhaps future of home dwelling in general.
MAYER: I think there is a lot of evidence that people need to have down payments. So we should have viable options for people who are not in a position in their lives not to be owners. And there is nothing wrong with that. Hopefully, we'll start to eliminate some of the stigma so when people buy they will buy for good reasons.
(END VIDEO CLIP)
ROMANS: Xander Clarke works in human resources. If he gets a promotion he wants to be able to take it, and move cross country, and not be tied down, limiting his mobility at work. That is something that a lot of young people are thinking about.
So which is your American treatment? All those amenities and that flexibility? Or the responsibilities that come with home ownership, especially when prices are bottoming, at best.
Chris Mayer and Jim Carr are back with me, along with Margaret Kelly.
Chris, in the piece we just watched you say renting is a viable option for those who can't afford home ownership. In fact, the numbers prove it. Renter growth has out paced household growth, new household creation, for four years in a row. But won't there be long term effects, economically, if we become a nation of renters, or at least more-a larger percentage of renters?
MAYER: You know, home ownership is a great thing in terms of if you're in a stable place to do it. But there's no evidence to suggest that well-run rental communities, well-run rental properties are bad for locations, in general. I think we are going to see -- I was just down in Atlanta at the beginning of this week and, you know, a lot of sales are going to people who, investors who are looking to rent single family homes out.
ROMANS: Yes, we know the numbers are showing a third of home sales- almost a third-are investors, and sometimes those are professional investors, that is not like you and me, or I guess, me, getting in and buy a new home.
Margaret, I want to ask you, you run a real estate company. We've heard for so long from people who make their money selling real estate that it is not going to get any worse. The bottom is almost around the corner. What does it feel like, or what do you think about this new talk that renting is a better option for people. They they'd to buy their cash cushion and the housing market isn't good for them right now? KELLY: There's quite a few thing. One is the confidence you have in your income, employment, and so on. But renting versus buying is a very personal decision based upon your personal situation. It's still the American dream and many people want it. You're right there are about 20 percent to 30 percent investors out there who are buying homes, and a lot of them actually are someone buying one home, in their neighborhood, and they are going to keep it and rent it. But if you look at the number of families that have been foreclosed upon, they can't buy homes now. They need the rental properties. That's why you see a bit increase in the whole rental market. .
ROMANS: Yes, Jim, we just showed a map that showed that most of the country, the homeownership rate is declining, parts of the Midwest, New York State, some other places you see it going up. Do you believe, Jim, that owning a home, the classic American dream, is still the better way to go. And that we do need to ditch the idea that houses never go down in value. We have to throw that out of the window, but home ownership good for communities?
CARR: Absolutely. There have been a number of studies that show there are significant differences in the behavior of owners versus renters. First of all, just starting with improving their own properties, as well as making sure that the neighborhoods remain really viable, that they have the right amenities, things of that nature.
But even going beyond that. There's nothing wrong with being a renter. But I think it would be unfortunate if, in fact, we move forward with public policies that really didn't promote home ownership. Because it's important to remember that for more than 50 years the American home was not only sort of the centerpiece of where one lives, but owning a home was the number one source of wealth accumulation for the typical American household. And if that's lost the question is what fills that gap?
Chris Mayer thanks for joining us. Margaret, Jim, stick around.
More than a million homeowners are doing it, walking away from the home they own and walking away from the debt that comes with it. But is it the right thing to do? We'll check it out next.
ROMANS: The Mortgage Bankers Association says nearly 13 percent of all homeowners with mortgages are either behind on their payments, or they are already in foreclosure. The stress of mortgages gone bad is leading to a new trend called strategic defaults.
These are people who can pay their mortgage, but they stopped because the value of the mommy is worth less than the loan. Who are these people? You might be surprised. The credit bureau Experian tells us the average strategic defaulter has multiple mortgages, has higher origination balances, a third of them, almost, live in California. And Experian also found they have higher incomes, higher credit scores, and higher financial literacy. Is it OK to just walk away from the mortgage? David Flores joins me now. He is a credit counselor at GreenPath Debt Solutions.
David, help me understand the two reasons why you say people do this?
DAVID FLORES, CREDIT COUNSELOR, GREENPATH DEBT SOLUTIONS: Well, the two reasons are this. One, to try and leverage with the bank, to work with them on a modification.
ROMANS: Saying, I'm walking away, unless you can work with me.
FLORES: Right. The other reason is simply because they want to be able to take advantage of the slow drawn out foreclosure process, live in a home --
ROMANS: For free.
FLORES: For free, for free.
In some cases people own a different home, they are renting out the other home, that they aren't paying the bills on, but still collecting rent.
ROMANS: And that is something that is happening, too.
Also, one thing I found interesting from the Experian data is that these are people with higher credit scores, higher incomes, they would seem to have better financial literacy. So that is why it is a strategic default.
FLORES: Right, right. And I think the information out there, there is a lot more information out there regarding what the banks -- what you need to do in order to qualify for a loan modification. And so there are a lot of attorneys out there, organizations who are feeding that information.
ROMANS: Oh, yes, there's a cottage industry. We'll take your money to help you strategically default.
Margaret Kelly, from RE/Max you're still with us. Margaret you are also on the front lines. What do you think has to be done to keep people who want to stay in their homes, in their homes, paying their bills, and not strategically defaulting. Or is it ever OK to walk away from your financial obligations to the bank, if there's no hope- you're so underwater, there's no hope you'll ever get out of it?
KELLY: That's a moral and ethical question that I think each person has to address.
But what we need to do is loosen up the jumbo mortgages and allow the higher-end mortgagees to be able to adjust their mortgage. It's kind of interesting. You talked about, it's the higher end. For those people with mortgages of $50,000 or below, only 6 percent strategically default. If you are over $1 million on your mortgage, 33 percent are strategically defaulting.
ROMANS: Why is that?
KELLY: Because more than likely, they paid way too much for their home. They don't see that they're ever going to get out of a negative equity position. And they have, as you said, it is strategic. They have thought about it and said, it is better to talk away than to sit here and continue to make payments, because I will never get the money out of this home.
ROMANS: You know, Jim Carr, I want to bring you back into the conversation. One of the things here, is that sub-prime borrowers, many of them have already been blown out and foreclosed in the past few years. They were on the front end of the whole housing crisis. It's ironic now that people who are still living in their homes and not paying any bills are people who have high credit scores and higher financial literacy.
CARR: Right. It's very interesting. And I think the term "strategic" is really key here. Because a lot of people really, you know, have a perception that maybe those are lower income households. But really, it's higher income households. And probably one of the reasons they do it, in addition to those reasons that have already been given, is that they have other wealth that they can rely on to continue to function in the economy, even though they have this serious ding against their credit score. Because a strategic default is going to hurt you with respect to your credit score. And as you know, you need a credit score for practically everything these days. You can't afford to lose more than 100 points, and continue, unless you've got a fair amount of assets that you can rely on.
ROMANS: Here's the interesting-
CARR: The other thing that-
ROMANS: Go ahead.
CARR: I was just going to say, the other thing, it's important to recognize that in many markets, consumers are upside down not by 5 percent or 10 percent, because that's not really where the problem is. It's in those markets where consumers are upside down in their loans by 25 percent, or even 50 percent. And in those cases, many people are walking away simply because they can't estimate the day at which their home will ever be worth what they paid.
So, again, it is a moral issue. It's also a legal issue. But the reality of it is, if you owe 50 percent more on your mortgage than the home is worth, a lot of folks are saying, well, this is clearly just a dead loss. I might as well take the ding on the credit score and go forward from there.
ROMANS: Right. Especially if you have multiple mortgages, which is what the Experian data found. If your credit score is going to take a hit, you're already living in one home. It's not like you're looking for another mortgage to live in your house. You're already living in one house. And also, they found that 90 percent of these people were paying all of their other bills. All of them. So from the credit rating point of view, your score falls, but with an asterisk, because you're paying all the other bills. That makes you still a good candidate for all the credit products that banks are trying to sell you, Jim.
CARR: Well, not necessarily. You're still -- strategic default means you intended to do it. You could have paid that bill. So you're going to be treated a lot less favorably by the credit scores than you would if in fact you defaulted because you literally had hard times. You know, you lost your job. The other thing I think it's important to recognize is that depending on whose numbers you're using, the number of households that are upside down range from between 23 percent to 28 percent. That's a huge number. So further drops in house prices, the conversation we were having earlier, if that happens, the potential for more strategic defaults is -- could, in fact, grow.
ROMANS: OK, guys, stick with me for a minute, there's so much more to talk about. Jim, Margaret, David, stay with me.
What will it take then to fix the housing market, to get home prices stable and rising again? And when will we see a real recovery? Real answers, next.
ROMANS: Before housing recovers we have to have confidence. But confidence is in short supply; 15 percent of Americans think the housing market will recover next year. That's 15 percent. And 24 percent say 2013. And you can see from this pie chart that most of them, 54 percent think the housing market won't recover before 2014.
Jim Carr, can the government, should the government, fix the housing mess?
CARR: Yeah, so there are three components of this housing market problem. The first is the foreclosure crisis that continues, the federal interventions so far have just been woefully inadequate, and there's a lot more that can and should be done. In fact, going back to our conversation on strategic default, the failure of a lot of these loan modification programs is one of the reason why people are going forward with strategic defaults.
The second is that we need to repair the housing market, meaning put new rules in place that make sure that loans are sustainable. But we need to make sure we don't put rules into place that are so onerous that they go beyond repairing the market, and really dampening further housing home buying demand, because that will simply slow the housing market's recovery.
And the third piece is unemployment. Unemployment has been the largest driver of foreclosures for the last two or three years now. So failing to get America back to work is going to be harmful to the housing market going forward.
ROMANS: You know, Margaret, we know the solution to the housing crisis, it's confidence. Only we don't know what it will take to get the confidence back. Maybe knowledge or financial literacy is part of it. The Consumer Financial Protection Bureau has unveiled the "Know Before You Owe". Take a look at this. These are two prototypes of a simple two-page mortgage form. That replaces the existing, lengthy, often confusing disclosure documents.
Margaret, is this the clarity we needed for borrowers five years ago, I guess? And does this go toward helping us get some help with the housing market again today?
KELLY: Well, unfortunately, years ago, the lending practices were way too loose. You could get a mortgage without anything down, without proving income. I think the pendulum has swung too far the other way, with where lending practices now are way too tight. We have to get back to common sense, good lending standards. We have to increase confidence and the best way to do that, let's get private sector jobs. Let's get people employed again. Because people who have jobs, they buy homes, and they stay in homes.
ROMANS: And people who are confident in their jobs.
KELLY: Absolutely. That they know they are going to stay in it.
And third is this whole distressed property glut that we have, or shadow inventory, it is going to take a few years to work through the system, but once those are gone, we are back to a normal housing market.
You know, David Flores, you counsel people who are trying to get out of debt. And they're trying to triage all of these bills, and decide what to do. And whether they should rent or buy, and if house prices are going up or down. David, is it jobs, the thing that we need to really help this situation?
FLORES: Well, I think it's a combination of jobs. And as you said, financial literacy. I think a lot of consumers got into mortgages that they simply could not afford, but didn't understand that they couldn't afford them.
ROMANS: Do you like that two-page document?
FLORES: I do like it. I would like, obviously, as a financial counselor, for the lender not to be the one to go over -- or only the lender go over that information. But a third party who is, you know, neutral to the situation, so that they can give them real answers and real advice.
ROMANS: All right. David Flores, Margaret Kelly, thank you so much for joining us, also Jim Carr, nice to see all of you today.
And let's keep talking about this, so we can really understand what's happening in the housing market. It's so important. It is part of the American dream, no question about that. Thanks, everybody.
That's going to wrap things up for us this morning. But the conversation continues online. Please send me an e-mail with your thoughts, your questions, to YourBottomLine@ CNN.com. Also, find me on Facebook and Twitter, @ChristineRomans. We reply to all of these. I want to know what you think about the housing market, confidence, jobs, education and the American dream. Back now to CNN SATURDAY for the latest stories. Have a great weekend.