In an environment filled with hyperbole and ever increasing tales of woe, it seems that a little counterpoint is in order. The following comments and observations represent my best effort to offer some sense of balance and perspective on the issues that are at the forefront of current news reports.
The difficulties facing the mortgage market are primarily related to â€œsub-primeâ€� loans, and they are the most severe in a relatively few states. More specifically, sub-prime Adjustable Rate Mortgages (ARMs) are at the heart of the problem. It should also be noted that not all sub-prime loans were made to borrowers with poor credit. In our resort area, a substantial number of well-qualified applicants voluntarily chose sub-prime over traditional loans for a variety of reasons, including ease of underwriting.
â€¢ A little over 13 percent of all mortgages are classified as sub-prime by the Mortgage Bankers Association. About 11 percent of the sub-prime loans are more than 90 days past due or are in the process of foreclosure. This means that roughly 89 percent of the sub-prime category of loans are being paid on time or are less than 90 days delinquent.
â€¢ Looking at the broader mortgage market, the Mortgage Bankers Association recently reported that the delinquency rate for all outstanding loans during the 3rd Quarter of this year was 5.59 percent. Loans in the process of foreclosure added another 1.69 percent for a total of 7.28 percent. In other words, 92.7 percent of all mortgage loans were not delinquent or in the process of foreclosure.
â€¢ As a point of reference, at the end of September, only approximately 200 out of over 70,000 real estate parcels in Sevier County were in foreclosure â€“ well under one percent.
â€¢ Delinquency and foreclosure troubles appear to be greatest in states that had the highest levels of speculative activity during the boom years and those in the Midwest with significant unemployment related issues. Although Tennessee does have a significant number of foreclosures, California, Florida, Ohio, Michigan and Indiana are at the forefront of these trends.
â€¢ The relativities associated with the mortgage market issues also need to be appreciated. According to the Mortgage Bankers Association, â€œWhile subprime ARM delinquencies and foreclosures are climbing in all states, in most states the actual number of loans involved is fairly modest. For example, the number of subprime ARM foreclosure starts in California during the third quarter equaled the starts in 35 other states combined.â€�
â€¢ According to the U.S. Census Bureauâ€™s 2005 housing survey, there were 74,931,000 occupied residential units in the country. One-third of these properties (24,776,000) were owned free and clear with no mortgage debt.
â€¢ With regard to the second home market, a survey conducted earlier this year by the National Association of Realtors estimated that 25 to 30 percent of vacation and investment properties did not have any mortgage debt.
Financing Availability & Interest Rates
Conventional loans to qualified buyers are essentially unaffected by problems elsewhere in the mortgage market. These loans, which are underwritten using traditional standards, are being made largely without any significant interruption. The mortgage market has changed. It has not shut down, and the changes that are occurring are generally positive in nature.
â€¢ In the Smoky Mountains financing is readily available for qualified buyers. Underwriting requirements have become more rigorous across the spectrum of loans.
â€¢ Borrowers who have limited or no equity in their properties and who are attempting to refinance adjustable rate mortgages are having difficulty finding alternative financing.
â€¢ Interest rates are near historical low points. Low interest rates make properties more affordable and provide a strong incentive for buyers to purchase before rates once again head upward.
â€¢ During the second week in January, the interest rate offered through a major lender for 30-year fixed rate conforming loans (loan amounts of $417,000 or less) was 5.75 percent with no points. A point equals one percent of the loan amount. The interest rate for jumbo loans (loan amounts in excess of $417,000) was 6.5 percent with the payment of one point.
The prices of properties have declined in most markets across the country as well as here in Sevier County. Lower prices in conjunction with low interest rates are a winning formula for prospective buyers.
â€¢ According to the Great Smoky Mountains Association of Realtors MLS database, the average selling price of residential properties in 2007 was $205,181, and the corresponding median selling price (half the prices are above, and half are below) was $170,000. A total of 2,236 residential properties were sold during 2007.
â€¢ The average residential selling price in 2007 was actually slightly higher than the same measure in 2005, the year when the pace of price appreciation peaked. The market from 2006 onward however was essentially flat with very little price appreciation. This was a sharp change from the dramatic increases in the years prior to this period. There is good reason to believe that the real estate market in Sevier County is stabilizing and that it may be at or near its cyclical low point. Experts agree that, except by pure luck, it is highly unlikely that anyone can time the market and purchase at the exact bottom.
Since the summer of 2005, we have experienced a buyerâ€™s market in our area. This has created conditions that make it an opportune time for anyone thinking about buying a cabin or lot in the area to turn their thoughts into action.
â€¢ With nearly 3,878 residential properties and 3,025 land parcels being offered for sale, prospective buyers now have a very broad selection of Gatlinburg area properties from which to choose.
â€¢ Given the wide gap between supply and demand, both the listing prices and the selling prices of properties have decreased. The latest research that I completed indicated that most residential properties were selling for about 95 percent of their list prices.
â€¢ In addition to the price decreases that are being seen, buyers may find sellers more willing to offer concessions during contract negotiations. Examples might include the seller paying a portion of the buyerâ€™s closing costs, the seller â€œbuying downâ€� the purchaserâ€™s interest rate by paying loan points, and, in some cases, the seller guaranteeing a specific dollar amount of rental income for the first full year of ownership.
â€¢ As a by-product of the increased supply of properties, prospective buyers should find the purchasing environment less stressful. There are fewer buyers looking at properties, and there are increased inventories of homes and lots for buyers to consider.
Market conditions such as those that we are currently experiencing in Sevier County can initially appear daunting for property owners who want to sell their cabins or lots. However, if a few simple facts are understood and acknowledged, a much more optimistic outlook emerges.
â€¢ Properties are being bought and sold all of the time, regardless of market conditions.
â€¢ Referring again to the study of prices that I researched earlier this year, the majority of properties that sold between January and June had a selling price that was higher than the original purchase price.
â€¢ Since 1998, the average selling price of residential properties in the area has risen dramatically. While prices are roughly flat compared with their peak in 2005, the average residential selling price in 2007 is still higher than the level reported during previous years.
â€¢ Sellers have the most control over the price of their properties and the condition of their homes. These are exactly the same two characteristics that buyers are seeking. Buyers are searching for the most attractively priced properties that are in the best condition.
It is more than fair to ask if I am implying by this discussion that there really are not any problems in the mortgage and real estate industries. Quite the contrary – I am simply attempting to demonstrate that, for the most part, the situation is much more positive than the national media is portraying it.
Every real estate market is local. While there can be no denying that events in the outside world have some effect on the Sevier County market, the statistical profile for our resort environment is quite different from the national, primary residence market that is the basis for the reports. Third, as we have recently seen, our government is not going to sit idly on the sidelines and let an economic collapse occur, especially with elections less than a year away. There is currently a strong push for some sort of action by the Congress and the President to improve the situation. This will probably take the form of a stimulus package. Additionally, interest rates seem poised to drop even more and the Fed has signaled that they will drop the discount rate as much as half a point during this monthâ€™s meeting. This will almost certainly cause a further increase in loan activity which will go a long way toward easing the current real estate doldrums we are feeling around the country and here in East Tennessee.
Remember, you heard it hear first: The recovery has already begun! We are currently negotiating several contracts and activity is way up since the first of the year. If you have been waiting on the sidelines don’t wait too long – the recovery has indeed begun.