I can’t tell you when the next housing boom will come, but I have an idea about how it will happen. Follow along with me and let your imagination add to the discussion.
As with previous housing cycles, the economic downturn has decelerated new-home construction to a snail’s pace. In many areas of the nation, it has come to a screeching halt.
The inventory of available housing will not keep pace with demand and that will lead, inevitably, to increasing home prices — and a new wave of construction.
The Sacramento metro area has formed through successive waves of construction and quiescence, beginning with the downtown core, moving out to the “Fabulous Forties,” Arden Arcade and now splashing against the foothills from Lincoln to Folsom.
The fits and starts of previous boom/bust cycles are readily observed in architectural styles, lot sizes and master-planned neighborhoods.
More than 160 years have elapsed since the first wave of Europeans swamped John Sutter’s fiefdom. Over those many decades, housing values have reached flood tide and ebb.
None will dispute the receding flow of our current circumstances, but there are factors in play that will accentuate the next boom in home prices.
The usual forces will work their way upward as a growing population meets a limited supply of available housing.
Lowered home prices increase the affordability of housing, and demand increases. Increased demand will produce increased home prices, reigniting a wave of building and increased prosperity for the region.
Employment opportunities will arise to stimulate more housing demand, making further contribution to the recovery of home prices. An upward spiral of economic health will ensue.
The retrenchment of mortgage practices is a comfort to me, producing a familiar and sensible lending environment.
When I began my career in 1979, things were not terribly different from the conditions we faced today. The extent of the challenge seems greater, but the opportunity for recovery is equally great. Bear with me as I attempt to explain my optimism.
It is important to note that underwriting guidelines have been modified in ways that will create pent-up demand for housing.
In particular, Fannie Mae has ruled that any prospective borrower who has experienced a foreclosure will have to wait five years to be eligible for a new mortgage. Freddie Mac has a four-year rule and the Federal Housing Administration has a three-year blackout period.
The folks who are placed in “time out” because of a past foreclosure will eventually re-enter the housing market, creating an additional subset to the normal population of homebuyers.
I speculate that the oversized group of renters will spark the next housing boom. First-time buyers and former homeowners will be the groundswell that lifts our housing market.
As I look down the time continuum, 2015 to 2020 could be very robust years for the real estate industry.
Will it take six years for the housing market to show evidence of a rebound? Possibly. We have experienced growth in sales activity during the first half of 2009, and that is a good sign. Some banking concerns are reporting healthier balance sheets and the stock market has shown more stability.
I would not begin to say that all is rosy, but the depth and breadth of our financial difficulties may show containment.
For example, an academic study conducted through the University of Virginia indicates that the entire loss of equity in the United States may be less than one third of the total funds committed.
Professor William Lucy concludes that, if home prices fall to their 2000 levels on a nationwide basis, the loss of home equity will be about 30 percent of the $350 billion dollars already provided to banks and insurance companies to cope with losses.
As I had predicted, Federal Housing Administration lending now provides a significant percentage of new mortgages. The volume of FHA loans has expanded from 2 percent of total loan originations in 2005 to 33 percent of the mortgages written over the first quarter of 2009.
I am certain that FHA loans will capture more market share in the years ahead, for many reasons. Under current guidelines, Federal Housing Administration loans will allow loan approval three years after a foreclosure — if clean credit is reestablished.
Federal Housing Administration loans will be the preferred financing vehicle for those who are willing and able to regain the privileges of ownership after losing a home to foreclosure. It should be noted that FHA keeps a database of past delinquency or default on any federal debt. A prospective buyer can be denied financing if their name is on the list.
Other important features of FHA financing include small down payment requirements and the allowance of gifts for down payment.
As a cautionary note, many of the lenders who preyed on borrowers in the past are now clamoring to join the ranks of FHA-approved lenders. Some are cloaking themselves in the licenses of other individuals or companies.
As with any business relationship, you should rely on the recommendation of others before committing to a transaction with any lender.
I do not advise responding to mass mailings that have come from remote locations. Be wary of unsolicited lending offers in any form, written, phone or electronic.
Even some household names are guilty of rewriting loans that may not be in the best interests of their current customers.
Let me close with this reminder. We know that a vibrant real estate market lies ahead, as surely as seasons of plenty follow seasons of want. There are exceptional home values this season, and interest rates are at their lowest.
At the slightest stir of restoring confidence, the pent up demand for homeownership will ignite a dynamic round of activity.
David Ryland is the acknowledged dean of loan originators at Big Valley Mortgage in Roseville. He has 30 years of experience as a loan officer, manager, trainer and mentor. He can be reached at dryland@apmortgage.com.
