How to Plan Ahead, Find Value in Real Estate

While economists concur that the next wave of home buyers will be focused more on shelter than an investment — and will shy away from non-traditional mortgages in favor of more conventional home purchase loan financing as a result — they believe there’s still value in housing.

“We need to separate the investors from the speculators,” said consultant John Tuccillo, also the former chief economist of the National Association of Realtors. “The flippers are getting out, but the real estate investors with deep pockets still see tremendous value in some of the price drops taking place around the country.”

Richard DeKaser, Senior V.P. and chief economist for National City Corp., predicts 40 percent of the nation’s housing markets are at risk of losing value, but the areas are definitely in low employment, over-built regions.

He said consumers in the market for a home should forget about stretching as far as they can for a bigger home and be more realistic about what they can afford.

“There’s a large group of people who are really stretched out. They should be in a home that’s half as expensive as the one the have. They are finding themselves with a reset mortgage where all of their spendable income is going to the house and they can’t afford to go out to dinner,” DeKaser said.

While millions of homeowners are undergoing the payment shock brought by the first adjustment of a low-rate adjustable-rate mortgage, more adjusting — and household stretching — is absolutely on the way. According to a new report released by Morgan Stanley, 25 percent of all secured debt, estimated at $2 trillion, will be reset in the next 12-18 months.

That adjustment should be a catalyst for mortgage loan providers to begin offering financial consulting as part of their core services.

“The main services have traditionally been mortgages, title and escrow,” said Jeff Hilligoss, managing director for Residential Capital Corporation. “But a wealth management component needs to part of the bundle.”

Regulators have scrutinized mortgages with low down payments for the past two years, yet lenders have not significantly curtailed such programs.

The subject often fuels a controversial question: Have lenders gone too far in extending credit to consumers, or have they simply helped borrowers get into markets unattainable with a conventional home mortgage rate?

DeKaser believes exotic mortgages will enter a period of remission, but it’s up to the consumer to make a realistic decision about ARMs and other unconventional choices, what’s really possible under their specific budget.

“Lenders have figured out how to price the exotics properly, but consumers did not,” DeKaser said.

While delinquencies and foreclosures have increased in some low-employment regions such as Michigan, Indiana, Kentucky, Virginia and Ohio, solid employment numbers across the U.S. will reduce those situations in prime markets, specifically along both the East and West coasts.

However, overvalued markets such as Las Vegas, Miami, Ft. Lauderdale, Phoenix and Washington, D.C., are in for a soft time, economists say.

Mortgage rates should not be a huge issue in the near future. According to Freddie Mac, the 30-year fixed-rate mortgage will average 6.4 percent in the fourth quarter and change very little in 2007.

Freddie Mac prognosticators say 30-year fixed-rate mortgages should average 6.5 percent, while the rate for one-year, adjustable-rate mortgages (ARMs) will be about 5.5 percent.

“If I was a buyer looking to live in the home, I wouldn’t worry about trying to time the market,” said David Stiff, an economist with Fiserv CSW. “The current housing correction will be far less severe than it was in the ’80s.”

Although the national housing correction will be a short-term adjustment, some salespeople have never experienced a down market. A majority of the nation’s 1.3 million real estate agents have been in the business fewer than 10 years — the last time a significant downturn occurred.

“Realtors are in for a very tough road. They make money on transactions, and we will see a 25 percent decline over the next 12-month period with all kinds of pricing pressure coming,” DeKaser said.

Tuccillo said salespeople will actually have to start marketing again instead of simply taking orders.

“They don’t remember what tools they used. If they hadn’t seen it before, then they need to find someone to show them what to do now. They have to learn how to work their lists and databases in different ways,” Tuccillo said.