Are we headed for recovery in real estate and banking? Are bankers taking us for a ride?

Thanks for asking these important questions. I can see you’ve really asked two, so I will try to answer them individually, though the answers are related.

As far as heading for a recovery in real estate and banking, you ask “are we headed” and I assume you mean on a national level. But real estate and banking recovery will happen, generally, on a regional and even a local basis. So, without knowing where you live, I will tell you the signs I think you should look for, signs that will be a portent of real estate recovery, and I’ll say now that banking will generally improve as real estate does. However, with regard to the banking industry, I’ll temper what I just wrote with the caveat that, for me, it is hard to think of an industry that has recently received billions of dollars in TARP funds as one that is hard-pressed, or in great need of recovery. Of course, you know that TARP stands for Troubled Asset Relief Program, a federal “bail-out” of the banking industry that has been much publicized since having been signed into law by then President Bush in 2008. I’ll write more in regard to your banking question in a minute.

As far as real estate recovery, here are four signs I think you’ll need to see, locally and regionally, before you can be sure that recovery is in progress:

1)   Homes once again begin to appreciate in value. Since Fall 2007 (at least in my area) homes have been going down in value. Loss of value has produced loss of equity and many homeowners now find themselves “under water” with regard to their home’s value; that is they owe more on the mortgage than the house is worth in today’s market.  Loss of equity means that homeowners won’t be able to sell and walk away with money to put down on a new home. Being “under water” has created a lot of foreclosures and “short sales”, which is where the mortgage holder has agreed to take less in payment of the mortgage balance than what is owed; sometimes as little as 50 cents on the dollar. Once you begin to see home values going up again in your area, look for the following signs and, if you see them, recovery will be underway.

2)   A resumption of new construction on a speculative basis. Many builders have stopped building homes altogether, with the exception of custom homes they are building for someone who is paying them as they go along.  But building homes on a speculative basis (not pre-sold but speculating that a buyer will come along shortly) has been almost non-existent in most areas for over two years. New construction leads the way in real estate sales because it creates housing for high end buyers, who sell their homes to buyers in the median price ranges, who sell their homes to first-time and entry-level buyers. New construction is important for real estate recovery. Once you see the resumption of new construction in your area, along with an increase in existing home values, look for the following to be sure that recovery is in progress.

3)   Re-employment in the workforce. Unemployment rates have been high nationally, in some areas up to or over 12%. However, unemployment rates don’t say anything about those millions more whose jobs are on the line due to shaky local economies. This is a critical issue for the real estate industry because unemployed people can’t be real estate buyers, and people who are worried about losing their jobs won’t be. Until unemployment rates start to drop in your area, and workers become re-employed, there is little hope for recovery in real estate.

4)   Loosening of the credit markets. This fourth sign is related to your second question about whether bankers are “taking us for a ride”. Although I don’t think they are taking us for a ride, I do think they are running scared. It seems to me that, contrary to what their advertising may say, banks are loath to make real estate loans right now, and have been for a while. And it’s not hard to understand why. In the past, when homes were appreciating in value at the rate of 10 to 30 percent per year, it was easy to make a real estate loan because there was so much less risk. They could loan 100% of the appraised value of the home and within six months the loan to value ratio could be down to as low as 80% because of rapid appreciation of value. However, in a market like we have today, where values are declining, if you loan 80% of the appraised value of the home today, in six months your loan balance could be as high as 100% of the market value of the home because of depreciation of value. Bankers don’t want to make a loan in a market where their security position continually deteriorates. But they have to make loans because of public and private pressure to do so. It’s natural, then, that they are setting very stiff loan requirements and qualifications in order to reduce risk, but in doing so they scare off potential borrowers.

With the advent of these four signs, I feel you can be sure that the real estate and banking industries are in recovery. Equities will be building, people will be going back to work (including builders), bank balance sheets will be strengthening, and buyers will be back in the market. Good for bankers, and the rest of us, as well.

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