Mortgage Professionals Should be Optimistic About the Future

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Th e M Rep o RT | 15 cover story "There are a group of home- owners who have seen prices jump dramatically, and they are now getting back to the point where they think they can get more for their house than they really can," Blomquist explained. "Similar to what we were seeing in the bubble of 2004 and 2008— they are overestimating what they can get for their house." Home prices along with media coverage may be mislead- ing sellers and buyers alike. As RealtyTrac points out, a few markets may be on the brink of a bubble. Once a bubble pops, prices inevitably fall again. Twenty-one percent of U.S. counties studied by RealtyTrac for a report on housing bubbles are now considered less afford- able than their historic afford- ability averages. In all, there are now 98 U.S. counties with a total population of 62 million people, where affordability levels are out of balance with today's consum- ers. Some of these counties include major metros such as Los Angeles, the Greater Houston metropoli- tan area and Dallas County, and Kings County, which makes up Brooklyn, New York. Petkovski also sees a discrepancy in how consumers feel about the market and home-value trends. "Home values are moving in the right direction for the most part, but appreciation is still dependent on submarket activity," he explained. The problem is that market participants often fail to recognize the current trends in home pricing and lending. On one side, the market has sellers overestimating values, set- ting themselves up for disappoint- ment later on. Yet, there's another type of market participant who has latched onto the negative news and refuses to let go. "[Y]ou have homeowners who don't real- ize how much equity they have regained in their home and that it may be a good time to sell," ac- cording to Blomquist. In fact, many homeowners have gained equity in recent years. As of the third quarter, 38 percent of all homeowners in foreclosure had positive equity, RealtyTrac says. "They have been so accustomed to prices staying flat or going down, they don't realize the equity that they have gained," Blomquist said of these homeowners. A third-quarter report from RealtyTrac, titled "U.S. Home Equity & Underwater Report," noted that 8.1 million U.S. properties are underwater on their mort- gages—the lowest level reached in two years. Meanwhile, the number properties with at least 50 percent equity rose to 10.8 million, repre- senting 20 percent of all mortgaged properties in the third quarter. That figure also is up from 9.9 million in the second quarter. The numbers suggest many silver linings still exist for sellers and buyers who live in one of the counties deemed by RealtyTrac as affordable according to histori- cal standards. RealtyTrac studied 475 different U.S. counties and concluded that 48 percent of those surveyed remain affordable. Still, Blomquist waves a red flag. "While 99 percent of markets have not returned to the irratio- nal affordability levels during the previous housing bubble, one in five markets have now exceeded their historical affordability norms, which is a strong sign that either a new home price bubble is forming in those markets or that home price appreciation will soon pla- teau until incomes can catch up," he noted in the study. With each market showing different signs—as some hit bubble levels and others report slower growth patterns—it can be dif- ficult for potential buyers to get accurate assessments of their place in the market. This, along with what seem like pessimistic media reports, can impede a potential mortgage or real estate client's abil- ity to make a confident decision in homeownership. "[F]or the most part, I think consumer trepidation can be at- tributed to a persistent real estate hangover that goes all the way back to 2008," said Petkovski. "I believe that consumers are still fearful of losing equity, and in most cases their nest eggs, as a result of a home purchase decision. But it is in fact one of the greatest ways an individual or family can build wealth throughout their lifetime." The key to cutting out all the negative noise is to create open and direct communication with poten- tial home purchasers and sellers, some within the industry say. "I believe lenders and Wells Fargo have invested a lot of time and resources in providing tools ... for consumers to educate themselves," Adams with Wells Fargo explained. "We have a tool we developed called My FirstHome that is available on our website and through a mobile app or a table app." The tool helps potential Wells Fargo borrowers educate themselves on what it will take to buy a first home. Blomquist challenges the popular idea that the market is not healthy due to lower levels of lending. There is an assumption that if the market isn't growing, then it's unhealthy, he said. But, Blomquist believes borrower discernment is one positive aspect leftover from the Great Recession. "From the data I look at, the buyers are behaving ratio- nally," Blomquist said. "There are some stakeholders who are almost wanting the consumer to go back to behaving irrationally when it comes to buying more than what they can afford." However, he says the addiction to rising home prices is over. "The consumer is behaving ratio- nally because you have additional safeguards in place to prevent con- sumers from taking out bigger loans than they can afford," Blomquist explained. "It is a good thing, but it is creating a bit of a hangover from the housing bubble because we are not going to see prices go out of reach of incomes—so it's a good thing in the long run." That may not be the positive "everything is rising" message that the media or industry wants to hear, but for Blomquist and the future of housing, it may be the best news yet. On one side, the market has sellers overestimating values, setting themselves up for disappointment later on. Yet, there's another type of market participant who has latched onto the negative news and refuses to let go.

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