A month-over-month drop in housing sales of 6.4% in December was one of the largest in history that did not involve a major change in government policy. December capped a 2018 that was dismal for the housing market and left sales at a 3-year low. The December sales plunge was well below the 1% drop expected by economists polled by Reuters. The phenomenon has economists and lenders scrambling for answers and explanations.
Lawrence Yun, Chief Economist for the National Association of Realtors, is even baffled by the numbers, stating,
The latest numbers do not reflect the lower, current mortgage rates compared to the November figures, so it’s really harder to explain. He went on to speculate,
Perhaps it is the decline in consumer confidence that’s been occurring in the latter half of 2018.
Previous drops in sales were blamed in low inventory, rising interest rates, and lack of affordability. However, in December inventory rose by 3 percent compared to a year ago, interest rates fell well off their October highs, and median home prices saw the lowest gains in three years.
Looking ahead to 2019, expect weaker existing-homes sales as the new year ushered in a government shutdown and worsening economic uncertainty, said Cheryl Young, a senior economist at Trulia.
Softening Lending Standards
Since the crash of 2008 we have witnessed an astonishing comeback to the real estate market. However, many economists fear that with the comeback we are once again returning to an environment of undisciplined lending and overexposure the real estate market by financial institutions.
Sub-prime mortgages, which vanished amid new post-2008 regulations, are undoubtedly making a comeback (albeit with different names such as
non-prime loans). California-based Carrington Mortgage Services, a mid-sized lender, just announced it is offering loans to borrowers,
with less-than-perfect credit. In Miami, a non-profit organization, Neighborhood Assistance Corporation of America, is offering zero-down no credit check home loans. More importantly, Bank of America has made a commitment to purchase $10 billion of these loans from the non-profit. AJ Barkley, senior vice president of consumer lending at Bank of America noted that the program has a 90% approval rate.
Recently former Fed Chair Janet Yellen warned of risks of corporate lending to the financial markets and even shared her fears of a new financial crisis. As more high leverage loans are made to home-buyers, developers, and builders, lending institutions become more and more exposed to any downturn on the real estate market. Therefore, lenders and financial markets are correct to worry about any downturn on real estate sales or real estate prices.
Why it Matters
Most individuals do not see themselves as real estate lenders, however, most also underestimate the exposure that they have to the real estate market. Many people can have massive exposure to real estate in their investments, in managed funds, and even in cash deposited in any financial institution. Banks are only required to maintain between 3% to 10% of deposits in cash (depending on the size of the bank) and can lend the rest out, much of it going to real estate loans.
In 2008, many major banks became insolvent due to their losses on bad loans when real estate prices fell. These banks were bailed out by the Federal Government and deposits at the bank were safe. However, when the Bank of Cypress became insolvent in 2011, the bank was bailed-in by its deposit holders. Depositors lost up to 50% of their deposits to pay off the bank’s bad debt. Many believe that this bail-in model could be used in the US in the event of another crisis.
Even those without financial exposure to real estate holdings should pay attention to the real estate market and should devote some portion of their financial portfolio to an asset class such as physical gold that does not have any exposure to the real estate market or the financial system.
Midas Gold Group is here to help individuals own physical gold privately or possibly even using IRA funds.