Be you a seller, landlord, manager, tenant, or investor, it’s a looming thought: “when will the real estate market pick up? Though your reasons to pursue the answer may differ, it is, regardless, a common theme. So, our aim today is to help you grasp the fundamental economics behind the United States real estate market, while displaying the importance of the information to you.
Firstly, let me emphasize that our current economic situation is atypical to anything that most of us have lived through, so it is important to look outside the realm of stock prices when gauging what will happen to the real estate market. Next, it’s important for you to understand real estate’s place in the economy in order to form your future life or business strategies. Let’s get started.
How are homes purchased? Typically a home mortgage issued by a bank will soon-there-after be turned around and sold off the the bank’s balance sheet in a secondary mortgage market. The vast majority (90%) of our country’s mortgage’s end up in the hands of either Fannie Mae or Freddie Mac. These two government sponsored companies repackage multiple mortgages together and sell “shares” to private shareholders. In essence, if you own Fannie or Freddie securities, it’s as if you own a percentage of your own mortgage. These companies generate liquidity in the real estate market; if banks cannot resell the mortgages in the secondary market, than they simply will not offer mortgages to individual home owners, regardless of interest rates. So, if neither Fannie or Freddie is willing to repurchase your loan, than you will likely be declined by the bank.
The willingness of both companies to repurchase home loans is a major influence on whether Americans can buy homes. Currently, neither company is shopping the secondary market for mortgages, that’s why no banks are lending and nobody’s buying. Fannie and Freddie have resold the majority of the “sub-prime” assets (the assets keeping them out of the game) to the Federal Reserve, but this massive sell off will end very soon. Once Freddie and Fannie rid their balance sheets of the poisons of frivolous lending, they can begin to refocus on the repurchasing and repackaging of home mortgages, generating liquidity and, more importantly, activity in the U.S. real estate market. Pay close attention to these companies and their interactions with the Federal Reserve to get a real feel of anticipation when the market will pick up.
Just a sec – our situation is unique because our economic climate is coupled with a political coup not rooted solely to the economic crises – it is a time when nearly every issue is leveraged in congress to gain a political vote, and the recent struggles of the two companies are in no way left off the table. It’s a time of finger pointing, and Fannie and Freddie stand as a scapegoat for many politicians, who may not realize the effects of their actions. While the two companies willingness to repurchase Adjustable Rate Mortgages from sub-prime borrowers may have led to the demise of the real estate market, it does not change their significance as a generator of liquidity in the market. Political attempts to dissolve the companies will only retard the re-growth of our primary means of mortgage repurchase in the country. So, it is equally important to pay attention to the political pressures placed on these companies.
Hopefully, you now know, generally, how how a bank can provide large sums of money and wait 15-30 years to get it back. As you follow what happens politically and economically, you can gauge the right time to buy sell or rent real estate, allowing for clarity and enhanced strategy in your personal and business decisions. Should I buy or rent? Should I sell or lease out? No matter who you are, knowing how our mortgage system affects the real estate market can only benefit your real estate decisions in the future. Best of luck, and God’s Speed.
The Rent Lobster