Generally, as real estate attorneys, we try to stay away from the financial aspects of transactions and focus on document review and the overall legal aspects of the transaction. However, it has been difficult to ignore some of the analysis and predictions that are permeating trade publications recently. As a real estate attorney, I am concerned about the state of the market as are real estate agents and brokers.
Mike Orr, a housing analyst at Arizona State University in Tempe stated
“Certain areas have already become a buyers’ market, and the entire market will be there by early next year.”
Why is this so? There are several factors at work that may cause this prediction to become reality.
There is a growing concern about the impact of a provision of the Dodd-Frank Act which goes into effect in January. The Dodd-Frank Act will, while well intentioned, inadvertently guarantees that many fewer home buyers will qualify for home mortgages. Effective January 10, 2014, the Dodd-Frank Act will require borrowers in a typical mortgage situation (such as through Fannie Mae, Freddie Mac, FHA and VA) to provide documentary proof from third parties of the sources of their income and the ratio of the borrower’s debt to income ratio will not be allowed to exceed 43%.
The burden of proof will be on the lender to demonstrate to the regulatory authorities that it made a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling. On the surface that is a good thing. For certain it is better than what lead up to the housing bubble where “stated income” loans allowed the borrower to simply state what his or income was with little or no verification required. But, will it have unintended consequences? Many banks are already starting to impose new and stringent requirements to be able to demonstrate their compliance with these requirements in advance of January 10, 2014. It sounds simple on its face but banks are taking these regulations very seriously. Borrowers are already finding it very burdensome and time consuming to comply with the banks demands for verification. Many applicants are turned away due to lack of qualification.
The sparks are already beginning to fly and the train is close to coming off the tracks. Banks have been reporting now, for months, that they are starting to lay off large numbers of loan department employees because of the high operating costs and increased litigation caused by the Dodd-Frank Act, not to mention the impact of increasing interest rates and fewer foreclosure homes available for bargain prices. Prices have risen significantly in general. Increasing home prices combined with increased interest rates is not necessarily a good formula for increasing home sales.
Let’s hope Mr. Orr’s prediction is not accurate for Tucson. However, it is time for everyone in the real estate industry to pay closer attention to statistics such as the days on market and the amount of home inventory in the multiple listing service.
Those of us with some gray hair remember the outrageous interest rates that predominated in the early 1980s. Agents and brokers managed to continue to make home sales by utilizing what was dubbed “creative financing”. That was a fancy name for seller carryback financing. We may soon see more creative financing surfacing during 2014.
So, my bottom line is this, while the market may get cinched up some due to some regulatory and economic forces, my faith remains with agents and brokers to be creative in finding solutions to counter those obstacles.