The drop in household debt in the second quarter of this year contains some really great news for Real Estate investors. During the period from April through June, U.S. household debt dropped 0.5% from the previous quarter. Over time this will lead to a stronger housing market, but in the short term the numbers reveal several obstacles in the way of a full recovery.
You may be wondering what relationship a drop in household debt has to Real Estate. According to the Wall Street Journal, much of the drop can be attributed to the efforts of homeowners to pay down their mortgages. This is good new – especially for investors.
The Silver Lining
Just a few weeks ago I received a lead from a homeowner interested in selling their property. By all indicators, this was an incredible deal. During our initial conversation I began researching recent sales in the neighborhood in preparation of making a “ball park” offer over the phone.
That’s when the deal died, but not because of my offer.
One of the first questions I ask a seller is whether a property has any outstanding mortgages, liens or unpaid utility bills. In this instance, the homeowner told me no. The truth is that she and her husband owe more on the house than it is worth.
I’ve encountered this scenario more and more frequently since the market crashed 4 years ago. It has become harder and harder to find private sellers with any significant equity in their homes. Many times seller motivation gets canceled out by their inability to satisfy their mortgage.
During the Great Depression people were losing their homes to the banks just like we see today. The major difference between then and now is the equity in the property. During the 1920’s and 1930’s it was not uncommon for a bank to require a 50% down payment. Only a few years ago lenders required 20% to buy that first home. The fast money of the last decade that offered millions the chance to buy a dream home “no money down” has now land locked many sellers in those houses.
Real Estate investors have been left picking through the heap of motivated sellers to find those few properties with enough equity to make a profit.
The recent numbers seem to indicate that homeowners once again recognize the value of a financially stable home. As they pay down debt and reduce mortgage balances, the Real Estate market will continue to strengthen. The increased equity will also provide more and more opportunity for Real Estate investors to thrive.
The Storm Clouds
Before we all start singing “Sunny Days are Here Again,” it’s important to look at the down side of the new Fed data.
Though some of the drop in household debt can be credited to responsible homeowners, a portion is attributable to the irresponsible. Some of the decreases are the cause of homes lost to foreclosure. When a lending institution writes off an obligation to pay, it’s no longer included in the calculation of household debt.
Thankfully, in the second quarter, the number of people entering foreclosure dropped to its lowest level since 2007. (But that fact, too, has a sinister side in the Real Estate industry. Twenty-two percent of nationwide sales are foreclosures and REO properties. The decreasing inventory of these foreclosed homes has slowed sales according to RealtyTrac.com.)
Another negative contributor to the positive Fed numbers is a tightening in the lending market. Requirements have become very strict. Individuals who traditionally qualified for loans are being denied – even with a sizable down payment. With fewer households qualifying to buy, the number of people taking on new mortgage obligations has decreased.
Looking Forward to Sunny Skies
I think we all look forward to the day when these trying times are behind us. I almost can’t wait to tell my grandchildren about “how it was in my day.” If for nothing else, our current financial troubles provide the opportunity for our own romantic stories of walking up hill in the snow to and from school each day.
Until that day comes, we can take heart in the positives that are right in front of us.
Three months is a tiny snapshot in the long road to a recovered economy and a strong housing market. But the numbers look promising. Homeowners are starting to be responsible again. Banks have again become responsible. They're only lending to qualified borrowers. Stability is returning and equity is growing.
For Real Estate investors there is a ton of opportunity just around the corner. When we finally reach recovery, it’ll be a deluge of deals falling from the sky like rain drops.