Sep

22

Long Island Real Estate Market: What You’re Not Hearing In The Media Part I

Filed Under Mortgage Matters, Sellers |


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For the Long Island real estate market, there are issues facing the market overall that you’re not hearing about in the media. I want to take a peak at the money issue.

Part of me really doesn’t want to write a series of articles about the realities because it just doesn’t look good for sellers. Another part of me says that I owe it to my communities here on Long Island to “keep it real”, otherwise I risk becoming just another real estate agent with head firmly implanted in sand.

One item we hear about is the “FHA” or Federal Housing Authority and the loans they back called “FHA loans”. Banks provide money to buyers at a greater amount (up to 96.5% Loan to Value or LTV). LTV is based on what the total appraised value is of a given home is and how much the buyer puts down and how much the bank lends.

So if a bank lends $80,000 on a home that costs $100,000, the LTV is 80%. The bank is lending 80% of the total money to a buyer to purchase a given home. This is referred to as a conventional loan.

On Long Island, due to the cost of homes in this area, many buyers put down less than 20% and thus require a FHA loan.

When a bank lends more than 80% to as much as 90% of the value of a given property, it’s risk factor increases because the equity position of the buyer (new owner) is very little.

Here on Long Island, the market is losing about 1% every month. So banks are lending money to buyers right now, in this local Long Island market, who are putting down 3.5%. The bank lending this money is providing money to a buyer who is buying a declining asset. For you who invest in banks, it would be wise if you reconsider your investment.

Now while this seems okay because real estate is a long-term investment overall, it still begs the question, why are banks lending 96.5% or over 90% of a value of a property during a time of 9.7% unemployment nationwide? Also, why are banks lending money to such a high risk investment?

The answer is because FHA loans are “guaranteed” by GSE’s or Government Sponsored Entities like FANNIE MAE up to 80% of the loan. So the exposure of the bank(s) lending on a given property is significantly reduced.

Now behind all this are mortgage insurance companies that provide the banks an insurance policy against default of a given asset or assets. What does this mean?

Anyone who’s bought a home has heard of “PMI” or “MIP”, primary mortgage insurance or mortgage insurance premium. Anytime a property is purchased with less than 20% equity position for the buyer (they put down 20%), the bank must have an insurance policy to back the investment, beyond the 80% loaned.

Well, read this article: Short On Capital, Mortgage Insurers Still Feel The Crunch in DSNews.

Now if you clicked the link for Fannie Mae, you noticed that as of today, it’s trading under $2.00. If you read the article in DSNews, which covers the Default Services field of real estate (foreclosures, short sales, etc.), it doesn’t take a genius to realize that we, as a real estate market both locally and nationally, are no where near out of this challenge.

Banks need money to invest. Part of the TARP funds from the government were made possible to avoid a complete breakdown of the real estate lending market in America. You do remember TARP? That’s the money the banks got and didn’t really need…and now not everyone knows where that money went (but that’s a political/governmental debate which I will leave out of this equation).

Now bringing things back down to us, read my last articles about the Long Island market:
August Update
Distressed Properties

Now for Part II in this series, I will be talking specifically about foreclosures and how bad things really are. Back in April, I broke down every zone of Long Island demonstrating exactly how the market has been hit in 12 months previous. I will be doing this again with an update. And I will also show, as much as I can from the information at hand, how many short sales (pre-foreclosures) there are all over Long Island. And here’s a small taste of what’s going on with foreclosures nationwide.

Sigh. When insurance companies don’t have the business they need to sustain, nor the money to back loans for real estate, what happens to the local Long Island market, that relies so heavily on FHA loans? Is the answer another bailout for the mortgage insurance industry?

I urge anyone reading my articles to leave a comment. Come back and continue checking in. It’s articles like this that make the difference between being informed and being misguided.

For buyers of today, I am not suggesting that now is not a good time to buy. Indeed it is. With prices approaching 35% less than peak and with interest rates so low, it’s an unbelievable time to buy. Just be clear on what you want and how much you’re spending.

To work with me as a seller or buyer, please call 631-831-9048 or email me.

(c) Copyright, 2009 www.tommcgiveron.com
By Thomas McGiveron, LSA



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