Wall Street, Subprimes and Fredericksburg

Unless you’ve been living under a rock the last several weeks, you’ve no doubt have heard something of the rollercoaster ride that “Wall Street” has been taking.  If you don’t think that the Dow,  NASDAQ or S&P 500 effect you (because perhaps you don’t own stocks and/or bonds)…you are dead wrong.

If you are a buyer, seller or owner of Fredericksburg real estate the current Wall Street woes are the primary reason why our local market is in such a funk (off by over 40% so far this year over last year).  What do subprime mortgages, mortgage backed securities, collateralized debt obligations (CDO’s) and hedge funds have to do with Fredericksburg?  Plenty!

It all has to do with liquidity and credit. Until recently, credit has been plentiful and all too readily available.  Lenders (despite what they should have learned via the S&L debacle of the 80’s) have been making questionable loans to borrowers they shouldn’t lend to.  A lot of these loans are known as adjustable rate mortgages (ARM’s) that feature a low initial (teaser) interest rate and monthly payment, followed periodically by “re-sets” which bump rates and payments to current market prices.  These current payments rates (via re-sets) are often way more than a borrower can afford and puts them in imminent risk of foreclosure.

As the lenders were awash in funds to lend (driven as they were by Wall Street’s insatiable demand for more mortgages to securitize), they created a demand for mortgages by making them more obtainable to folks that (probably) should not have qualified. More buyers equaled more homes being built and prices that kept rising.  As real estate is an inherently ill-liquid investment (e.g. it takes longer to get your cash out of vs. say a bank CD), when credit dries up (as it certainly has), liquidity (or lack thereof) really hits home (pun intended).

TIME magazine has a great article called Real Estate's Fault Line that explains this all very well.  The key thing they point out is that “At its core, the entire process is based on using borrowed money (home mortgages) as collateral to borrow more money (mortgage-backed securities) to borrow yet more money (CDO’s) and hoping the payment chain doesn’t break.  Once home mortgage defaults rise, the whole system can unravel”.  The current crisis was touched-off by a record $515 billion in re-sets so far in 2007.  Next year, some $680 billion worth of ARM’s are due to re-set.  Yikes.

What TIME and distressingly few other pundits fail to comment on is the lack of personal responsibility that we, as Americans take for creating this mess.  It’s easy to blame the nameless, faceless “lenders”, “bankers” and the hard to understand “Wall Street” for this mess.  What about your neighbor who borrowed that $100,000, $200,000, $300,000, etc. that had no business even trying to do that on his $40,000/year salary.  Most of us (hopefully) were raised with some semblance of financial responsibility and know better than to borrow more than we can comfortably afford to pay back.

With easy-money offers bombarding your mail box from credit card providers to mortgage lenders to car dealers, it’s hard sometimes to say no. It all sounds so good, so easy.  You have to always remember; however, that the buck stops with you and if it sounds too good to be true, it probably is.

While the Fed recently cut rates and has pumped more money into the markets, the credit crisis is likely to continue for some time.  Qualified buyers will still have access to borrow money to buy real estate but the unqualified buyers who made up a decent percentage of the past market surge have gone bye-bye.  This will result in fewer units sold, stagflation in values and increased days on market for most properties. A classic BUYERS MARKET.

Additionally, as well-known overheated markets continue to cool, folks moving to our area from those softer markets will be unable to sell and therefore be unable to relocate to Fredericksburg.  As the majority of sales over the last three years have been to auslanders, this further affects us here in Fredericksburg, TX.