Why the real estate market has not recovered

The housing bubble of 2006 burst in large part because of lax lending practices that led up to the housing recession.

The collateral damage from these practices caused the loss of personal fortunes through foreclosures and investment losses because of the devaluation of mortgage-backed securities tied to nonperforming mortgages, resulting in a global economic crisis.

Now the mortgage lending industry is making up for their slipshod business practices by tightening credit standards to an extreme level. This has partly to do with regulations recently put in place that make one wonder if anyone consulted real estate professionals and economists before they were enacted.

It’s commonly agreed that the easy-money lending practices that were in vogue before the downturn in 2006-07 should be left behind. Then, buyers didn’t need to qualify to get a stated-income mortgage. Unrealistic teaser-rate mortgages were popular, and 100 percent and 110 percent financing was available.

Buyers had little at risk except their good credit, which for many went up in smoke when home prices stopped rising and they were left upside down in their house because the price they could sell for had dropped lower than the balance owed on their mortgage. Not only were they precluded from borrowing more, but many who lost jobs fell behind on their mortgage payments and lost their homes in foreclosure.

It’s a good practice for lenders to actually qualify buyers before giving them a mortgage. Buyers should make a cash down payment.

However, many lenders want down payments equal to 20 percent or 25 percent of the purchase price. A proposed regulation would require lenders to restrict mortgage lending to borrowers with 20 percent cash down or more. There are many Republican and Democratic politicians and industry groups – some that normally oppose one another — who are aligned to fight this.

Requiring a 20 percent cash down payment could have a negative effect on the recovery of the housing market. It would take most buyers five to 10 years or longer to save this amount of money. Regulations should be implemented that protect lenders, buyers and investors while fueling a sustainable recovery in the housing market.

Lenders also need to streamline their underwriting procedures. Underwriting criteria have tightened in the past six months.

Buyers are told their loan has been formally approved; based on that, they remove their financing contingency. Then, it’s not uncommon for the lender to ask the buyers for more documentation. This leads to delays in closings. Some deals fall apart and put the buyers’ deposit at risk.

HOUSE HUNTING TIP: Slow job growth is holding the housing market back in many areas. On the national level, only 25 percent of the jobs lost in the Great Recession have been replaced. The recovery has been plagued with joblessness and underemployment. The national unemployment rate currently hovers around 9 percent.

Because the home-sale market is a localized business, the housing recovery will be uneven. Some areas, such as Texas, Washington, D.C., and the Silicon Valley in the San Francisco Bay area, have strong local economies and are generating sufficient jobs to actually produce a pickup in local housing markets.

To illustrate how important the local factor is, Silicon Valley has strong job growth even though the unemployment rate in California is about 11 percent.

The additional major factor that’s keeping housing down is the backlog of foreclosures. Lenders are holding houses they’ve foreclosed on but haven’t yet put on the market. This is called the shadow inventory.

Lenders have tried to keep from flooding an already-challenged market with more inventory, which could cause prices to decline further.

THE CLOSING: However, for a sustainable recovery, these properties need to be sold.

Hymer is a real estate broker in the San Francisco Bay area and author of “House Hunting: The Take-Along Workbook for Home Buyers” and “Starting Out: The Complete Home Buyer’s Guide.”