March 18, 2019
Orion’s brokers know that the ability to finance was the primary factor in the market collapse. They also know that it is the biggest reason our current market slowdown is not similar.
Leading up to the collapse, an enormous percentage of the loans funded would be, by today’s standards, labelled as "Alternative." Borrowers didn’t have to prove the ability to repay the loan. During that time, anyone with decent credit could buy a home and many purchased homes with adjustable rate mortgages so they could buy very expensive homes with very low mortgage payments in the first year(s) of ownership ignoring that in the future their payments would be higher. In fact, financing had become so easy that more buyers entered the market solely to purchase and resell in a short period of time, cash in, and then purchase a more expensive home and continue repeating the process. The process to obtain the “American Dream” morphed in to “anyone can buy a home…no need to verify you actually have money to pay for it”.
On Wall Street, investors discovered that the mortgages they were buying were becoming rather risky and stopped buying. Lenders and brokers, many in Southern California, started going out of business, inventory climbed therefor prices decreased and homeowners found themselves with property in which they owed more than the property was worth and could barely make their mortgage payments. Why struggle to pay a loan for a property that is worth less than you owe? Homeowners walked away from their properties, creating a flood of foreclosures and banks putting homes on the market at lower and lower prices.
Orion’s brokers report that homeowners once again have a home, not an investment. A decline in value won’t prompt a reason to sell. The homeowner has a long-term plan and still has equity in their property – the amount of down payments has gone up, and owners have more “skin in the game.” During the collapse with easy qualifying guidelines, as prices rose, homeowners took advantage of their increased equity and refinanced for quick cash. Some homeowners engaged in multiple cash-out transactions from the early 2000's into 2007, pulling hundreds of thousands of dollars in cash from their properties. Then, prices started dropping and they owed a lot more than the value of their property. Yep, even more homes on the market.
The real estate market that has grown over the past decade has done so due to solid fundamentals. Today, our housing stock in Southern California is mostly owned by homeowners who can qualify for their mortgage payments, have mortgages with very low fixed rates, have equity in their property and are staying in their homes for the most part until a life changing event like having children, kids graduating from high school, change in jobs or retirement.