Jacksonville, What does the Government takeover of Freddie Mac/Fannie Mae mean to you?

Buyer, Seller, Real Estate News

Rates Are Expected to Come Down

"Mark Zandi, chief economist at Moody's Economy.com predicted that 30-year mortgage rates, currently averaging 6.35 percent nationwide, could dip to close to 5.5 percent."

John Couson, chief operating officer of the Mortgage Bankers Association, sees rates already coming down to around 6 percent today on 30 year fixed rate conforming mortgages, but says it will take 30 to 45 days to see the ultimate results of the government's actions. He does warn that today's falling rates maybe just a one day reaction but the restoring of investor confidence in the market should lead to lower rates.

The "lower rates" that we are expected to see is actually just a return to average premium levels for mortgage rates over the 10 year treasury note. Recently there has been an unusually high spread between mortgage rates and the 10 year treasury note. What is currently 2.4% difference between 30 year fixed mortgage rates and 10 year treasury notes has been around 1.6% for the past two decades. So current home buyers have been paying .8% higher on their mortgages due to the current credit crisis. And according to Professor Chris Mayer, this has increased the cost of owning a home by 10 to 20 percent.; or in other words an increase of $145/month on a $250,000 loan.

Why the Government Takeover of Freddie Mac/Fannie Mae Is Going to Make a Difference?

The government takeover of Freddie Mac/Fannie Mae takes away the implied "government backed" company status and replaces it with Government Backed Company Status. This means that buyers such as foreign countries, pension plans, etc. of the loan packages from Freddie Mac/Fannie Mae have the "utmost assurance" that Freddie Mac/Fannie Mae will be existing in the future to back the payments from the loan packages. This "utmost assurance" also means that the buyers of these loan packages are taking on less risk and thus be willing to accept less of a return on their investment. This lessor "return on investment" will trickle down to home buyers as a lower interest rate as long as mortgage lenders don't try to take it as extra profit.

With the injection of capital and the government in control there are a few other changes that we may see and that I hope to see that could seriously help the real estate market:

Lender underwriting guidelines could get a little easier. Fannie Mae/Freddie Mac originally tightened their guidelines in order to increase income and enable them to raise more money; now that the government is funding these companies the need for additonal income and capital have diminished.
Jumbo loan rates may get lower as conforming rates drop
The deadline on the extended jumbo mortgage amount that Fannie Mae has been recently allowed to buy may get extended and just maybe (that's a big hopeful maybe) the jumbo limit may be raised! Congress has recently allowed the purchase of loans by Fannie Mae of up to $729,750 in high cost areas until 12/31/08 and then it will be lowered to previous $625,550 loan limit. In other areas the Jumbo loans limit has stayed around the $417,000 level. Now that the government and thus congress has control of Fannie and Freddie there is a chance that congress will either extend the Jumbo levels out further than 12/31/08 or just maybe raise the Fannie Mae loan limit to even higher levels!

Now where does that leave the Jacksonville FL Real Estate Market?

Our market will be a little better off than before. The government takeover of Fannie Mae and Freddie Mac is not a quick cure for the market but more of insurance that the market will not of gotten worse due to interest rates potentially rising in the future due to market risk from Freddie Mac/Fannie Mae failure.

The current slump in the real estate market and the reason why it hasn't bounced back yet as so many predicted is because of multiple issues that will not be solved by just having lower interest rates. These factors include:

1. Oversupply of property available for sale in Jacksonville Florida.

As of August 2008 the Jacksonville Metro area for all property types had 15.37 months of inventory on the market. (Meaning it will take 15.37 months to sell out the current amount of homes on the market given the current amount sale occurring in the market.) You can see we are still in a "buyers market" when 6 months of inventory is a stable market and anything over is a "buyer's market". The only two ways to fix this oversupply is for less homes to be on the market or more buyers buying the homes and taking them off the market.

In August 2008 we did see 16% less homes came on the market. So that is helping out the market a little and we can hope it is a future trend that will continue.

Furthermore, the eventual drop in interest rates from the Government takeover of Fannie Mae/Freddie Mac will allow more buyers to enter the market since the lowering of interest rates increasing the purchasing power of the buyers. So this should lead to further purchasing by buyers and the dropping of the current inventory of homes available. However, with a 15.37 month supply of inventory it will take a while for these positive aspects to start our market up again.

2. It is Harder to Get a Loan Today in Jacksonville

Gone are the days of everybody getting 100% financing. Most lenders require significant down payments and good credit scores to get the best rates. (FYI: There are still 100% loan out there if you know the right mortgage broker). The banks have done so many "bad loans" that they are trying to even out their portfolio with "extremely good loans". No one can blame them but it is slowing the recovery of the real estate market.

3. Sellers and Buyers Refusing to Agree on Market Value

Buyers have read the articles, done their research and know what the last home sold for. They do not want to overpay in this market. Seller's on the other hand know that they don't have to sell if they don't want to (unless there are financial or life circumstances that require the sale). So, we won't be able to see a significant turn around in the market until buyer's feel confident that market won't be falling further and seller's realize that the market is what it is today and not yesterday.

These differing views of Buyers and Sellers of the real estate market are resulting in a big difference in the listing price of homes and the actual selling price of homes in today's market. The average list to sales price for the Jacksonville metro real estate market for August 2008 was 93.22%. (meaning that the sales price of the homes that did sell sold at 93.22% of their list price)

Compare this to September 2006 where homes sold at 96.64% of list price and you can see that home listing and sale prices haven't yet reached the more normal list to sale percentage for Jacksonville of around 97% - 98%. Our list to sale percentage will only increase when our market value increases or seller's reduce their listing prices closer to market value. Of the those two options, the latter is more likely outcome in this market.

Areas in the U.S. where they have been alot of Foreclosures and where the banks have reduced the prices of real estate down to or below market value are seeing some their highest selling volume months. We can see that this is evidence of buyers out there buying; it just that they are just bottom fishing at this time.

We can also see some of those results in the Jacksonville real estate market with the days on the market of a sold property in August 2008 being 87 days! This has been falling since May of 2008. So if a home is priced right then it could sell quickly.

What is also interesting is when you look at the average listing price of the sold listing in August 2008 of $143,650 and compare it to the average listing price of the active listing of $314,250. You can see that the average buyer today is the 1st time home buyer. This is what was expected. The the 1st time home buyer is buying their first home and the seller of those homes will be buying in the next higher price range if they are able to obtain a mortgage in today's tight credit market. Eventually this first home buyer trend will trickle through the rest of the market as a recovery takes on momentum. This momentum can be sped up if homes were priced correctly and lenders didn't have such tight credit requirements as they currently do.

4. The Economy

It's hard for buyers to believe the real estate market is going to get better when people are loosing their jobs. We need a positive forecast for our economy and confidence in our next president's economic plan to help our real estate market get better.

In Summary

So while you can see that the government takeover of Freddie Mac/Fannie Mae is a positive for the real estate market there are a few more hurdles to be leaped before a full real estate market recovery can take into effect. These include lenders reducing their overly strict lending guidelines, lenders giving better interest rates on their loans so that buyers can afford to buy more, buyers gaining confidence in the real estate market and sellers pricing their homes at market value.

(Please note I am not an economist and this is an opinion of a Jacksonville Real Estate Agent).

Good luck and Happy House Hunting.

Related Links:

'Frannie' bailout makes money cheaper, not easier

Date: Monday, September, 8th 2008 @ 09:31:00 AM
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