Monday, July 28, 2008

WILL TOMORROW’S HOUSING MARKET BE STRONGER THAN THE GLOOMY 1980S?

If you are a 30-year-old dreaming about buying your first home or condo, it is possible that you still were in diapers during the last great housing recession of 1981-1982, so keep reading and learn.

As gloomy as the media says the economy and housing market are today, things were much, much worse in the early 1980s, veteran analysts recall.

In mid-July, lenders were charging an average of 6.24 percent for a benchmark 30-year fixed home loan, according to Freddie Mac’s Primary Mortgage Market Survey. That’s down from 6.37 percent a week earlier and nearly a half of 1 percentage point less than this time last year when the benchmark rate was 6.73 percent.

To appreciate today’s historically low rates, housing experts say home buyers need only to look at what banks and mortgage lenders where charging in the early 1980s.

According to Freddie Mac, benchmark 30-year mortgage rates peaked at a whopping 18.45 percent in October of 1981 during the last great recession. Rates fell below 10 percent in April of 1986, then bounced in the 9-percent to 10-percent range during the balance of the 1980s as housing climbed out the recession.

Now, let’s look at inflation. In 1980, the annual inflation soared to 13.5 percent. Today, through June of 2008, the nation’s inflation rate stands at 3.4 percent even though oil prices have doubled in the past year, and the dollar is weak.

How long with the current housing downturn last? The recession of the 1980s lasted about five years and finally ending in 1985 when home loan rates eased into the 11-percent range.

Experts say the current downturn already is in its third year and it is likely that the market will not rebound until six months to nine months after the Presidential election.

With today’s low interest rates, if the economy bounces back and job formations increase the worst part of the recession could be over by late 2009, analysts say. The wild card is how long it takes for consumer confidence to rebound.

“Today’s young, first-time home buyer drives a fuel-efficient auto or rides a bicycle and wants housing that is small, affordable and green,” said Chicago architect Pat FitzGerald of FitzGerald & Associates.

“Developers should be focusing on building housing that is nice, but not fancy,” FitzGerald believes. “What’s wrong with an 800-square-foot, 2-bedroom unit with concrete floors and a minimalist kitchen? This home would look good to a buyer whose last home was a college dorm room.”

And, young home buyers have to get smarter. Thousands of sub-prime borrowers recently were saddled with punishing loan terms that quickly made the loans unaffordable. Borrowers today must understand the loan documents they sign.

The Federal Reserve Board has adopted a series of new rules to protect borrowers, including prohibiting lenders from making loans without proof of a home buyer’s income. Lenders now must verify the borrowers income and assets to make sure they can repay the loan.

In Cook County a new law now requires first-time home buyers to receive mandatory housing counseling and obtain a Certificate of Mortgage Compliance at closing.

So, it’s going to be a vastly different housing market out there in 2009.