Realty Times - 2002 Is No More: A Look At 2003

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2002 Is No More: A Look At 2003

by Benny L. Kass

"Another year older and deeper in debt".

Aren’t those some of the words from that old labor union folk song, that some of us may remember?

2002 is gone, and never to return. Were there really 365 days in that year? Where did they go? It only seems like yesterday that we were welcoming in that new year.

We entered into 2002 in the midst of an unprecedented real estate boom. Sales of all kinds of residential property (single family homes, cooperatives and condominiums) were brisk. Buyers were vying with -- and outbidding – each other just to be able to get a contract signed by a happy seller. Interest rates were very low, and this was perhaps the single most important factor fueling the real estate frenzy.

Although real estate sales continued to be very strong during 2002, the frenzy disappeared. Potential buyers began to realize that no house was that important – that unique – to merit signing a contract with an inflated, escalated price, and with no contingencies for financing or for a home inspection.

Enter 2003. Real Estate sales continue to be strong – indeed perhaps one of the few positive indicators on the charts of economists and statisticians. And mortgage interest rates remain at an all time, historic low. But these same economists continue to argue whether or not we are still in a recession – and that clearly is not the way to enter in the new year.

It is also not a good sign that our economy has not yet recovered. Despite predictions – or perhaps hopes – that retail shopping over the Christmas holidays would be strong, current indicators seem to suggest that sales were even lower than in the previous year.

As we enter into this New Year, terrorism continues to be a major threat – and a major source of uncertainty impacting our nation and our world. And, as if that was not enough, we have to add the possibility of war with Iraq, and nuclear threat from North Vietnam.

Welcome to 2003.

Its always challenging to predict the future. But the two crystal balls on my desk reveal the following:

Mortgage interest rates: They are hovering around 6 percent, and have been relatively stable all year. No one could have predicted at this time last year that the Federal Reserve Bank would continue to reduce the federal interest rates as often as it did – and to such a low rate. However, not all decisions of the Federal Reserve Board impact directly on mortgage interest rates. Indeed, just a few months ago when the Fed once again lowered the federal rate, mortgage rates actually jumped up a bit. I predict that interest rates will continue to stay at their current levels for at least the next eight months. Now is still the time to buy – or refinance your current mortgage.

Real estate sales: Home sales will continue to remain strong, as long as interest rates remain low. However, Condominium and cooperative apartment sales will slow down. The American consumer is not happy living in community associations – where the rules and regulations often conflict with the basic right to enjoy living in your own home. Each and every year, I receive numerous letters from disgruntled owners, complaining about their neighbors, their boards of directors and their restrictive covenants.

Predatory lending practices: As predicted last year, this was a "hot button" issue during 2002. Although Congress continued to claim it did not understand the concept, many State and local legislatures attempted to address the serious problems by enacting laws aimed at curtailing some of the most pernicious lending practices. Too many people – especially minorities and low-income families -- are being taken advantage of by unscrupulous lenders – lenders whose sole objective is to milk the unsuspecting homeowner to such an extent that their house ultimately has to be sold at a foreclosure sale.

Such unconscionable practices as flipping, multiple refinancings, home improvement scams and excessively high settlement and mortgage broker fees will continue to be the focus of attention this coming year. To their credit, several federal agencies – notably the Federal Trade Commission – were extremely active last year and their activities resulted in several large financial settlements with mortgage lender. Hopefully, the message will get out, and one day, these practices will end.

Settlement services: This may be the next "hot button" topic for 2003. The Department of Housing and Urban Development (HUD) has issued proposed regulations which, if enacted, will dramatically change the way real estate settlements take place. Consumers will be given an opportunity to have "one-stop" shopping – the lender will not only make the loan, but will be able to offer fixed rates for such other services, including real estate closings.

While this sounds like a good idea, in my opinion it will deprive the American consumer of the ability to shop and compare – and to use the services of their own attorney for a real estate closing. The small title companies will ultimately be forced out of business, and then – with little or no competition – the cost of closing on a house ( which is already quite high) will get even higher.

Buyer-brokers : I want to continue to raise my concerns about this concept. Why should a potential buyer have to retain a real estate broker – especially if that broker will be paid a commission by the seller? How can a buyer-broker truly represent a buyer under these circumstances? Consumers and legislators are beginning to look carefully at this issue, and there will be some important court cases decided throughout the country this year which will deserve the attention of the entire real estate community.

Contingencies: In my opinion, there are two important contingencies which must be included in every real estate contract. A contingency is a condition which if it does not materialize gives the buyer the right to cancel the contract and receive a return of the earnest money deposit.

These contingencies are (1) to get a mortgage loan, and (2) to get a satisfactory home inspection of the property from a home inspector selected and paid for by the buyer.

In the real estate frenzy of 2001 – and part of 2002 – buyers were afraid that they would not get the house if these contingencies were included in the purchase offer to a seller. However, many buyers – after successfully entering into a real estate contract – learned a valuable lesson the hard way. Many buyers who did not have inspection contingency clauses found thousands of dollars of repairs were needed – repairs which could have been negotiated with the sellers had there been an inspection. Additionally, many potential homebuyers lost their earnest deposit because they could not get a mortgage loan – and their contracts contained no "financing contingency". Why was the loan not made? Because the house did not appraise at the inflated purchase price.

I predict that more and more homebuyers will begin to understand that they cannot sign a real estate contact without at least these two contingencies. I also predict that homeowners will begin to realize that the seller’s market has slowed down. While it still is not a "buyer’s market", at least it is a balanced market.

One issue that will continue to be on my "wish list" relates to the massive amount of paperwork needed to buy or refinance a single family house. In the good old days, borrower only had to sign two or three legal documents – a promissory note, a deed of trust (mortgage) and a settlement statement. Now, in addition to the mortgage documents, lenders require such miscellaneous documents as: name affidavit, clerical error affidavit, affidavit of debts and liens, disclosure statements, flood hazard insurance statement, power of attorney, etc.. While relief in this area is desperately needed, and while it appears that high level officials at the Department of Housing and Urban Development (HUD) are aware of this issue, I do not believe that the mortgage industry will rise to the call this year.

2003 is but a few days old. Let’s enjoy the new year, with health, peace and patience.

Published: January 13, 2003

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