For the Most Affordable Homes, Many in the Middle-Class Need Not Apply

It is strange but true that the most universally agreed-upon tragedy in American real estate is falling prices, otherwise known as more affordable prices. But the actual tragedy is that the people who need affordable homes the most today can’t buy them: banks today often won’t lend money to reach-up buyers and, when selling foreclosed homes, banks won’t take their money either.

The problem is that the programs designed to ease credit for the middle class, Federal Housing Administration (FHA) and Veterans’ Administration (VA) loans, impose rules that have completely diverged from the new realities of a distressed market. Banks liquidating as-is properties at fire-sale prices will almost never agree to the repairs needed to make a home move-in ready, as required by FHA and VA loans. And banks aren’t waiting for additional inspections, appraisals or paperwork required by FHA and VA loans.

The result: anyone who hasn’t amassed a small fortune, including many vets, first-time home-buyers and small-business owners, are effectively disqualified from buying the most distressed properties, which usually sell at a 30% discount to neighboring listings. What these buyers are missing out on isn’t just a tiny slice of the market. In cities like Phoenix, Miami and Las Vegas, distressed properties are the market, with more than half the home sales being sold or approved by banks, not occupants.

So even as we preside over one of the rare moments in American history when property forcibly changes hands – on a scale akin to the Oklahoma land rush if not the Russian Revolution – new lending rules ensure that this transfer not only impoverishes the middle-class people forced out at the market’s nadir, but enriches the wealthy who buy the abandoned home with cash. Nearly a third of all home sales are now all-cash deals, many bought by hedge funds.

The banks selling houses have not been subtle about their preference for investors. In the listing remarks that often only agents can see, the bank owning the property outlines the financing options it will accept for a home, excluding veterans and first-time home-buyers using Veteran Affairs (VA) and Federal Housing Authority (FHA) loans.

We know from first-hand experience that banks tell the real estate agents hired to sell these homes to reject any offer based on a VA or FHA loan. Even when there’s a bidding war, the banks selling foreclosed properties want a sure, easy sale more than an extra $20,000, particularly when appraisals for new loans have become, for many listing agents, a game of Russian roulette. What matters in today’s market is how much money you have, not how much you’re willing to pay.

One of Redfin’s Denver clients, Joel Brown, a master sergeant who served during the Iraq War, got this news in writing, and recently appeared on the Denver news to talk about it. Joel’s agent has asked time and again: “why would the banks spurn a vet making an offer, especially if he wants to pay more?”

The answer isn’t surprising, or even particularly diabolical. You can’t blame banks digging through a backlog of more than one million foreclosed homes for trying to sell properties as-is, FHA and VA rules notwithstanding. Getting a VA or FHA loan approved is also more hassle for the bank’s real estate agent, and the delays associated with government-backed loans often put off everyone who’s anxious for a quick sale.

Joel just came to terms on the sale of a conventional listing, so it’s not as if he’ll be homeless as a result. It’s just a surprise to find a buyer shut out of the best deals for using a government-backed loan. What’s galling is that investors getting those deals often turn around and sell the place at a mark-up to the buyers who just lost out due to their financing.

As a result, the people who should benefit most from more affordable housing often describe the house-hunting experience as frustrating and demoralizing. Many real estate agents dread representing buyers with FHA and VA loans. Often the buyers themselves just give up. This isn’t an abstract or occasional possibility for Redfin; it has been the experience of probably more than a thousand of our customers.  A market that should be a home-buyer’s paradise is quite the opposite.

This paradox is deepening the real estate crisis. You rarely see individual sellers refuse to consider FHA or VA buyers; these sellers can’t afford to turn away anyone who might pay a higher price. But even as foreclosures gut neighborhood homes prices, this is what banks are doing.

Fortunately, there’s a simple solution to the problem: just as it’s a Fair-Housing-Act violation to reject buyers for being African-American or Asian-American, it should be against the rules to reject buyers sight unseen for using a VA loan. For such a rule to be practical, VA and FHA standards requiring repairs to be made before a sale occurs should be relaxed and timelines shortened; lenders should be concerned only with whether the house is sufficient collateral for the loan, not with whether patio stairs need a new railing before closing. Programs for selling government-owned foreclosures to occupants rather than investors should also be expanded.

Such changes would not be unwarranted or irresponsible government meddling. We can extend credit to vets and first-timers without returning to liar loans and wink-wink appraisals, as the safeguards now required for conventional loans are mostly sufficient for VA and FHA loans, even with the lower down-payments.

It would be easier to argue for letting the market run its course if the U.S. hadn’t taken vigorous, unprecedented steps to drop interest rates to historic lows,  all while doing very little to allow the easy money to reach beyond Wall Street to Main Street. Already the world’s wealthiest people are richer than they were before the credit crunch. The new home-buyer, the bailed-out bank, the neighbor hoping for the return of higher prices, don’t have to be poorer in the exchange.

Discussion

  • Jakob

    I agree that the govt loans should be tweaked to allow for easier
    purchase of fixers, for example by the buyer showing more cash cushion
    available to deal with the repairs.

    In defense of the cash buyer, most are small-time guys making a small markup in exchange for making a house habitable and lendable quickly.  I'll gladly pay someone 10-20k for all the time and risk and hassles of that.

    • http://blog.redfin.com GlennKelman

      The cash buyer may win a deal despite being $10K – $20K below other offers, but when he flips the property, the markup is usually (much) larger than that, no?

      • Jakob

        After accounting for all the home fixes, adding in the property tax payments, commissions 10-20k is about what ends up as profit for the flipper on average.

        Like everywhere there's competition for flipping houses.  They make a decent living like the rest of us, but it isn't fair to say these guys are getting rich and flying around in private jets.

        • http://blog.redfin.com GlennKelman

          I think it's fair to say that anyone who can buy a house with cash is wealthy, but also see your point that there are degrees…

  • Jostrickley

    Not all gov't owned foreclosures give cash buyers first look in. Investors are being weeded out, and often to detriment of those who have built up equity and just want a home. We've gone from collateralised debt obligations to politicized debt obligations.

    • http://blog.redfin.com GlennKelman

      How does weeding out investors hurt those who just want a home Jostrickley?

  • Renting in Mass

    “Already the world’s wealthiest people are already richer…”

    What kind of a CEO are you? It trickles down man.

    • http://blog.redfin.com GlennKelman

      Some of it trickles down, some of it doesn't… and the statement that the world's wealthiest people are wealthier now than before the credit crunch is a simple statement of fact, isn't it? It's good when anyone's wealth increases, and bad when someone doesn't have the same opportunities to accumulate wealth.

  • Lori Bakken

    I love your words here…I totally see this happening especially with VA offers…. but you make me proud to be an agent at Redfin- having someone at the helm who understands this keeps me fighting for our clients!

    • http://blog.redfin.com GlennKelman

      KEEP FIGHTING LORI!

  • http://www.Kens411.com Ken Brand

    I appreciate the passion, it's oxygen.  Thanks for sharing.

    • http://blog.redfin.com GlennKelman

      Thanks Ken. We're very glad to have you as a reader…

  • Pingback: Foreclosure Delays | The SunBreak

  • http://blog.restphone.com/ James Moore

    “Such changes would not be unwarranted or irresponsible government meddling.”

    Translation:   “It's a government subsidy for _me_, so it's good!”

    • http://blog.redfin.com GlennKelman

      We were the only brokers I know of opposed to the first-time home-buyer credit, publicly, on this blog.

      And in this case, we aren't proposing a subsidy. The government wouldn't pay any money.

      And we wouldn't benefit. The folks who benefit in this instance are needy home-buyers in competitive situations; that is, situations in which a sale is already assured.

  • http://www.insidesfre.com Eileen Bermingham

    I find that my colleagues and I in San Francisco–at least, the agents I know & respect–don't shy away from buyers with FHA or VA loans. There just aren't that many of them, and there's a limit to what you can purchase with an FHA loan in San Francisco (especially when it comes to condos.

    Jumbo loans will be more challenging to obtain in the not-too-distant future, which means that it's best for sellers to put their homes on the market in early Fall if they want to get a leg up on things. The reality is, however, that San Francisco still benefits from healthy Bay Area tech/financial/legal job markets, and there's still a demand for housing under $1M in the city. I don't expect that to change.

    • http://blog.redfin.com GlennKelman

      Good point and great to hear Eileen! But San Francisco can be a different world, you know?

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