Subprime Mortgage Update

Failed sub-prime mortgage loans may be the face of the credit crisis, but they’re also potentially good news for property managers. That’s because lenders have dramatically tightened their standards, and the marginal homebuyers who received mortgages during the boom are back in the rental pool.

The economy, generally, should begin to recover by the end of the year, predicts Bernard Markstein, vice president and senior economist for the NAHB, based in Washington, D.C. But lending conditions will remain strict, so the short-term forecast for property managers is bright.

LowesForPros asked Markstein for his take on economic recovery and the future of sub-prime mortgage lending as it applies to property managers.

LowesForPros: When you say that the economy will begin to recover in 2009, how quickly will we see a tangible change? What will be the short-term impact on the housing market?

Bernard Markstein: The recovery will be relatively slow. We’ll start to see employment gains by the end of the year, but we won’t return to peak employment levels for [more] than a year after that.

Home purchases will be limited by lenders’ willingness to make loans. We have very low interest rates right now, but the availability of credit is limited—banks are very cautious on lending, very cautious on appraisals. We think they’re too cautious, not using proper comparables, and then shading the values downward in the same way that, during the boom, they were inflating them.

LowesForPros: Clearly, it’s much harder to get a mortgage now than it was a year ago. Do the people who have been getting sub-prime mortgages for the last several years stand a chance of buying a home in this market? What’s the outlook for them?

Bernard Markstein: If you’re a sub-prime customer, you’ve got problems. Your only choice now to buy a home is a government program like a Federal Housing Administration loan.

Sub-prime is essentially dead. It will come back, slowly but surely, but it will be very expensive and not desirable for most people. That’s one of the sad things here. When we had all the fraud and lenders weren’t careful, sub-prime got a bad name. Even now, there’s a 25 percent default rate on those mortgages and that’s way too high, but that means 75 percent of those people are making their payments, even through a recession. And of that 75 percent, there has to be a percentage that otherwise would not have owned a home. These are people who were honest, careful and didn’t get in over their heads; not everybody with one of these loans is either trying to defraud the lender or financially not astute enough to realize they might have trouble making this payment.

LowesForPros: The flip side, for property managers, is that those good sub-prime mortgage candidates also sound like great tenants. If fewer people are getting mortgages, what does that mean for the rental market?

Bernard Markstein: In the same way that we [had] too many luxury condominiums for several years, leading to an oversupply, we were starting to build too many apartment buildings, as well. And that might be a problem a few years from now. But in the near term, the money has dried up and that’s going to keep too many rental properties from coming on the market. We’ll still see them come on as old projects are finished, but very little new development is being started at this point. So the next couple of years should be very good for property managers because the supply will be a little lower relative to demand, and that should hold up rents and make property managers’ jobs a little easier in terms of filling up their properties.