The best I can tell from some quick internet research, financing your home became possible in the United States in the early 20th century, primarily through your relationship with your local banker.  We have come a long way since 1900 in the home financing market as buyers today are able to finance purchases with as little a 3.5% down payment thanks to the FHA option.  Values have also come quite a long way since 1900 in part because of our ability to leverage other people’s cash based on our ability to pay it back over time.

What would happen to values however if financing wasn’t available at all?  This may seem like a farfetched idea, but the reality is this is happening right now in certain segments of today’s market place – namely mixed use residential and commercial buildings.

During the real estate “boom” years of the early 2000s may projects were developed as mixed commercial and residential dwellings, particularly in popular urban areas across the country.  The concept of living where you work/play was (and still is) very popular leading to a number of residential buildings with large commercial components.

The problem is Fannie Mae adapted a rule that says no association can have more than a 52% commercial component and since most banks follow Fannie procedures, many of these mixed use buildings are not financeable on the standard mortgage market.  This is forcing cash sales in these buildings and cash buyers usually want a big discount to use their cash – which is pulling the values down for everyone else in the building.

I currently have a listing in one of these buildings and my client is forced to wrestle with the question – how much is his condo worth when the purchase is restricted to all cash?

I suspect we are about to find out.

I’m returning to DC after having met with an asset manager of a quasi government organization that buys most of the mortgages in the country.  We went to lunch and discussed the future of the REO business (bank foreclosures) and it is clear there are several more waives of foreclosures to come before we’ve flushed out the challenges in the real estate market.  There are essentially four areas of REO assets and we have really only cleared through one.

1. Subprime mortgages – we’re mostly done with the bulk of these
2. Prime mortgages – moving through this inventory now, unemployment is causing this to increase
3. ARMS –resets coming in the next couple years which will put more inventory on the market
4. Commercial – the damage has just begun

Additionally, lenders are holding back huge stock piles of inventory known as the “ghost market” and releasing it slowly.

The good news for sellers though is I think most of the price declines have stopped in the DC area.  We are now seeing many multiple contracts (as many as 20) on foreclosures and the prices in several cases have fallen to below the material cost of constructing the home itself and sometimes below the land value!  (not in Dupont Circle though) Just as prices could not remain unsustainably high, they cannot remain unsustainably low either.

Buyers:  you’ve missed the best time to buy which I think was last fall, yet now is still an AMAZING time to buy.  My question to you is – what in the world are you waiting for?

As we mentioned in our last e-newsletter, Ken Rub has joined Brandon Green Companies.

Ken already has a vast knowledge of the real estate market because of his background in wealth management, commercial real estate, and real estate lending. While he enjoyed that line of work, Ken realized that his interest in real estate transcended the financial aspects of buying a property—he wanted to guide people through the entire real estate process.

We are very excited that Ken has joined our team and brings a new aspect to Brandon Green Companies: commercial real estate.