One of the most important determinants in establishing a bottom and bringing strength back to real estate will be the return of a dynamic mortgage market. Real estate is not typically purchased with cash even though this occasionally happens. The tight underwriting standards that are being applied are making it extremely difficult to secure a mortgage to purchase a home or to refinance an existing one.

Real estate values are suffering from reduced demand, and the values shall continue to decline until demand is improved. It sounds elementary enough until you examine how this is being determined. It used to be that only the desire for a house, along with a pulse, was all that was needed to purchase a home. Nowadays, the process is being complicated by the difficulty of securing a mortgage. There are many worthy potential homebuyers that are being turned down on their mortgage applications, thus keeping them as renters or in their current homes. To make matters worse, refinancing of existing homes has slowed considerably because of severely impaired valuations, which is forcing homeowners to recognize the market decline with cash at closing if they desire to refinance to obtain better terms. Unfortunately, this is a recipe for a continued decline of value until it equalizes with the market of those that desire to purchase and have the capacity to either pay cash or to obtain financing in this environment. Regrettably, the Government feels the need to intervene with this mechanism to prevent further value declines by wasting taxpayer money. In the end, the market forces will prevail because only lenders willing to lend can energize the mortgage market, and these lenders can not be coerced to participate, but they can be encouraged by good policy and potential gain.

Focusing on the reduction of interest rates to get the mortgage market moving again will not alleviate the whole problem. This will have limited effect even if the rates dropped substantially because such a small segment of our population has the credit profile to take advantage of it. Obtaining conventional financing is requiring 700+ FICO scores, 10% money down, and the ability to fully document the loan with reasonable DTI ratios. There are not many people that fit into this ideal profile, and failure to meet these parameters will make it increasingly difficult to obtain a loan. There are other options available such as VA and FHA loans which have more favorable credit terms, but they are often associated with higher costs and some limitations. These loans are being used more today than in the past years due to the absence of the subprime market. In spite of these other options, mortgage loan access has remained severely constrained and not likely resolved with lower rates alone.

Adding to the difficulty is the oversupply of housing that was built to stay ahead of demand during the easy money days, and that demand has waned dramatically. This excess housing will have to be absorbed before values can begin stabilizing. Solving this oversupply and the returning of a market for existing homes will be essential to get housing back on the upswing. To make this happen, the mortgage market would need to become accessible to a greater number of people again. Ideally, it would expand to the availability of a few years ago except for the excluding of the bottom 10-15%, thus forcing this group to continue renting while working on their credit profiles. Bringing strength back to mortgage lending will not be an easy task since lenders have become so risk averse, the ones left standing are struggling to stay alive while investors have stepped aside until integrity and stability returns. This could prove to be a long period of time, and unfortunately, home values will continue to suffer until a more positive environment develops.

The decline in home values is a certainty that we will come to reluctantly accept over time, but it will be necessary for market forces to take hold and bring some life back into this market. Any action taken by the Government is unlikely to solve the problem, it will only serve to delay the inevitable and waste a lot of taxpayer money in the process. The best indicator for when values will stabilize and recovery can begin should be found in watching for the return of a dynamic mortgage market, not a meddling Government.