So how does the current mess on Wall Street affect Main Street?

After spending a large part of today talking to people who are concerned about how the turmoil on Wall Street is going to affect Main Street, I thought I’d take a few minutes and share some observations.   So, I’ve taken the liberty of revising a post I put on Bloodhound Blog this morning.   I’ve updated it to reflect some of what has happened today and also to reflect a more “consumer” focus whereas the other one was written for Realtors.

Here goes…..

First, let me remind you that we are in what could truly be called a historical (in a negative sense) event and therefore any prognostications are exactly that and I don’t even think that the Chairman of the Fed knows how this is going to pan out.   But here’s what I see as some potential ramifications for the real estate markets:

1. Mortgage rates - due to the increased “danger” and perceived lack of safety in the stock markets, I think we’re going to see a major “flight to quality” as people pull money out of stock and into bonds.   And, because Fannie and Freddie are now owned by the government, we could see a pretty nice drop in mortgage rates because of it.  I also believe that rates will drop because (see #3) of the anti-inflationary pressures that a major drop in the stock market and a pretty hefty jump in unemployment will bring.

2. Non-agency loans - by Agency, I mean anything that is bought by Fannie, Freddie, FHA and VA.  I believe that the death of Lehman and the forced sale of Merrill (as in, sell or die) are going to be, in many ways, the death knell (for the time being) for non-agency loans.   If a bank can’t sell it on the secondary market (and the only secondary market that’s left is Fannie, Freddie, FHA and VA), then they won’t do it or it’s going to be very expensive.   Now, there will be small exceptions to that where you have small community banks who are willing to do some creative portfolio stuff, but that’s going to be the exception rather than the rule.   So what does that mean for a borrower?  You need to work with a lender who knows the ins and outs and keeps up on what is changing with Fannie, Freddie, FHA and VA.   And trust me, there are a lot of changes going on.

3. Cash is king in the financial world - we’re going to see a tightening of credit in all forms of lending where it is being done with the bank’s own money.   Commercial loans, equity lines, car loans etc. are going to be harder to get and more expensive.   This will have a negative effect on an already hurting economy and will reduce the risk of inflation.

4. We’re not done with it yet.   This isn’t the bottom, but it might be the start of reaching the bottom.   Does that make sense?   We aren’t done with the failure of financial institutions, but at the same time, the start of this might show that we are getting close to the point where we can see the bottom.  You know the feeling when you are riding a roller coaster?   Right after the roller coaster starts the long steep descent to the bottom?  And your stomach kind of does a flip flop and your muscles clench and you start screaming?   Yeah, that’s kind of where we are right now…..

5. So should you put your plans on hold or keep looking at buying or building a house?   I wrote a post called The 7 Top Things a Home Buyer Should Know back in July of 2008.  I just pulled it up and read through it again.   The only thing I’d revise in it is essentially these two things:  1) If you work in the financial services industry (like me), I’d probably think twice about buying a new house until the dust (nice word for it) settles.   2) If you live in an area with a high concentration of workers in the financial markets, I’d probably stick with the status quo for a while if you can.   There are a lot of top notch people who worked in the financial markets who are losing their jobs and their retirements due to these problems and I feel for them.

6. There has never been a time where it’s been more important than now to work with a mortgage professional who knows what’s happening and can help you work through the intricacies of a market that is changing daily.

I’ll try to update again if (or when) anything else major shakes out. If you have questions or want to know more, e-mail or call me at (616) 292-7559.  Or post them in the comments and we’ll tap into the wisdom of the readers and the rest of the writers.

Thanks for reading and hang on to your hats!

Tom Vanderwell

September 15, 2008