Not so sure Paulson is correct

The premise that Paulson is using to justify the government's purchase of these Mortgage Securities is that home values will go up because money is being made available. I am assuming then that he believes that it will raise the value of the securities being purchased by the government.

The problem I see with that argument is that the housing prices we saw from 2003-2007 was a combination of a couple of things.

1) It was so easy for buyers to be approved for loans so people were offering more for homes than list price. For example, a home might be listed for $250K and a consumer might then offer $300k for the house. Why? Because the seller would then give the buyer $50k at the closing table. It was a round about way of allowing buyers to borrow more money at mortgage rate interest rates. Often times it was meant to help investors pay their mortgage while they waited for a tenant to occupy their property. In order for that to work, the appraisers had to be willing to appraise the property higher than "market" value which was already inflated. The lender gets their 1 - 2% commission, the realtors get their commission, and the appraiser gets his pocket padded.

2) There were so many people being qualified for loans that the housing inventory was not meeting the demand. With so many people chasing houses, we were faced with a seller's market. Sellers could expect higher prices for their homes because buyers were being qualified for them. Sellers did very well during these years.

These lax policies for lending money is why we are seeing the foreclosures we see. The strict policies that lenders traditionally required when offering loans were there for a reason.

So, I don't believe this bailout is going to change home prices as much as he is predicting because so much of the housing prices were fundamentally influenced by one thing: The ease by which a person with a pulse could get a loan.

It is my opinion that in order for home prices to go up from here, creditors would have to continue to look the other way when borrowers don't have what it takes to qualify for loans. And that will continue to deteriorate the mess we are already in.

If we go back to the rules that banks have followed before this mess, then it will be more difficult for fraud to take place, which results in fewer qualified buyers. Such a scenario creates a buyer's market. A buyer's market brings down home prices.

Recent events and Real Estate

I've been trying to make heads or tails out of recent events and how they may affect real estate in Houston.

I had been optimistic that the recent hurricane would drive up housing demand in Houston. So many misplaced residents will need housing and once FEMA and various home owners insurance payments are made, people will feel ready to move forward. Some will want to stay near the water, others will decide not to risk another storm. At any rate, I've anticipated an increase in demand for housing near Houston.

Baton Rouge couldn't hold on to their inventory shortly after Katrina hit. Bidding wars were commonplace.

Now, we have this new turn of events with our Financial industry. I see two ways this is going to impact the market.

The first impact is consumer confidence. These are complicated issues and a lot of people don't understand them; that usually leads to fear. Fear paralyzes most people which forces them to hold on tight to their money.

The second impact: ultra-conservative underwriters. I believe this is going to be what ultimately determines home values. I'm seeing it right now with a condo I have available for sale. There were actually two available in the community. Both are nicely priced for the area and both had offers. Even though both condos had offers by well-informed buyers within just days of being listed, the underwriter would not accept the appraisers proposed values. They didn't like the formula he used and forced him to under value the condo. My client wouldn't play, so we lost the contract and the condo is back on the market. I think she's going to sit tight and lease it out. Condos are very tricky animals; only under certain circumstances do I consider them to be good investments.

Ok, so is it a buyer's market or a seller's market? Jury is still out. I do believe that right now, it's a good time to buy. Sellers are worried so they will probably be far more willing to negotiate.

We don't have enough rental property to meet Houston's demand for rental housing. This is and excellent time to be a property investor. Excellent.

I predict that within about 3 - 4 weeks, we'll see an increase in home sales that can be linked to Ike. How strong this impact is going to be will be directly affected by how accessible loans will be after the bail out. I'm most interested in how underwriters are going to impact home prices. Will they allow the market to determine home values?

Well alrighty, then.

For the most part, Open Houses are things that Realtors do to give their sellers the feeling that something is being done to sell their house. Rarely do you actually get a contract as a result of an open house.

Well.... famous last words.

Remember the open house I held this weekend? We have an executed contract for that property and it came from someone who attended the open house. The house wasn't even on the market a week and we got an offer.

It's a strong buyer, too. Really solid.