The effect of bank lending on real estate
By James Wedgeworth on October 22nd, 2009I would hate for us to get to the point where we are in a “cash only” real estate market.
What would happen if we were? Obviously, supply and demand is important, but availability of capital is also important because they are connected hand in hand.
We are seeing in our homesite market that very few banks are loaning money. Therefore, we are in what we call a “cash only market” meaning that the only buyers we have are the people willing to pay cash.
In this type market, we have very few sales which means an increase in inventory because we have more properties coming on the market than we have leaving the market. This also means that buyers are buying from a position of strength meaning that they know the market is slow and they know there is not a lot of capital available so they are holding firm on their prices and sellers are giving in to their price.
I really don’t understand what banks are thinking – they have gone from one end of the spectrum to the other. Three years ago they were offering credit to anyone who wanted it – you could get 100% financing on loans. Now, they are offering no financing at all. It does not make sense to me. Maybe somewhere in the middle is where we need to be and hopefully we get there soon.
The problem with this market is prices are still to high. The banks believe the market is still to high. If they get a 25% down payment and the market drops 30% they are underwater by 5% on the loan. When the banks start to lend is when we are at the bottom not before.