Housing market is flatlining... but it can be revived

The global economic meltdown has shown how vital banks are to sustaining economic activity.

When banks stop lending money, economic activity grinds to a halt and this affects the real estate market like any other. But life goes on notwithstanding the world’s financial woes and people still need a place to call home.

If you were paying attention during your Economics 101 course, you will remember that the intersection of the demand and supply curves is what governs the price of a commodity.

Lending

The price of real estate is subject to the same effect. Demand is fuelled in large part by the availability of money and in the context of real estate, this usually means the availability of a mortgage from a bank.

When banks stop lending, demand dries up and prices fall. This is what has been experienced in Bermuda and globally.

It is not the first time in living history that Bermuda banks have ‘turned off the taps’. Such was the case in the early 1990s.

But in those days buyers and sellers were more innovative.

Vendors were more likely to provide second mortgage financing — at a time when banks were being cautious and keeping their debt to equity ratios on a more conservative level— and in some cases, vendors would finance the entire property sale with a first mortgage.

In this economic climate, vendor financing may be a good solution for some sellers.

It lends itself particularly well to people who are selling a home with a view to investing the sale proceeds for income purposes.

Interest rates these days on bank deposits is still pretty low, so if you can sell a house and earn five or six per cent per annum in interest on the sales proceeds, you are doing well investment-wise.

Of course, if a seller is going to “play bank”, he needs to do the same sort of due diligence procedures a bank would undertake when considering whether or not to make a loan.

You have to find a buyer/ borrower you are fairly confident will be able to repay you.

That requires a careful assessment of their current income-earning capacity and the prospect of their job security in the future.

You should know the credentials and creditworthiness of a potential buyer/borrower well. It is a good idea to require that the intended buyer/borrower have a decent sum of money saved to put towards the purchase price. What better indicator could you get of financial responsibility?

If you as a seller are planning something like this, it is important to obtain legal advice, especially when it comes to negotiating the specific terms of the mortgage loan.

Exchanging property is another way to create movement in the real estate market.

At any given time there are people looking to upgrade and others looking to downsize. When you match these persons and properties, you can secure certain transactional savings as well as meeting the needs of these types of buyers and sellers.

The exchange technique might arise when a young, growing family is looking for a larger house to fit its increasing space requirements, while older empty-nesters are looking for a smaller, more manageable place to live.

Matching such individuals requires innovative marketing initiatives on the part of realtors by perhaps actively developing specific databases of people interested in exchanging.

Exchange

The financial advantage to exchanging properties comes in the form of savings on stamp duty.

In an exchange scenario, stamp duty is only paid on the money exchanged to achieve equality of value in the exchange process — for example, if the owner of the smaller house gives his property and a certain amount of money to the larger house owner in exchange for the larger home.

Add to the mix the possibility of the owner of the larger house taking back a mortgage for the equality money and the transaction becomes more interesting and potentially more advantageous to all involved.

Next week: Other ways of revitalizing Bermuda’s real estate market.