Developing Trends

The “Great Recession” has been going on for over a year now.  The financial markets went into their collapse last autumn.  As a result credit has been incredibly tight for many months, yet we are only recently seeing seller financing as a means of selling homes really picking up steam.  I’m wondering why there has been such a delay.

Certain ebbs and flows of seller financing have been predictable in the past.  Generally when interest rates are high, qualifying for institutional loans becomes difficult and we see a marked increase in activity.  Conversely, when interest rates are low, most people qualify easily and seller financing is not as prevalent.  For the past year we’ve had the paradoxical dilemma of very low interest rates, but very difficult qualifying standards that amounted to a near stranglehold on lending of almost all types.

Banks were charging in the range of 5% for a 30-year fixed mortgage, but they wouldn’t let you have one.  Savings accounts, bonds, and CDs had very low yields – less than 3% in many cases.  So, it would seem that for those folks who wanted to, or needed to, sell their homes the opportunity to carry the mortgage themselves and earn 7% or 8% or perhaps more would be a good one.  But, for a long time we did not see any surge in seller financing activity.  In fact it only seems to have begun to pick up steam in late Spring/early Summer and is still continuing.  Why did it wait so long to occur?

It’s a given that seller financing is not an option for many people.  Many of the homes that came on the market in the past year were due to the subprime lending craziness that put many people in the situation of owing more on their mortgage than the home could be sold for.  Even for those who were not “underwater” or “upside down”, if they had little or no equity in their homes, seller financing made little sense.  But, as in every market, there are those who market their homes at a time when they want to sell for the usual reasons – wanting to purchase another home, transfer to another locale – and have equity built up.  For them selling was still difficult due to all the reasons that we are all too familiar with by now.

Those people should have been offering seller financing to broaden the market reach of their properties and closing deals a long time ago.  I fully expected to see a surge of such activity beginning in January or February, but it did not seem to happen.  As we moved into the late Spring and early Summer however, we’ve seen things pick up noticeably.  Being in the business of servicing those notes we’re hoping it continues for some time to come.

We’ve all heard about leading economic indicators, and occasionally are told about lagging economic indicators.  I’m not sure if seller financed transactions fall into one of those categories or if they are just the natural result of some of the forces that are measured and tracked.  It would be nice to know more about what affects the timing of such activity as the economy goes through its seemingly inevitable gyrations.  Time for some market research perhaps.