S.O.S. Sorting Out Subprime

Does distress in the housing market spell lasting trouble or has it created prime opportunities to put your money to work?

Times have changed for Mike Teer. A real estate broker in Riverside, California, Teer’s business has fallen off _dramatically over the last 18 months. And it’s no wonder. In the first half of this year, Riverside posted the highest number of foreclosure filings of any metro area in the country–a total of 41,351, or one for every 33 households, according to data provider RealtyTrac Inc.

Not too long ago, Teer says he could place a “For Sale” sign in a yard and offers would start rolling in, often that same day or, at the most, within just a few days. Now he says properties stay on the market an average of 90 to 120 days. As a result, three of eight agents left Teer One Properties, his 18-year-old firm. “Those agents whose only source of income was real estate commission checks and who have gone several months without a closed transaction have been forced to get another job,” says Teer.

The housing slowdown has also led to changes in his day-to-day activities. Though Teer has more time to work with clients, he has also taken up blogging and opened an account with Zillow.com, the popular Website that allows users to obtain an estimate of a home’s value. “Frankly, these are things that I didn’t have to do two years ago,” he says. But perhaps the most significant change is that it’s been increasingly difficult to get buyers to pay the true value of a house, forcing sellers to become more flexible. Says Teer: “For more of my clients who are selling and can’t afford to leave the house empty, I’m helping them find tenants to lease the property, for at least a year, to give them more time for the market to recover.”

Even though he says no more than a handful of his deals involve subprime loans–which are higher interest rate loans offered to borrowers with low credit scores or a heavy debt load–it may have been unavoidable for Teer, as a broker in a hard-hit market, not to feel the sting. But it’s the more widespread fear of just how far the subprime mess may impact other areas of the economy that has led to increased stock market volatility and caused lenders to tighten their purse strings.

In September the Federal Reserve took action to suppress rising economic anxiety by cutting the fed funds rate–the rate banks charge each other for overnight loans–for the first time in four years, lowering it from 5.25% to 4.75%. How Chairman Ben Bernanke would address the subprime situation was regarded as his first major policy challenge since taking office. The fed funds rate had been 5.25% since June 2006, which marked the end of a string of 17 rate hikes. Whether lowering interest rates will calm investors’ nerves and stabilize the market will take time to play out.

To get a handle on how the housing slowdown may continue to ripple through the economy, it’s first necessary to look at how the subprime stone was cast.

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