Sunday, May 18, 2008

The Housing Market

We all know that the credit crunch is for real and is creating turmoil in the housing industry. It has unsettled the confidence of investors on Wall Street and consumers on Main Street. Market analysts and the media have piled on, sounding a death knell for the housing industry: We have heard the claims that there is no mortgage money, foreclosure rates are skyrocketing nationwide and home values are in a free-fall with no bottom in sight. But is it really true?

Conforming Markets Operating Normally

First, regarding the credit crunch, there is no question that a major shakeout is occurring in the subprime market, creating turbulence in the broader financial markets.

But what the media is not reporting is that there is no credit crunch for qualified buyers taking out conventional loans for under $417,000. And this is where the bulk of all home loans are made. The reason why this market continues to operate normally is because loans up to this amount can be purchased by Fannie Mae and Freddie Mac, having the implicit guarantee of the federal government.

While underwriting standards may have tightened for all loans, credit-worthy home buyers should have no problems finding conventional, conforming mortgages at very attractive rates. In fact, today’s mortgage rates remain near historic lows, in the range of 6 percent for fixed-rate, 30-year loans.

Nonetheless, getting the word out that mortgage money is available at very attractive rates for credit-worthy borrowers is vital to boosting consumer confidence and traffic of prospective customers.

Foreclosures are High but Limited in Scope

There is no question this is a serious problem. But again, a close examination of the facts shows that for a vast majority of the country, there is no foreclosure crisis.

While foreclosure rates have increased this year, almost all American home owners are making their mortgage payments on time.

Most foreclosures are concentrated in the once super-heated markets in four states: California, Florida, Arizona and Nevada. The Midwest is also experiencing problems as a result of continuing job losses in the manufacturing sector.

Breaking down prime and subprime loans, nearly 97 percent of prime borrowers – the bulk of the mortgage market – are up-to-date on their payments. The problem is in the subprime market, where about 17 percent of borrowers are behind on their mortgage payments.

But it’s also important to remember that 37 percent of all single-family homes are owned debt-free – without any mortgage – and that home owners nationwide have built up $11 trillion in equity that provides a good cushion against any decline in values.

It’s also important to note that a high percentage of foreclosed loans to date – particularly in California, Arizona, Nevada and Florida – have been among speculators or investors who were looking for quick profits and just walked away from their investments when the housing market cooled.

The Myth of Declining Home Values

Lets explore some of the facts surrounding the claim that home values around the country are in a free-fall.

Except for about 30 or so high-flying metro markets where home values doubled in four or five years, the correction in the home values has been relatively modest. Different economic and job-market conditions directly affect demand for new and existing homes in every market.

Treasury Secretary Paulson made the same point in a March 26 address to the U.S. Chamber of Commerce: “We do not have a national housing market,” he said, adding that housing markets are unique and those experiencing the biggest price corrections are in areas that had the greatest overbuilding.

Part of this problem is due to an influx of speculators in some large markets who helped drive prices up to unsustainable levels.

For example, nearly all the markets that posted the largest average decline in home prices during the past year – Las Vegas, Los Angeles, Miami, Phoenix, San Diego and Tampa – have appreciated in value by more than 77 percent since January 2000, according to the latest S&P/Case-Shiller home price statistics. Two of these markets – Miami and Los Angeles – were up by more than 100 percent over this period.

It makes sense that the most super-heated housing markets in California, Nevada, Arizona and Florida are now experiencing the most serious market corrections. For the rest of the country, however, the price adjustments have been relatively modest.

The fact is, now is an exceptionally good time to shop for a new home. Buyers with good credit, a job and steady income will find there is plenty of mortgage credit to be had at good rates. With home builders appropriately cutting back on new supply to meet current market conditions, they are also offering great incentives to boost sales.

This is a boon to home buyers. But six months or a year from now, as the supply-demand equation rebalances, builders may stop offering these incentives.

The Home Builders Association of Midwest Georgia serves over 700 businesses in the building industry in Fayette, Coweta, Spalding, Meriwether, Heard, Pike, Upson, Lamar, Butts and Jasper Counties. For information about the association, call Executive Officer Sandy Boda at 770-716-7109.

By Sandy Boda

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