Monday, September 10, 2007

Why it all matters.

It is well understand that the credit crunch has effected real estate in the last six months and especially so with the tightening of programs for the jumbo market. The impact of the dramatic change in the mortgage industry will have far reaching effects on clients now and for years to come. Many people don't think they have any involvement with the 'Subprime' problem as the media likes to refer to the credit situation within real estate. The effects are wide ranging and people won't realize the impact on their own pocket book until they have to sell, refinance or purchase. For people looking to sell now or anytime in the next few years need to face the reality of today's market not the fantasy land of what a friend sold for in May. I believe values in bubble markets will continue to adjust lower each month as the inventory increases, closed transactions decline, and the tight money environment reduces the available pool of buyers. As an example, a client could have perfect credit, excellent income, but 100% financing for a purchase over 417k on a single family home is no longer available. That could delay the purchase as the client has to save the minimum 5% down payment, plus have six months of PITI on deposit as well. Every purchase scenario is different as you have people upgrading, downgrading, first time home buyers, and investors all within the marketplace buying/selling homes. But, overall you can see the stress the market is under with the changes that occurred since April when all the subprime lenders began to fold. The impact of the changes in prime mortgage lending really has just begun as it wasn't until the first week of August that the jumbo mortgage market began to change guidelines and move up rates to compensate for the added risk. This won't be seen in the numbers until the Sept numbers are reported in Oct.
Make no mistake, this isn't a liquidity crisis. Money is available to lend, but its available at lower risk levels or much higher rates than the public has become accustomed to over the last few years. In looking at listings throughout the hot areas you can start to see the smart sellers capitulate and move their asking prices down. Buyers are searching for a deal and seem to think prices will move lower so they are very patient. They often are bidding well below asking prices because they are conditioned by watching listings fall in price throughout the bubble markets. We have moved into a period of slowly declining prices in the hot areas, notice the deals that are closing are priced right for today's market. Not what a neighbor sold at in July. The market is different and once all participants understand the changes that have occurred you will see inventory decline and sales volume pick up. This could take several years. A lot of mortgage debt is resetting to higher(unaffordable) rates in the next two years. This could put a lot more homes on the market further pressuring prices. Homes are selling on their fundamentals and buyers are not counting on property appreciation to bail out a poor decision. So they are buying carefully and are often requesting very safe 30Y fixed loan scenarios.
In my next article I will highlight why falling real estate prices will have an enormous effect on people refinancing. After all, one of the tenants of mortgage lending is loan to value. If your neighborhoods values are falling, that will absolutely have an effect on the rates available come the time to refinance. Has the real estate environment changed your plans for selling, buying or refinancing? Please comment.

1 comment:

grammar police said...

Good blog. Might want to look up how to use the words "effect" and "affect". You have it backwards.