Is The Slump Over Yet?

Is The Slump Over Yet?
Challenging Housing Markets Continue Into 2008

By Amy Hoak, Marketwatch | 20 December 2007

CHICAGO (MarketWatch)— After a year of falling house prices in numerous parts of the country and a meltdown in the mortgage market that affected borrowers regardless of their ZIP code, many hope that housing markets will finally start to get better next year.

But if there's any improvement in 2008, it may be relatively modest. It's difficult to get a consensus on exactly when housing will turn the corner. Local markets will certainly vary, but at the least it's likely that some of the same problems that plagued 2007 will carry over into next year.

At best, market conditions could start to stabilize, with home sales regaining strength. If more buyers get back into the market, some of the huge inventories of new and existing homes for sale can begin to be worked off.

"The only reason why demand is finding a bottom is because sellers are cutting their prices," said Mark Zandi, chief economist of Moody's Economy.com. "There was a sense that the market would cool— I don't think there was a sense it would crash. And it crashed."

The National Association of Realtors predicts a slight increase in existing-home sales next year but a decline in new-home sales. After the median price for existing homes dropped 1.9% in 2007 to a projected $217,600, NAR forecast that the median price would rise 0.3% to $218,300 in 2008. Others aren't as optimistic, including the Mortgage Bankers Association, which is predicting that sales won't pick up until 2009. And, the MBA is expecting prices of existing homes to decrease 2.93% in 2007 and 2.04% in 2008; new-home prices should decrease 2.72% in 2007 and 1.96% in 2008.

A recent Economy.com report, "Aftershock: Housing in the Wake of the Mortgage Meltdown," predicts home sales will hit bottom in early 2008, with housing starts hitting bottom mid-2008. But prices will continue to drop, and by early 2009 home prices will have fallen about 13% nationally from their peaks, according to the report. Prices will have fallen more than 15% if nonprice discounts to buyers are taken into account.

Housing's Ills

Housing's most fundamental problem, according to the Economy.com report, is the excess of unsold inventory lingering in many of the country's local markets. The supply of homes for sale hit its highest level in 22 years in October, according to NAR.

Overbuilding is a culprit in many markets, and investors who are unloading units bought during the boom are adding to the massive supply, the National Association of Home Builders pointed out in a recent forecast. In December, the group reported that single-family housing starts were down by about 50% from a record high at the beginning of 2006.

"Once we hit bottom ... we're going to stay there for awhile," at least in terms of new construction, predicted Richard F. Moody, chief economist of Mission Residential. Adding to the already elevated inventories are foreclosures hitting the market. According to the MBA, 1.69% of first-lien mortgages were in the foreclosure process in the third quarter. The percentage was the highest in the survey's history, and the group expects high numbers of foreclosures to continue into next year.

Areas where overall economic conditions were weak, including Michigan and Ohio, drove up the national foreclosure numbers, as did areas where there was much investor speculation, including California, Nevada and Florida. Defaults on adjustable-rate loans— especially subprime loans made to borrowers with weaker credit histories— caused a lot of the strain; when the mortgage's teaser period was up, homeowners couldn't keep up with payments.

The mortgage meltdown this summer made it tougher for borrowers to get a loan, another stumbling block in this housing market. In particular, nonconforming loans [[e.g., Jumbos: normxxx]], which can't be bought by government-sponsored mortgage agencies Freddie Mac or Fannie Mae, were harder or more expensive to come by.

Many borrowers with good credit and a decent down payment were fine, but subprime loans, intended for borrowers with poor credit histories, became a thing of the past. Alt-A loans, which required little or no documentation, became a rarity. And rates on jumbo loans went through the roof, making it tougher for home buyers in expensive markets.

Some borrowers who could qualify for a Federal Housing Administration insured loan turned to those, and proposed FHA modernization may help some borrowers even more. But in the second half of the year, the credit disruptions slowed down an already sluggish market.

Waiting For The Rebound

Rick Loughlin thought the Boston market appeared to be "really coming alive" this summer. "Then we had the mortgage crisis," said Loughlin, chairman of the Greater Boston Real Estate Board and president of Coldwell Banker Residential Brokerage New England. The borrowing ability of many individuals took a hit, reducing the number of buyers able to enter the market and stranding homeowners looking to trade up.

The lending landscape isn't likely to change much in the near term, with no-documentation and low-down payment loans remaining harder to come by, Moody said. Perhaps the only bright spot in the mortgage arena this year was low interest rates on conforming loans. The average rate on the 30-year fixed-rate mortgage fell below 6% at one point in December; NAR expects the 30-year to rise to about 6.4% by the end of 2008.

The low rates "should have provided a lift to home sales, but it has not," said Lawrence Yun, NAR's chief economist. That indicates to him that the elevated cost of jumbo loans is still taking a toll. If conforming loan limits were raised to accommodate expensive markets, it could have a greater impact on housing than the current low conforming rates have, he said.

Sitting On The Sidelines

The home price drops encouraged a number of people to put home buying decisions on hold. In some of the most sluggish markets, sellers who don't absolutely need to sell aren't attempting to do so; those who do are offering price cuts and concessions to make the deal.

"A lot of buyers and investors are sitting on the sidelines. They feel unsure what is happening in the marketplace," said Devin Reiss, president of the Greater Las Vegas Association of Realtors. Some mistakenly think that it's impossible for anyone to get a mortgage nowadays, even with good credit, he said. Often, however, fears revolve around the undesirable scenario of buying a home only to watch it decrease in value a short time later. His advice for bargain hunters: Don't wait too long. "If we start to see demand go up and supply go down, prices will go (up) with it," he said.

But probably the best advice is to know your market before making any kind of move. "A hallmark of the downturn is how broad it is across the country," said Economy.com's Zandi. But even in poor-performing markets there could be good neighborhoods, he said, adding that housing conditions vary "block to block."

NAR reported that 93 out of 150 metropolitan areas showed increases in median existing single-family home prices during the third quarter of 2007, compared with 2006, even though price drops in other areas brought down the national median price. Still, Bob McNamera, a real-estate agent with Pasquesi Realty in Chicago, said that some people are staying out of the market based on what they hear about general trends. "They hear it's a bad market, and don't do any more homework," he said. First-time buyers, however, with a down payment and decent credit, could find bargains, he added.

Even in Stockton, Calif., an area hard-hit by foreclosures, Renee Becker, a Realtor and vice president of Beck Realtors, has hope for next year. The deals in the foreclosure inventory might bring back more investors and help fuel a slow and gradual recovery, she said.

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Normxxx    
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