Scary math: More homes, fewer buyers

[on-ramp]

so when will be a good time to dump 100-200K into the RE market? waiting on the sidelines patiently...


Scary math: More homes, fewer buyers
http://money.cnn.com/2007/03/12/real_estate/new_real_estate_reality/index.htm?cnn=yes

The problem with subprime lenders means there will be more homes in an over-supplied market and not as many people who can step in to make purchases.



NEW YORK (CNNMoney.com) -- Subprime lenders are already getting crushed, but the impact rising mortgage delinquencies will have on home prices overall is still an open question.

At a minimum, it means financing is drying up for those with less-than-perfect credit and that spells fewer home buyers.


The subprime mortgage market is heading for a meltdown with some major lenders defaulting on current financial agreements. CNN's Gerri Willis reports. (March 10)
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And foreclosed properties will add supply to a housing market that already has too much.

"It's going to be a really big deal," says Dean Baker, co-director of the Center for Economic and Policy Research.

"[National] inventory is 20 percent higher than last year, vacancy rates have soared and prices are down about 3 percent," he says. "Now, with the tightening of credit, I don't see how prices don't fall another 5, 6 or 7 percent."

The tightening of credit could take as many as one million buyers out of the market, says Baker, citing Bear Stearns research. "Even if you cut that in half, say to 400,000 or 500,000, that's huge."

Mark Zandi, chief economist for Moody's Economy.com, is also concerned. "I think the subprime problems will take housing activity to a whole other level," he says.

Zandi is projecting a doubling of subprime defaults this year to 800,000. "Those homes will go on the market at a discount and will weigh on the market," he says. He also believes that 500,000 fewer Americans will be able to obtain financing because of the tighter standards.

All that has led Zandi to alter his projection of a 3 percent decline in housing prices this year to a mid-single digit decline. The hardest hit areas, which he thinks will be Arizona, Nevada, parts of California and Florida, will absorb high single digit or even double-digit punches.

Not everyone paints as bleak a picture. "We don't know how many subprime mortgage holders will actually default," says Christopher Mayer, an economist at Columbia University. "Banks are working with borrowers [so they can keep their homes]. Plus, there's plenty of liquidity around for people looking for mortgage loans."

That's not to say he sees everything as hunkey-dorey. Mayer thinks values in speculative markets had gotten way ahead of fundamentals and that weak local economies in the Midwest will depress values there.

Top 10 foreclosure markets
The extent of the subprime delinquency problem is disputed. According to a report from the Center for Responsible Lending (CRL), about 1 in 5 of the subprime loans written in the past two years will go into default, costing 1.1 million their homes and unleashing a flood of foreclosed homes on the market.

But Doug Duncan, chief economist of the Mortgage Bankers Association, thinks CRL is overly pessimistic, noting that defaults for subprime mortgages have never exceeded 10 percent in any given year.

And he argues that most of the loans written before mid-2005 are unlikely to fail because they are already out of the danger zone - they've either reset with their borrowers continuing to pay them off or the increased housing values that accompanied the boom have boosted home equity enough so that owners have comfortable cushions.

More significant than defaults may be the impact of credit tightening.

"Banks have become much more cautious. Lenders are tightening, not just subprimes, but Alt-As (not quite prime) loans and primes as well," says Ellen Bitton, founder of the Park Avenue Mortgage Group.

Lawrence Yun, an economist with the National Association of Realtors, which tends to have an optimistic view of home markets, is projecting the number of potential homebuyers unable to obtain financing because of the subprime crisis will average about 20,000 a quarter.

Defaults, he believes, will come to perhaps one-half of one percent of mortgage holders, perhaps 200,000 homeowners. NAR's position is that the impact on prices will be only slight.

"Unlike the last housing crisis in the early 1990s, the economy is very sound; people are getting jobs, not losing jobs," says Yun.

Baker, perhaps the most pessimistic of the prognosticators (he is someone who sold his Washington, D.C. home a couple of years ago in anticipation of it falling in value), saves most of his concern for the markets that had the most speculation - Las Vegas, Arizona and parts of Florida. Meanwhile New York, Boston, and coastal California, and even D.C. should hold up OK, he says

[Dantilla]

I may pick up a few more houses, and keep them as rentals until the market swings around again.

[red-beard]

My God! Who would have thought?

And last month, all of the real estate professionals were saying the worst was over...

BAH!

[Bill Douglas]

I'm looking to buy a nice place in sunny California, maybe somewhere other than Compton though.

[HardDrive]

Lets see, 20% of a 1.3 TRILLION dollar market going bad....

[cantdrv55]

Sacramento will be a great place to invest into.

[Porsche-O-Phile]

You can't escape fundamentals. . . More supply and less demand. Pretty obvious what the result will be. . .

I've decided to sit for a while. Even as recently as a couple of weeks ago I'd been batting around the idea of buying a condo, but the likelihood that the market is going to get MUCH better for buyers in the foreseeable future is quite good now.

The biggest problem is still down payments. Nobody has $100k sitting around in liquid assets that they can plop down on a property (20% down on a $500k place, which is not unreasonable in some markets). Even at half that ($50k towards a $250k place), it's a lot of money and very unlikely that most people will have it.

Rentals are pretty bad right now - I have yet to see a situation where a prospective rental property can make the math work to cover the mortgage at 95% occupancy and a 5%-per-year contingency fund for repairs and maintenance. Not even close.

[hytem]

I doubt things are nearly as bad as the perception. Vacation rentals have been strong. Interest rates remain low. Housing is just fine in some sections of the country, still lagging a bit in vacation properties. Everything took a hit in October with that oil spike--when Bush said he wouldn't rule out nukking Iran's nukes. Now there's a rub. And then there's Iraq and global warming. People are worried. Good time to invest.

[wcc]

I'll admit, I didn't read all that. I guess I'm too lazy tonight.

But if this applies then so be it. I've been thinking that when the 'baby boomers' start to die off there will be an excess of homes/business for sale that their kids don't want or take care of. I really think real estate is going to take a SERIOUS hit in the coming future. More then now or the short term.

BTW... I also predict longer mortgages on average like 50-60yrs. If they don't already exist. I'm sure they do somewhere if you have SUPER CRAPPY credit....

My Rant:
I can't tell you guys how many people around here LIVE on property their parents or grandparents bought. These people bought lots of acers and now coming to retirement and instead of selling it or leasing it they are giving sections to their kids or grandkids to build on. I think this is a HUGE insite to what is coming. Basically it's saying that these younger families can't fend for themselves. I also know of MANY people that COUNT on that 10k gift from their parents to make it through the next year.

Sorry, I'm done..... I guess, maybe I'm just jealous cause I EVERYTHING my wife and I have we've had to earn it instead of it being a handout.

[jyl]

Existing home prices have just started to fall.

http://streetlightblog.blogspot.com/2007/03/new-data-on-house-prices.html

Scroll to the last chart. Compare how much prices fell in overheated markets during the last housing bear market, with how much they have fallen so far.

P-O-P, you're in LA, one of the most overheated markets in this housing bubble as it was in the last bubble. See the red line in the chart.

[RallyJon]

So lemme get this straight: builders who shouldn't be building houses for buyers who shouldn't be buying houses are complaining? Stop! Just stop right now. That guy who works at Quickie Mart for $7 an hour can't buy your $700k spec house anymore. Not going to happen. Just stop building the damn houses and go to community college and learn a skill already.

[Bill Douglas]

I think as prices fall there will be so many entry level buyers for the cheaper places and bargan hunters for the better places that it won't fall far (10%). In New Zealand we've had prices fall in a couple of towns but the houses had been selling for nuts dollars to rich foriegn buyers, the rest of the country still grows at 10% to 12%. Or if you are like me and pick the emerging neighbourhoods 20%.

[Tobra]

Originally posted by cantdrv55
Sacramento will be a great place to invest into.

What makes you say that? Sacramento is going to be the next major metropolitan area devastated by flood, way too many houses built in flood plains protected by levees that are sorely inadequate, 100 years old or both. I think I should be okay where I am in Carmichael, but my parents have a million dollar home right off American River Dr that I could picture with 4 feet of water in the living room.

I would NEVER want to be a landlord in California, unless I were renting to a family member or close personal friend. If you were unfortunate enought to get a tenant who decided to stop paying rent, this is not the place to easily evict someone for failure to pay their rent.

That said, I would love to have a bunch of dough to drop on real estate when the bottom falls out of the market.

[dd74]

A couple reports I heard today say the San Fernando Valley is the most resilient (in So. Cal) against "correction."

[red-beard]

Originally posted by dd74
A couple reports I heard today say the San Fernando Valley is the most resilient (in So. Cal) against "correction."

Porn?