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March 23, 2007
Home sales up, but....
What’s wrong with this picture? Amid all the sturm und drang surrounding housing, the government reported earlier today that existing-home sales rose by nearly 4% in February—a surprise given that economists surveyed by Thomson Financial were predicting a decline of a little less than 2%. So what gives? Is the housing recession over before it even started?
Not quite. Warm weather in December and January probably helped, since it encouraged folks who would otherwise be bundled up inside, to go look at houses (which, per the normal cycle, would close in February) And you can count on the National Association of Realtors – the same group running those gauzy now’s-the-time-to-buy commercials with those L.L. Bean-type couples saying “We’d never have gotten the home we wanted if we’d waited.” – puts bullish spin on the picture. Granted, the NAR concedes home sales will possibly dip in March as the cold weather in January and February meant that they’re probably aren’t a lot of deals in the pipeline that would be scheduled to close this month. But the NAR predicts a rebound in April and beyond.
What do coming months hold? Glad you asked. My prediction is this…
The NAR’s optimism notwithstanding, I think home sales decline in each of the next six or even nine months. That’s partly because of the ongoing blowups in the subprime market—that whole strata of buyers who got into homes in 2005 and 2006 with nothing down and no documentation of their income aren’t going to be in the market going forward. And partly because all the subprime defaults are going to thrown more inventory onto the market.
And home sales will also decline because banks are dramatically tightening their underwriting standards. My favorite banking analyst, Richard Bove at Punk Ziegel & Co., did some on-the-ground spadework in Florida and put out a report earlier this week arguing that underwriting in that state has changed dramatically—starting with the appraisals. No longer are mortgage brokers “shopping” for a friendly appraiser who will “hit the number” they need to get the loan approved by their managers. And no longer are appraisers relying on “comps”—recent sales of comparable properties—as their benchmark. Now they’re looking more at metrics like “replacement cost”—how much would it cost to build a similar home from scratch on the same property?
Bove estimates that this change in practice is cutting property values by a good 15%. While that might sound like good news for buyers, here's the real killer: Bove's research indicated that banks there are no longer willing to write mortgages with 0% or even 5%. They now want a downpayment of 10% or more. The result is that a year ago a buyer could get a $400,000 home for 5% down, or $20,000. So even those the value of that home may have dipped to $340,000, banks now want 10%, or $34,000, as a downpayment—and they want full documentation of your income. So given all that, how can someone predict home sales are going to increase in coming months?
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Lots of loan officers are shifting from one lender to another to hedge against the lenders remarking, "sorry, your borrower no longer qualifies," or ,"sorry,we are no longer funding this program," or "sorry, we no longer are in business."
Our escrow office has seen this occur to transactions we have worked on. Unfortunately, when it is a purchase, the dominoes start to fall, affecting other purchases up-line (read: equity being used to buy another home). This magnifies the importance the sub-prime loans have had on first-time buyers entering the market starting the up-line domino effect.
Posted by: Tim at March 24, 2007 12:16 PM