Letters to the Editor
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Well, folks, this could have been predicted
when you allow for the fact that there was a little, totally underreported change in how mortgages are created that took effect for most borrowers about March 8. I mentioned in another post weeks ago that the mortgage insurance (MI) companies were going broke; well, as of March 8, most of them came out with new rules saying that their minimum FICO score went from 575 to 620 with a considerable down payment, and to a 660 (!) with a small one. Overnight. The last MI company (Radian) followed suit effective April 1.
So, let's combine what's new over the past 2 months: borrower FICO minimums are now at requirements tolerating NO credit blemishes just to get a loan with less than 20% down; maximum financing in most markets is reduced by 5% per the GSEs when the property is in a declining market county; Expanded Approvals (for less than perfect buyers) are no longer being accepted by most lenders; the 100% Flex program is now all but extinct; and the Fannie Mae stated income loan program--a superprime loan for the self-employed requiring excellent credit, proven assets and other strong credentials--is being phased out.
Basically, if I ran a convenience store with the scope of changes like these being put in my business, I'd have to tell 8 out of 10 customers they weren't eligible to play the lotto, buy milk, cigarettes, bread or the paper in my store. Yes, 80% of actual transactions, based on what I've seen over the past three years of all prime loans I've written, would be affected by these changes. The only thing buoying these numbers up was the rush to FHA programs, which don't have these considerations--yet.
Given all that, Andrew, how could ANYONE familiar with the housing industry think the sales figures would rise this spring? Here's my prediction: the next batch of figures will fall again.
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Housing Market questions
These median sales prices and statistics are, I'm guessing, national numbers. Is the housing market bad everywhere? Obviously some places are worse off than others, but I'm wondering if there are regions that have weathered the market bust intact. And if so, what did these areas do or not do to maintain rational housing prices? Will these areas be hit hard by proxy? Are we talking about irresponsible regional markets that are skewing prices downward nationally?
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Andrew, you're mixing adjusted and raw numbers
Sales actually increased over Feb. The seasonally adjusted number is what fell 2%.
See calculated risk:
http://calculatedrisk.blogspot.com/2008/04/march-existing-home-sales.html
Barry was pointing out that they always target the raw number to make a point which is absolutely the wrong thing to do unless looking at YOY values. As the calculated risk graph of raw numbers shows, things are still deteriorating, but there was an increase between March and Feb. If there wasn't that would be housing Armageddon.
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Jobs, Jobs, Jobs
mjwycha, I'm far from an expert, but from what I've been hearing, two kinds of places are coming through the housing bubble better. Some places didn't experience a "bubble" in the first place. Their housing market didn't rise precipitously over the last few years, and so it's not dropping precipitously now. The other exception is NYC, and other places like it. There's just a huge demand for housing there, and not a lot of supply. (And, supposedly, a lot of people from outside the US are buying up high end properties in Manhattan.)
I think it comes down to jobs, jobs, jobs. I live in PA, and the housing market here is still moderately strong, mostly because the job market here is still moderately strong. If you have a city where a lot of the jobs are service jobs that will be cut in a recession, the housing market will reflect that.
Personally, I think the housing market has to fall further, and I hope it does. Over the past 20 years, most middle class incomes have not increased dramatically, but home prices have gone up by huge amounts. That's great if you're one of the winners who hit the jackpot, but it's not sustainable. Housing prices need to fall and get back in line with what people can responsibly pay.
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Yes this is painful
But this is just what the Dr. ordered. The real estate market in many areas of the country badly needed this enema.
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@KayWWW
I too live in PA, and that is kind of why I asked the question(s). I have not seen the housing bust in my area. But I am concerned that the unstable market will unduly effect housing prices in this region, even though housing prices here have stayed rational, and most people (like my wife and I)who buy houses opt for a fixed rate mortgage rather than the risky adjustable rate mortgages or the colossally stupid sub-prime mortgage ("ownership society" my ass--more like the greatest swindle perpetrated on the poor in a generation).
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causes of the housing bubble
The reaction of mortgage lenders described by cdunlea is not necessarily rational.
Quality of borrowers had relatively little to do with the housing crash. It was the quality of the collateral.
The main priority of mortgage lenders used to be, logically, not lending over the market value of the house. It's really very simple. If someone owes less in mortgage principle than their house is worth on the market, they can nearly always sell the house and pay off the mortgage (and pocket the equity), rather than foreclose. That's why, traditionally, foreclosed houses have been a risky buy. If they went to foreclosure, it was often (not always but often) because something unexpected happened that reduced the value of the house to below the amount of the original mortgage. Flooding, unexpected zoning changes, something like that.
But if you owe more for the house than you can get for it, you have to either make the payments, sell and take a hit, or foreclose. If you can't make the payments, you're likely to foreclose, unless you can and will pay off a "mortgage balance on nothing".
Why did lenders, after decades of tending to get it about right, suddenly start getting it wrong? Two reasons. The first was, yes, CDO's. Essentially, the original lenders were able to sell the loans more readily than before. That took away the incentive of the original lender to be really sure they were valuing the house correctly, and created an incentive to make as many loans as possible at the highest possible principle. So why did primary lenders get hurt, as well as buyers of CDO's? Because many of them ultimately built up an inventory of inflated mortgages that was more than they could sell.
The other issue was overbuilding. Massive numbers of new units were coming onto markets so fast that the supply increase was higher than what traditional models allowed for. Excess supply depressed prices faster than anyone expected.
The character of the much maligned "subprime borrower" had relatively little to do with it. If the purchase prices had not been inflated, any borrower could have usually avoided foreclosure by selling, even if he or she could no longer make the payments.
It's worth noting that many people did benefit from all this. There was a massive transfer of wealth from buyers and lenders to whoever sold homes in the 2004-5 period.