Columbia real estate - things look worse

A new Harvard study reports that the housing market will continue to spiral downwards, even as this represents the greatest slump in 60 years. Some key points:

During 2003 to 2005, housing prices surged so far ahead of incomes that by 2006, the number of households (both renters and owners) paying more than half their income on housing rose to 17.7 million, or 15.8% of all households. Today, lenders are requiring larger down payments and higher credit scores, squeezing many would-be buyers out of owning a home -- even though prices have fallen.

More proof of the changing lending landscape: Subprime loans fell to 3.1% of originations in the fourth quarter of 2007, from 20% in 2005 and 2006. Interest-only and payment-option loans fell to 10.7% of originations in 2007, from 19.3% in 2006.

As employment conditions worsen and the credit crunch spreads, these two points have dire consequences for housing. Consider that the larger the share of one's income that is devoted to housing, the more likely a foreclosure will occur from even a temporary loss of employment or other financial stress. Also, given that there were still so many subprime loans being originated in 2006, and that a lot of these were 3/1ARM or 5/1ARM-type mortgages, the rate adjustments have not yet hit those loans, and many of them will go into default once that occurs.

With baby Seth on the way, our 2 BR apartment, cramped by our two ginormous bear-dogs, is getting a little cramped. We were thinking about buying instead of transitioning into another rental in August. I called Bank of America and Wachovia two weeks ago to get pre-qualification to buy, just to give myself a price range. We have good credit (my FICO > 720), but they told me that they just aren't doing the 80/20-type 0% down loans anymore. Since a lot of the market values are falling, the banks just don't come out with a safe margin. In addition, as of last week, Bank of America is requiring a standard 10% down payment, and they are not alone:

Two things are certain. The days of 100-percent financing—no down payment—are gone. And the baseline credit score you need for approval has risen sharply.

“It is more difficult to qualify borrowers for loans these days,” says Peggy Deane, vice president of mortgage services for Member Options, which provides mortgages for the UVA Credit Union. Dean says the secondary markets, institutions like Fannie Mae and Freddie Mac who buy loans from originators, have tightened up their guidelines around the county.

“Even a year ago, for credit scores in the 500s, I won’t say those loans were easy to come by, but they were certainly possible,” Deane says. “That’s not the case today. We’re seeing a migration to a minimum of a 620 on more programs.”

So basically the demand for housing will sharply decline as fewer and fewer people now meet the bar for homeownership. In addition, the rates on mortgages are going to be rising soon:

Wells Fargo economist Michael Swanson sees rates rising to 6.6 percent by the end of the year. Other economists and analysts say interest rates could climb to 7.3 percent or higher by the middle of next year. Such a jump could further dampen the already-anemic demand for housing.

“I wouldn't at all be surprised to see mortgage rates jumping between 1 and 1.5 percentage points over the next year,” said David Galland, managing director of Casey Research in Vermont. “The only reason they haven't moved up sooner is that foreigners have been reinvesting their dollars into Treasury bills.

Put all these factors together:

1. a lot of subprimes haven't even "come due" yet
2. largely as a result of losses on subprimes and forecasts for more losses on subprimes (#1), banks are raising the standards of lending
3. as a result of #2, the pool of qualified buyers will go down sharply, which will reduce demand further
4. as a result of the weakening dollar and other economic impacts, mortgage rates will continue to rise, pushing down prices

This gives credence to the Havard study. The slump is really just beginning.

I put up a post last month with housing data for the greater Columbia area, and I expressed concern about the prospect of buying due to a continuing slump that might leave me with negative equity for a while. This morning, using the SC Realtors data, I got a few numbers to share on the state of the real estate market here:

The number of units sold in the greater Columbia area comparing April '07 to April '08 has dropped by 16%. Keep in mind that the "housing slump" was noticed and appreciated around that time last year -- which means that some of the slack has already been removed from the markets:


Now, on the price side things don't look so dire, with a 5% increase in median prices from April '07 to April '08, and a 1.4% increase in the '08 median over the '07 median. To temper your optimism, the gains were wiped out by inflation, as the rate during the period Apr '07 to May '08 is 4.81%:

Thus, in effect, prices have stagnated with inflation. In addition, since the days on market (DOM) here in Columbia rose 22.5% from April '07 to '08, I fully expect to see some declines in prices soon. This is typically peak buying season, so that sort of hit during April tells you a lot about the general weakness of the local market right now:

Of course, the realtors themselves have a rosy optimism about conditions here over the next 6 months, although their predictions about how things would be right now didn't look so good:

My prognostications aren't worth much, but just looking at the fundamentals and the supply of homes available, I would be right now that prices in this area will drop over the course of the summer. Columbia may not have been victim to the rampant speculation that drove up prices in some areas, but it cannot escape the inevitabilities of the fundamentals mentioned at the top of the post.

We'll just have to wait and see...