Let's Not Get Too Excited

For the last couple of weeks, if you've been tuned into the news, you've probably heard at least three stories about the declining housing market and problematic mortgage market. If you've really been tuned in, you've heard about 100 stories. As I've been listening and discussing the situation with many, I'd like to try and put things into perspective. Bad news sells and I believe the abilities of the media to sensationalize these issues could actually be causing more damage then the actual issues themselves.

What has caused these problems?

Over the last couple of years, the real estate market appreciated at an incredible rate; far beyond inflation, the consumer price index, salaries and basically any salable product. While home values began to rise, financial lending institutions recognized this opportunity and promoted less restrictive financing products that fueled housing's appreciation rates. Buyers who were once required to put down at least 20% on a home could now purchase with 100% financing, and in some cases 107% financing, therefore needing significantly less funds to close a deal. Further, you could get these loans paying interest-only and with great introductory rates that would last anywhere from 1 to 7 years. For example, when I purchased my home in 2003, while I choose a more traditional loan, paying principal and interest, my introductory rate on my adjustable mortgage was 4 1/8 % for 3 years...an incredible rate.

With these changes in mind, a buyer who could once afford a home for $100,000 now has the ability to qualify for a home over $200,000 if they had good credit and a decent job. The buyers purchasing power increased over 100%!!! With this type of funding available, buyers were willing to pay more and sellers could ask for more.

Why the Doom and Gloom Stories??

While this housing boom worked great over the last 5 years, home values can only appreciate to a value that people can afford. Once you reach that point, the housing market has nowhere to go but down. If you live in New York, San Francisco or anywhere where the appreciation went completely through the roof, pardon the pun, you're experiencing depreciation and the easiest way to tell is by looking at the inventory of homes. When prices are too high, homes will not sell and therefore remain on the market.

To make matters worse, interest rates have increased over the last couple of years and home owners carrying mortgages that adjust are experiencing large increases in their monthly payments. What used to be a payment of $1000.00 per month could be $1400.00 with just two years of adjustment. That's a 40% increase!! Because of this situation, its no wonder why we've seen foreclosure rates soar. Homeowners can't afford their mortgage payments!

The Chain Reaction

Once the homeowner defaults on the loan, financial institutions begin their foreclosure process, hoping to recoup the amount borrowed by the homeowner. While this isn't a big problem in a growing market, as the property should maintain its value, the financial institutions have huge problems when the property's value declines. Additionally, if the lender has been closing lots of higher risk loans at 100% loan-to-value, any decline in price will have an impact on that lenders bottom line. This in turn has caused many sub-prime lenders and major lenders go completely out of business.

Just last month American Home Mortgage, employer of over 5,000 people and 8th largest mortgage lender in the United States, is gone with no warning. Ameriquest is done. Even Countrywide Home Loans, the largest mortgage lender in the country, announced that is was borrowing over 11 billion dollars to fund its loans!!

The Result

With all of these issues occurring, it has resulted in mortgage companies rewriting there policies and restricting different types of loans. In particular, you'll have a very hard time finding any 100% financing in the market place and you'll pay a premium interest rate for a Jumbo Loan (loans over $417,000). The bottom line is that financing has become less available.

The Bright Side

The areas in the country that are suffering the most from these recent developments are those areas where prices exploded. We don't happen to be in one of these areas. The Philadelphia region, while it did experience quite a bit of real estate appreciation, was more conservative then New York and most of the West Coast. While our region won't be untouched, the market adjustment should not be as extreme.

Finally, if you were financially prepared to buy your home, whether it was last year or 5 years ago, and don't plan on moving for a couple of years, these circumstances may have little, if any, impact on your equity position. Real Estate markets rise and fall all of the time.

What if I want to Sell?

For those of you who might want to sell or need to sell, don't get too worked up. It might take a little longer and you won't get quite as much as you might like, but the home your purchasing should also reflect the lowering of prices in the current market.


Of course, this is a lot to digest. If your interested in more details please check out my website at http://www.talktotyler.com/ or email me at tyler@wagnerrealestate.com

I'll keep you posted.