Where Have All the BUYERS Gone? PESSIMISM May Be the Culprit!
FEWER BUYERS MEAN HIGHER HOME INVENTORY. THAT DEPRESSES PRICES, WHICH COULD LEAD TO INCREASED LEVELS OF FORECLOSURES. THEN, EVEN MORE PESSIMISM!
This might be a too-simple explanation of the state of the housing market, or perhaps it is exactly true. The fact is, in today's real estate market, here in Chicago and elsewhere, many buyers are not confident they should enter the housing market right now.
Perhaps they are afraid of losing their job. Or not affording their house payments, and possibly facing foreclosure down the road. Some may be waiting on the sidelines, for prices to fall even further than they already have.
In the opinion of Lawrence Yun, Chief Economist with the Research Section of the National Association of Realtors, any further weakening in the already-fragile U.S. Housing market could trash Gross Domestic Product (GDP) across the country into as much as a two-percent annual decline. That will most likely result in a moderate economic recession.
Here is Dr. Yun's summary of why buyers may be holding back on purchases so far in 2008 -
1. The Possibility of Still-Lower Home Prices. The very public nature of increased home foreclosures, with the accompanying web and newspaper coverage, may indeed push prices further downward. Not to mention the wrenching pshycological effect of seeing actual foreclosed, boarded-up homes in neighborhoods you are considering.
2. The Likelihood of Ongoing Reductions in Mortgage Interest Rates. In an eight-day span last week, the Federal Reserve Board lowered it's key Fed Funds Rate twice, by a total of 1.25 percent. This historically-high rate cut may not be the last move the Fed makes this year, should the real estate market, and the economy in general, continues to be sluggish.
There is not a direct correlation between the Fed's action and U.S. Mortgage Interest Rates, as these mortage rates are often tied to other, international benchmarks, still high. But a pattern of rate cuts by the U.S. Central Bank may create a consumer expectaion that more rate cuts are right around the corner. "Why buy now, when we may be able to do better later," some consumers may ponder.
3. Sub-prime lending has dried up. Many real estate practitioners will tell you it wasn't long ago that anyone with a pulse could get a home loan. That is not true anymore!
About 1 out of 5 loans originated over the last three years were done sub-prime, for blemished-credit buyers, often with very high loan-to-value. Although some of these riskier loans may return eventually, or be supplanted by greater numbers of government-insured FHA Loans, underwriting standards will improve, the very bottom ranks of potential borrowers will not have the opportunity to come back to the market. Fewer buyers, for greater levels of inventory - simple supply and demand - until the market balances.
4. The Jumbo Mortgage Market Needs Fixing. Current "conforming" mortgage loans - less than $417,000 at present - serve a diminishing number of potential buyers, especially in higher-priced metro areas. Current thirty-year conforming fixed loans run around 5 1/2% for the best rates, and should be slightly higher for the larger, Jumbo Mortgages. In reality, however, these higher loan amounts are tagged with a disproportionate interest rate, sometimes as high as 7%.
Increasing the Jumbo Loan Threshold, as is now under consideration by the U.S. Congress, to the $625,000 level could, in Dr. Yun's opinion, result in 348,000 additional home sales, reduce home inventory levels, pump $44 billion into the economy, strengthen average home prices, and potentially reduce foreclosures.
The first step, however, is to induce potential home buyers to "jump in the pool," as many good values can be found in today's real estate market, in Chicago, and across the country.
For more information, read Dr. Lawrence Yun's article in the January edition Real Estate Insights - viewable online via Realtor.org.
DEAN MOSS & DEAN'S TEAM CHICAGO
