Sorting Out the New Housing Market
The shape of the newAmerican housing market — the post-bubble market — is starting toemerge. It is one that favors the young who never owned a house and thebanks that have access to cheap deposits. It may be harshest on the twocoasts, where both distress and a newfound lack of mobility may be onthe increase.
The ideal home buyer now — in a reverse of what was true for years —is a renter who is not burdened with a house. Such a buyer will need adown payment from somewhere, and he or she will need enough income tomeet the monthly payments for the foreseeable future, including anyincrease in adjustable rates that seems probable.
But not owning a home, which may be hard to sell, is a big plus.
A year ago, having a home that had appreciated in value meant thatan owner could trade up to a more expensive home. Now it means that thehomeowner cannot move until the old home is sold, and that is gettingmore difficult.
First, the seller has to find a buyer who can get a mortgage.Second, the price has to be high enough to pay off the old mortgage andleave enough cash for the down payment on a new home. Both were takenfor granted a year ago. In many markets, neither is a sure thing now.
That has created a daisy chain of delays and cancellations that has frustrated builders, homeowners and real estate agents.
Selling one house depends on the buyer’s selling another house, andthat deal in turn depends on yet another sale, and so on and so on.
A failure to get a mortgage approved at any stop along the way can halt the sales of an entire series of homes.
The loss of mobility stems from the fact that homeowners with housesworth less than they owe can find themselves unable to move to accept ajob in a different city.
That has been true when home prices have declined in the past. Whatis new this time, and could bring much greater pain and more sellingpressure in many markets, is the existence of “exploding mortgages,”loans with monthly payments that will rise sharply within a year or two.
Homeowners who can refinance such mortgages are doing so now, butothers — without enough income to qualify for a new mortgage or with ahouse not worth what is owed — may be forced to sell if they cannot getconcessions from their lenders.
That threatens a downward spiral in prices, most likely in areaswhere prices rose the most and where unconventional mortgages were mostoften used. Broadly speaking, that means many areas on the East andWest Coasts, plus once-hot areas like Arizona and Nevada.
Just how bad it will be depends in part on how the banks fare. Thosewith money to lend will be able to charge more than they formerly did —and thus get better profits.
That gives a leg up to banks that can finance themselves with low-cost deposits. Bank of America, in agreeing to acquire Countrywide Financial,purchased a mortgage distribution network that could no longer befinanced as it had been. But the more home prices fall, the greater therisk that banks will have to write off more losses, resulting in steepdrops in capital levels and even causing failures of financialinstitutions — thus reducing the supply of available loans.
That reduction of supply is particularly threatening to buyers ofmore expensive homes. Jumbo mortgages, those over $417,000, cannot besold to Fannie Mae and Freddie Mac,the government-sponsored enterprises that are still buying loans. Thereis legislation pending to raise that limit in some parts of thecountry, but it appears that many such loans were so risky that theycannot be refinanced. The only way prices got so high was that peoplewho could not afford to buy those homes were given mortgages they couldnot hope to repay unless home prices kept rising.
It is possible that we will see a negative spiral, in which lowerprices reduce the availability of loans, and thus push prices lower.That, in turn, could leave more homeowners unable to refinanceexploding mortgages, producing more forced sales that push prices evenlower — and further reduce bank capital.
That would be the reverse of the cycle that prevailed untilmid-2007, when easy credit made loans available even to those withdubious credit, driving up prices and, for a time, making it appearthat there was little risk in mortgage lending.
At some point, the pressure on the government to step in will beintense. Its efforts so far have been mixed. Tougher lending standardsordered by regulators may only increase defaults, but efforts topersuade banks to renegotiate loans may reduce the dislocation for somehomeowners.
But barring a huge government program, the housing decline may beprolonged and bitter for nearly all involved. The worse it gets, thebigger the losses for financial institutions and the less able they maybe to make the loans to turn things around.
