My New Blog

Yesterday I spoke to a friend who is applying for a mortgage to purchase a home for he and his family.  His experience really brought to light the current housing and lending nightmare to me.  My friend is no slouch.  His credit score is good, and he can show an average income for the past 2 years of over $100k.  He is trying to buy a new home for $450k.  In his conversation with the mortgage broker on how much income he needed to show to qualify for the loan, and how much money he would have to put down on the property, he came away very dissappointed, and him qualifying for the loan was marginal at best.  Here is a guy who makes well over what the average US income is, and is buying a home at an average price, and he is having a hard time qualifying!  He related to me that he asked the mortgage broker about how can all of these people around here, that he knows makes less than he does, live in homes that required mortgage amounts far and above what he was trying to get.  The mortgage broker responded that had he applied 8 months to a year ago, or more, he could have easily qualified, just like all of his friends had.  Back then, a person could get a loan without averaging two years worth of reported income, put very little money down, and there were three times the amount of lenders and programs that could be drawn upon, at the least.

So now the question, is the current depressed housing market a result of over supply, or a result of lender's having a stranglehold on current lending guidelines- thus making it virtually impossible for folks to buy or refinance?  And what is going to have to happen to make the real estate market recover?  Kind of like the chicken and the egg question.  There are all sorts of opinons on which of these caused the problem, but from my point of view, the biggest solution is going to have to be the lender's being willing to loosen guidelines a little to allow a larger demographic to actually qualify.  In my day to day appraisal experience, I see plenty of demand and desire from potential buyers, but the range of folks that could actually qualify for a loan is almost nil.  The result is that homes and vacant lots sit on the market for much a much longer time period, with several price drops.  I really don't think it is a price point question-ie. lower the price till someone gets interested.  I think that most of the population does not have enough cash to put down on a house to qualify for a smaller loan.  If a person cannot find a bank to borrow from, those properties are going to continue to decrease and decrease and sit and sit. 

A person could reason that this is an inventory problem and that as prices get lower and lower the spectrum of potential borrowers will broaden because the loan amounts will be lower.  This may be true, but at what price range will things have to be at to use up the inventory?  But then the predicament arises that at what point do values drop before people that can afford their current payments, but now see the value of their home drop so precipitously, determine it isn't worth it and just walk away, thus causing more foreclosures and defaults. I know this is already happening in certain parts of the country. Projecting that amount is disconcerting at best, and illustrates a definition of a downword spiral.

I don't know what will happen, but it appears to me, from my friend's experience this week, that if the lender's loosened up a little, the value drop would be much less in both time and values.  But do the lender's even have the capital to loosen up with?

I wish I had better news to blog about.  Currently, most of my appraisal orders are for where values are less than $300k.  I do occassionally get some orders where values are over the million dollar mark.  The owners and buyers of million dollar properties either have so much cash and/or income that qualifying for a loan is still obtainable.  Matching up this observation with current inventories on the MLS shows that the majority of people cannot buy homes between these price ranges (300k to 1 million).  Interesting because this price range was where the majority of values fell into pre mortgage and real estate meltdown.