Darn those banks, anyway. More and more they are insisting that buyers be able to afford the homes they purchase, and that the homes be worth what is being paid. This isn’t sitting well with everyone:
It’s not that people don’t want homes, it’s that they can’t buy them under the stricter lending standards.
That’s how the National Association of Realtors explains the 17.5 percent drop in sales from April 2007, and eight percent drop in housing prices.
But the problem is worse than even the NAR says it is.
Lenders are turning the clock back to 1975, requiring larger downpayments and higher credit scores to qualify for low interest rates. That’s only prudent, but what they’re also doing is tightening appraisals on properties that are being sold or refinanced.
That’s not all lenders are looking at:
Lenders are no longer dazzled by high credit scores. They’re scrutinizing home sales trends, days on market, debt ratios, and other criteria.
Sales were easier and more plentiful in the boom years when "due diligence" was a quint concept. Current sales may be lower, but at least the sales that are being made should have a lower incidence of defaults. That, in the long term has to be better for market stability and ultimately, home sales.
Lenders might be "choking" home sales but if they had taken a stranglehold on loose lending a few years ago, the market wouldn’t be in the dire straights it is today.
Just wait until the banks start taking into account rental values to determine a true “price floor” to base all of their calculations on.
As the NYT writes today (in http://www.nytimes.com/2008/05/28/business/28leonhardt.html?em&ex=1212120000&en=8f80e8ad15cc051c&ei=5087%0A ) :
” The concept will probably sound familiar to stock market investors. It’s the real estate market’s version of a price-earnings ratio — a measure of how expensive an asset is, relative to the underlying economic fundamentals. Like a P/E ratio, the rent ratio provides something of a reality check.
Throughout the 1970s, ’80s and ’90s, the average rent ratio nationwide hovered between 10 and 14. In the last few years, though, it broke through that historical range and hit almost 19 by the time the housing market peaked, in 2006.
And while home prices — and rent ratios — have always been higher on the coasts, they reached whole new levels recently. In the Washington area, the ratio went above 20. In Boston, New York, Los Angeles and south Florida, it topped 25. In Northern California, it approached 35, higher than it had been in any city, at any point on record.”
What if, what I expect to happen eventually, the “average rent ratio” returned to the sane “between 10 and 14″ of the era before money was free?
So let me get this straight, when you use time honored methods for loan credit worthiness, people who can’t really afford homes can’t really buy them? Wow what a concept! And the NAR is moaning that this is what is stopping people from buying homes?
Keith on Housing Panic has an even more interesting take on this this morning. Apparently the NAR is telling its members to look at 40-50% haircuts from the peak prices. That is when we will see sales go up.
metro -
What is standing in the way of the necessary return to sanity is that the legacy of toxic paper from the silly loans over the last few years means that essentially all the financial institutions on earth are insolvent. That is, every Western government needs to go to ZIRP to save their banks like Japan did in the 1990s. That is, Justice Mahoney was dead right in December 1968 when he found in the Credit River Decision that banks issuing mortgages is some species of unenforceable magic. In other words, August 15, 1971 was a suicide pact, and you can now expect Bush to declare an emergency shortly where the private ownership of gold by American persons will be a serious crime (sorry V).
The following commentary is informative and highly important, not least for several important issues it leaves out, notably the expense of America’s recent wars and ongoing foreign military basing and the military industrial complex.
“The Fading of the Mirage Economy” by Steven Pearlstein, Washington Post, May 28, 2008.
So let’s re-phrase that opening line in the article.
“It’s not that people don’t want homes, it’s that they can’t afford them.”
It’s not that I don’t want a Mercedes, it’s that I can’t afford one.
Doesn’t quite garner the same sympathy, does it?
Now, let me take a little trip down memory lane to the Economics 101 class in bidness college:
Prof: Define Demand.
Me: Demand is BOTH the DESIRE and the ABILITY to purchase a particular good or service.
Prof: Your charm is exceeded only by your brilliance. A+.
Me: Awwww shucks.
Ok, maybe I made up that last part, but I’m pretty sure I got the definition right.
John,
I like Pearlstein, he generally sees things correctly, or at least how I see them.
BTW, check this article out on price to rent ratios.
http://www.nytimes.com/2008/05/28/business/28leonhardt.html
Ah, the olde military industrial complex. Mass hysteria. I still see lots of potential in all this. If one can make it through hyper-inflation/economic stagnation stage. The good things coming from this are a return to the good ol days people like to cry about. Local manufacturing and businesses will be able to retake local markets. A bunch of little main streets. They will be able to run more efficiently than fort500 companies. This spells opportunity and a return to folk minded community. I am CHEERING the move to pricing based on LOCAL economies. It seems to me that most brokers think that EVERY market they happen to be in is the next Hollywood or Manhattan.
billy -
Thanks for the sarcasm
Waste is about keeping folks happy in peacetime, but war is about efficiency. The Sparrow as originally conceived reflected the organizational chart of the company that was producing it. So the cable to connect the different components turned out to be bigger around than the missile itself. Strictly localized production and consumption in the redesign made the cable disappear (the concept of the pluggable circuit-board and backplane, not to mention the first LSI computer-on-a-chip came out of the effort).
Now, ironically, those hundred mile long traffic jams on 128 (not to mention 495) must disappear too. The innovation to make this happen will be just as extreme, and the time constraints are measured in just a couple of years.
I know someone right now defaulting on 3 million dollars worth of loans, 770 credit score and living in a McMansion(of course not defaulting on that one!) in NC…so what are the banks, who are getting back these properties worth 40% less than the mortgage(s) they have on them, going to do?…and this story is being repeated everywhere…
Banks need to return back to the good ole days where if you did have a blemish on your credit, and had a feasible explanation you could write a letter or put a bigger downpayment….These foreclosures coming on the market aren’t just hurting investors or liar loan borrowers, they are degrading whole communities where hard working people saved, bought, didn’t helco and are now paying the price as crime and empty lots surround them…
There is nothing wrong with owning and there is nothing wrong with renting..however, there is something wrong when lenders contribute to parties being put into a situation they should never have been ALLOWED to enter into the first place..
AustrianEconomist-
I agree completely. I believe that many of the areas that are reporting an increase in sales are “sucker’s rallies”- a lot of investors are stepping in hoping they will make money because we are “near the bottom”. We could end up with more walkers when values fall further.
Until rents are more in line with buying, a doubt we’ll see a floor or motivation for buyers to return to the market.
All planned, all planned, all planned. The laxity was planned, the strictness is planned. Isn’t it obvious there is nothing more to be looted in the housing establishment, for now? So for the time being (hey–maybe forever), be strict.
But there IS still more to be looted in the housing establishment. Specifically, YOUR housing. Look around and kiss it goodbye.
Stand by the for the next leg down.
jryskmpr,
my father believes in huge malovelant cabals as well.
If you’re anything like him, I pity you.
>>there IS still more to be looted in the
>> housing establishment. Specifically, YOUR
>> housing. Look around and kiss it goodbye.
Okay, I’ll bite. How so?
If you want to be credited for having predicted something that happens in the future, you’ll have to be far far more specific than that. Anybody can paint a broad brush and later on point to some random item that “proves it right”. Give us the details.
MikeC (#12) -
K pitches wildly but his fastball can top 100 mph at times, so it’s dangerous to underestimate him. Probably his best Doom moment came in the information he contributed for this December 2006 post.
Crispy cited it in this CRisk comment a year later where they were asking “what hit us” with respect to ABX. K’s contribution was probably key to Aaron’s starting up the Implode-O-Meter in early January 2007.
You don’t have to believe in huge malevolent cabals to believe this will get worse.
Just thinking good old “Murphy” gets you there.
I think that things will start to look a little more rosy…..for now. However, like the stock market, that bounces up, then down lower…so will this housing market be. I am predicting that the next set of housing numbers will look a little better temporarily.
Wait until the recession hit is full swing and people start losing their jobs. Not to mention, inflation and gas prices. OUCH! Alt-A loan defaults are starting to hit, then next year, the 5 year ARMs will readjust. OUCH!
Hutch,
You don’t have to believe in huge malevolent cabals to believe this will get worse.
Just thinking good old “Murphy” gets you there.
Yep. Just saying organized malfeasence isn’t likely. Plain old imprudence and greed explains everything quite well.
Looks like Fannie Mae is lifting the 5% LTV restrictions for all declining areas staring tomorrow. Maybe that will help some folks afford the down payments?
Wait until the recession hit is full swing and people start losing their jobs.
Already there. Among the largest and most profitable law firms in the U.S., layoffs of staff and attorneys have already begun in earnest.