Commercial PropertyPending Sales Dip Should Have Been Expected
Once again, the financial press is all over a negative housing report that doesn"t reflect current conditions. Not only is real estate local, not national, but things can change quickly enough that no matter what the news reports, it"s already out of date. And besides, does anyone expect a whistle to blow calling the real estate bottom?
The National Association of Realtors reported that its monthly Pending Home Sales Index, indicating contracts signed by buyers to purchase homes, fell 6.5 percent to a reading of 85.5 from an upwardly revised 91.4 in July, based on contracts signed in August.
That"s 21.5 percent below the August 2006 index of 108.9, and the lowest level in six years (before the housing boom of 2002-2006.)
"Pending sales of existing-homes activity will be dampened near-term as mortgage disruptions continue to impact the housing market," explained Lawrence Yun, senior economist for NAR." Fewer contracts were being written because of mortgage availability issues, and a separate internal survey of our members shows more than 10 percent of sales contracts fell through at the last moment in August, primarily the result of canceled loan commitment."
Yun explains that the "volume of activity we"re seeing today is below sustainable market fundamentals because some creditworthy people are trying to buy homes but can"t because of the credit crunch" and that the "impact was greater in high-cost markets that are more dependent on jumbo mortgages. In some areas, as much as 30 percent of signed contracts were falling through in August when the credit crunch problem peaked.
But nothing lasts forever, and Yun says that "the problem has since become less severe, though jumbo loan rates are still higher than they would be under normal conditions. Therefore, sales activity in late fall will better reflect market fundamentals."
Thanks to the financial press and its incessant trumpeting of the "mortgage meltdown," buyers are paralyzed.
While it"s true that some buyers couldn"t get financing, it could be that the real truth is that they didn"t get the financing on the homes they want. Stay with me. What we don"t know is why some buyers couldn"t get financing. Was it because some lenders went out of business or were the loans they wanted out of their reach? How many buyers bought something less expensive? How many walked away in a huff?
It could also be that sales are down because investors, or non-occupying homeowners, are having a harder time getting financing. A disturbing number of the loans that are in default are on non-owner-occupied homes, but these were primarily in speculation-heavy states: Nevada, Arizona, Florida and California. As of June 30 here are the statistics for non-owner-occupied defaults:
Nevada - 32 percent of prime mortgage defaults and 24 percent of subprime defaults.
Florida - 25 percent of prime loans and 14 percent of subprime loans.
Arizona - 26 percent of prime loans and 18 percent of subprime loans.
California - 21 percent of prime loans and 15 percent of subprime loans.
Elsewhere, non-owner-occupied homes accounted for 13 percent of prime defaults and 11 percent of subprime defaults, according to the Mortgage Bankers Association.
At the time, Doug Duncan, the MBA"s chief economist said in a statement to the press, "Defaults are on the rise in most parts of the country, but it should be recognized that it is not always the case of a homeowner losing his or her home; often it"s the case of an investor gambling on a continued increase in home values and losing that gamble."
Jumbo loans ($417,000 or higher) are at nearly a point higher interest rate than conforming loans, regardless of the buyer"s credit, impacting a sector of the market that was previously bullet-proof.
Since then, lenders have calmed down, and mortgage-backed securities are starting to sell again, but only because of assurances from banks that the packages are predominantly conforming. That may have meant that mortgages were harder to get in California, but out-of-the-spotlight cities like Tulsa, Oklahoma, saw not only more homes sold, but a handsome price gain in housing.
It"s the selling of securities that allows new money to come to the banks to make new mortgage loans, so investor safety is paramount right now.
Until it isn"t.
No, what"s going to happen is that everybody will mind their p"s and q"s for a while. Expect housing to continue to be sluggish, but look on the bright side. Builders won"t be building to speculators for a while. They"ll be building for people who actually need a home.
And maybe, with a little luck, they"ll build what people really want, where they want to live, and for an affordable price.