My own observations:
The best definition I have heard for the term ‘Fair Price’ is one that is agreed to by a willing buyer and a willing seller. Today, there are a lot of willing buyers. The problem is that they cannot qualify for loans. It is this factor more than anything else that is affecting the demand side of the equation. As for willing sellers, there are a lot of them right now, which is pumping up the supply side of the equation. Certainly banks are very willing. They have inventories of foreclosed homes that are affecting them in many ways. First is that they have lost the income stream that the foreclosed loan provided. The previous owner was at least 3 months (and often 4 or 5 months) behind on payments before the bank filed a Notice of Default. Then, 90 days later, a Notice of Sale was filed,. The actual sale could take place 21 days later. Following that, the bank often must evict the former owners, taking another 2 months. Quite often, that home is not even in minimum saleable condition. There is deferred maintenance, unpaid property taxes, mountains of junk and perhaps vandalism to contend with. This all needs to be dealt with before the home is put on the market. Adding to these troubles is that banks are restricted in the amount of real estate they can own. If their inventory climbs, they are required by law to increase their reserves, further limiting the money they have available to loan. A willing seller? You bet!
Now, some loans may be kept in the bank’s own portfolio, but most loans are put together in a package and sold. Some are sold to large institutions (insurance companies, retirement funds, etc.) others are securitized and sold like bonds. Obviously, the banks have more money to lend if they can sell those loans, and most of them were. With so many investors being burned by the sub-prime meltdown, there are a lot fewer buyers for those loans. Two of those buyers are FNMA (“Fannie Mae”) and FHLMC (“Freddie Mac”). These corporations are quasi-governmental agencies referred to as GSE’s (Government Sponsored Enterprises). They buy mortgages on the secondary market, pool them and sells them on the open market with a guarantee. That guarantee makes these securities very desirable in a market burned by sub-prime loans. In order to make that guarantee, Fannie Mae and Freddie Mac had to put stringent requirements on the loans it would accept. Two years ago, less than 50% of U.S. loans were of this type. Today, I think the figure is more like 87%.
The conforming loan limit for these loans was $417,000, well below the median price for homes in California. Anything above that loan amount was considered a non-conforming jumbo loan necessitating a higher interest rate. Congress has passed an economic stimulus package, which increases conforming loan limits to $729,750 and President Bush has signed it. The National Association of Realtors (NAR) had been pushing for raising the limit to $625,000. Their research found that simply increasing the loan limits for Fannie Mae and Freddie Mac to $625,000 would permit as many as 300,000 families to enter the housing market and reduce foreclosures. Housing inventory would be reduced and home prices would strengthen by 2-3%. Obviously, the higher limit in the new legislation will have an even greater effect.
FHA loan limits are also being raised to $729,750. This will help an additional 138,000 Americans achieve the dream of homeownership and will allow nearly 200,000 homeowners to refinance and potentially keep their home.
It should be clear that there is going to be a great rush to get these loans and large backlogs are to be expected, especially since lenders and title companies have reduced staffs. Those near the front of the line will have a definite advantage.
Housing is a unique commodity. Unlike gold, stocks, bonds or most other commodities, it, like food, is a requirement. Being homeless is not an option for most people. They must either buy or rent. If they cannot buy, they must rent. If home ownership decreases, the demand for rental housing increases. Increased rental demand results in higher rents. Increased rents attract more investors and eventually create more demand for home ownership. This factor acts as a brake to declining home prices.
R.W.
