Housing market explanations

March 26, 2008 7:55 AM

What are the core reasons for the sagging housing market -- not in terms of what is going on at banks and at the Federal Reserve, but rather, why is Joe Sixpack is not walking in to Century 21 with a preapproval and eager to buy?

I know people are upside down on their mortgages, properties are not being appraised at their true values, the dollar is falling, the bubble is going through an implosion, and so forth, but I'm trying to clarify my understanding in less abstract terms. Why is Joe Sixpack is (presumably?) not shopping right now? Does it have more to do with being unable to get a loan or more with not being interested in buying?

I feel I have a good understanding of the problems but I don't think all the pieces connect in my mind at a more practical level.

Furthermore -- I'm aware there are big reasons why places like SoCal and the southwest are burned out, but I am more interested in what's going on in "average America" places: the south, the Midwest, etc.

Also is there any U.S. region or type of housing that isn't being affected much right now?

posted by crapmatic to work & money (31 comments total)

I'm actually fine in Baltimore, with a good chance of selling my house for my asking price and looking for something more. The problem? Sellers aren't taking offers contingent on sale of current property, which means I have to sell my house before I can offer on any other. That's kind of more hassle than I was bargaining for. Still, I am plowing ahead.
posted by kalessin at 8:04 AM on March 26, 2008

Where I live in the Northeast, I think a lot of people are feeling pinched financially. A lot has to do with the cost of fuel. There was a an article in yesterday's Boston Globe that pretty accurately described the way a lot of us feel. Couple that with uncertainty about how low the Real Estate market is going to go, and tighter requirements for getting mortgages, I think a lot of people are reluctant to buy. My wife and I are thinking about moving to a different house, which would require us to sell our existing home, but I'm less worried about getting that done than I am about trying to figure out when the market is closer to its bottom. I don't think we are near that yet.
posted by thomas144 at 8:09 AM on March 26, 2008

It's harder to get a mortgage now.
posted by konolia at 8:12 AM on March 26, 2008 [1 favorite]

There's also the ongoing problem of people asking a price for their homes that they feel it's 'worth' because it's higher - or equal - to what they paid for it; there seems to be a misunderstanding that objects, and in particular homes, have some kind of intrinsic worth other than what someone's actually willing to pay for it in an actual market.

Plus it's really, really hard to get loans right now, even for people with good credit, in many areas.

Plus if you're having trouble selling your old house - for any reason - you'll find it harder to buy.

Plus due to general economic worries, people are less eager to engage in large difficult transactions like home purchasing. If you're worried about getting laid off, you're probably not shopping for a house.

Plus probably half a dozen things other people will mention shortly.
posted by Tomorrowful at 8:15 AM on March 26, 2008 [1 favorite]

Marketplace actually covered this today, and it's a mixture of things. As Konolia mentions, it's harder to get a mortgage now. For people that own homes, they have to find a buyer for their own home to get a new one, and with the market down there's a chance they might lose money in the process. Other people are thinking the market will go down more, and are trying to time it.
posted by drezdn at 8:17 AM on March 26, 2008

My sense is that to a large degree, Joe Sixpack is out there buying houses -- for the old normal reasons. People move towns. People's kids move out, or they get hitched and want to nest. All that normal stuff still happens, if not quite as much as before.

But, you don't see nearly as many people buying houses they have no intention of ever living in to do a quick surface-rehab and sell in a month, or people buying homes they have no intention of living in, or even rehabbing, but just want to keep for a month or two and resell at a higher price, or people buying unbuilt houses on spec so that when they're finished, they can sell them for more than they paid. And in some areas, those people were an awful lot of the housing market.

Around here in western NY, the median house price is actually up *google* 8% on a year ago... to the princely sum of $97K. There was never any bubble to burst.
posted by ROU_Xenophobe at 8:20 AM on March 26, 2008 [1 favorite]

I think a lot of things have come together at this point in time to produce the housing sag. In my mind, the foremost of these are 1) stupidly high home prices, and 2) stagnant or decreasing real wages in the middle class.

If you lived in a middle-class neighborhood (the Joe Six-pack neighborhoods. Not the Dr. Joe Merlot neighborhoods) over the past several years, you had to be aware of how people were beginning to cut-back on expenses...some slowly and subtly, others more overtly...as rising costs began to out-pace the ability of incomes to keep up. Quite simply, it became more financially prudent to just stay put in the home you already have and reign-in expenses.
posted by Thorzdad at 8:25 AM on March 26, 2008

My impression would be that the stark reality of the housing crunch has caused "average joe 6-pack" to more realistically evaluate his/her situation, and made (forced?) them to decide that the smarter path in the future is to tighten the belt and stop spending more than they have. Work harder (to ensure job stability)... use extra money to pay down credit cards and a variety of other debts, and basically stabilize their situation instead of taking on more risk. Average Joe 6-pack overextended him/her self for much to long... now your seeing the pendulum swing in the opposite direction (in my opinion). There are of course exceptions to this rule.
posted by jmnugent at 8:36 AM on March 26, 2008

A couple of things (as someone looking to buy - in the SF Bay Area).

1. Pre-Approval is becoming harder to come by. Currently you need 20% down and in many cases 2-3 months of mortgage payments in the bank. This is a significantly higher bar then the "Ninja" loans of the last couple of years.

2. Decreased Fed prices have not translated into lower interest rates to consumers. I don't have numbers currently but my understanding is that fixed-rate mortgage interest rates are actually a bit high right now. Banks are actually hesitant to extend loans to home buyers currently so interest rates are a bit high.

2. There's hesitancy because many may believe housing prices are going to come down. At least in my area prices are so bloated that Joe Sixpack just can't afford to buy right now (particularly if there's more rigor in the loan process)
posted by bitdamaged at 8:37 AM on March 26, 2008 [1 favorite]

The NAR Housing Affordability composite index indicates that housing is not yet as affordable as it generally was during the period from '97 through '03.

Sorry, the link only has data going back to 2005. I'm looking at historical data I have offline, but I couldn't find it online.
posted by mullacc at 8:43 AM on March 26, 2008

For a UK perspective - which is probably not so different - the Motely Fool explains why there are now only half as many home loan products on the market as there were last summer - and why they are harder to get.
posted by rongorongo at 8:47 AM on March 26, 2008

I think Joe and Jane Sixpack are starting to wise up to the myth that housing is an investment. Economically (right now) it justs makes more sense to rent and invest the money saved by renting somewhere else.
posted by DawgterFeelgood at 8:47 AM on March 26, 2008

There's also a case to be made that in a lot of the boom regions, builders took advantage of low rate construction loans to overbuild, producing a glut of empty new houses compared to the number of buyers.
posted by ikkyu2 at 8:47 AM on March 26, 2008

The big problem here is the overextension of the credit markets and the fall of mortgage-backed securities. These two factors are intrinsically codependent. When the housing market was soaring and lucrative, many investment banks and other banks started extending mortgages to individuals who were in higher-risk categories. Then they'd take this large pool of mortgages, especially the now notorious ARMs, and bundle them together as a security to sell. Things were fine for a while, until those adjustable rates started going up, at which point many of the mortgage holders- many of whom could barely afford, or even flat out could not afford, the mortgages in the first place- started defaulting on their loans and going into foreclosure.

Now the key to why this screws over Joe Sixpack is that banks are regulated in terms of how much credit they can extend- for example, for every $1 in assets they have, they can extend $10 of credit. When all of these banks suddenly have to do writedowns for hundreds of millions, if not billions, of dollars, it puts a huge squeeze on how much credit they can extend, meaning that (as mentioned above) mortgages are getting harder to come by. Exacerbating this problem is the fact that foreclosures just suck for the bank to own- properties that get repossessed by the bank are frequently in incredibly poor condition, as the previous owner doesn't feel particularly responsible for a house they know they're going to have to vacate shortly. So not only does the bank own a property that they aren't getting any money for (but are still paying taxes and frequently fines on- property maintenance stuff), it's in even worse shape because any buyer would have to sink a lot of money into repairs to get it into reasonable condition. Add in the fact that vacant properties are frequently targeted by copper thieves and you've got a recipe for disaster.

Not that I'm boo-hooing on the behalf of the banks. This is their fault in the first place. The two main reasons for this are that they were extending mortgages to people who really should not have gotten them, and the fact that they were taking a huge pile of debt and selling it as an asset. The mortgage-backed security issue is what's causing this to really ripple across the financial system- exposing the market to that kind of massive risk has had some incredibly serious implications throughout the economy. In fact, some banks are unable to foreclose on properties where the owner has stopped paying, simply because the mortgage in question has been bundled, rebundled, sold, and resold so many times that nobody can actually really figure out who owns it.

I'm not really an expert on the subject but I think I have a good idea of what's going on. If I've made any serious errors in my analysis please feel free to correct me.
posted by baphomet at 9:12 AM on March 26, 2008

I think ikkyu2 is on to something. There's a supply side and a demand side to this problem (sort of--I'm mixing up my terms). Mortgages are harder to get and less attractive. But on the demand side, if I were thinking about buying a house right now, I'd probably hold off. The town where I live is in the middle of an unprecedented construction boom. Between the emerging glut of new housing and the completely separate decline in property values, I'd want to wait until sellers started getting desperate.

I wouldn't be surprised if the Resolution Trust Corporation reappears.
posted by adamrice at 9:20 AM on March 26, 2008

there seems to be a misunderstanding that objects, and in particular homes, have some kind of intrinsic worth other than what someone's actually willing to pay for it in an actual market.

This is not a misconception. Intrinsic to the market system are concepts like "market value" (as opposed to "value"), "overvalued", "adjustment", "bargain", etc, all founded on the reality that the value an asset can supply often differs from the value it costs to acquire, or from the value it could be immediately liquidated to, and so on.

As to the question, until now, buyers have been happy to buy, believing they could get their money back by selling the house, so it was safe to buy. It is no-longer safe to buy, because chances are they will have to pay more for a house than what they can sell it for. Therefore buying a house means losing a lot of money, which means (to many people) that they're better off either staying where they are, or renting, for the time being.

Since so many people paid far more for houses than their current value (way above both current market value and current intrinsic value), if they sold those houses at current values, they would lose more money than they can afford to lose. So they're not prepared to sell for much less than the mortgage they're still paying off, so they start the bidding at a price close to that of their bubble-time mortgage. Buyers aren't prepared to pay those prices, as it's clear they're still overpriced, and waiting a few more years for the market adjustment to kick in further will reduce their loss.

Plus, it's harder to get credit. Part of the housing bubble was person A using their easy credit to bid up person B to use all of their easy credit. Buyers today can't compete with that easy credit, and sellers can't afford to write off the difference, so the buyers and sellers can't agree on a price, so no sales take place.
posted by -harlequin- at 9:30 AM on March 26, 2008

Also is there any U.S. region or type of housing that isn't being affected much right now?

NYC

But some other ideas
posted by unsigned at 9:33 AM on March 26, 2008

I just closed on my first house last week, and in comparing notes with some of my associates who got mortgages 2-3 years ago the process is much harder. I had to provide more documentation than I thought was reasonable including my college transcripts (what that has to do with a mortgage is anyone's guess) and I have great credit.

So Joe Sixpack is out there as ROU_Xenophobe said, but the process is so much harder than in was 3 years ago, more deals fall through and less people are inclined to stick their neck out until things settle down.
posted by prk14 at 9:57 AM on March 26, 2008

I think Joe and Jane Sixpack are starting to wise up to the myth that housing is an investment. Economically (right now) it justs makes more sense to rent and invest the money saved by renting somewhere else.

Eh, I think you can make that statement true for a relatively narrowly defined group of people (single, no kids, going to relocate in the next few years), but in general buying a house is a reasonably good investment. The linked to article makes a lot of broad assumptions and some of the information is just plain wrong, such as the estimated closing costs (closer to 3%) and the idea that the buyer pays the agent's commission (just plain incorrect).

Housing could be a very good investment in the near future, once all the subprime losses are known. Until that shakes out, it's still fairly risky.
posted by electroboy at 9:58 AM on March 26, 2008

Also is there any U.S. region or type of housing that isn't being affected much right now?

According to a recent report, Charlotte, NC is the only major city in America in which housing prices went up last year.
posted by kindall at 10:05 AM on March 26, 2008

and the idea that the buyer pays the agent's commission (just plain incorrect).

No, it's entirely correct when one looks at the economics.

The seller is agreeing to a price net commissions, ie. the cash in his pocket at the close.

If the commissions were $0 instead of $X, then the price the buyer paid would be less $X.

Housing could be a very good investment in the near future, once all the subprime losses are known

subprime really hasn't anything to do with it. Alt-A was the main driver in prices, 2002-2006.

To answer the question, lenders are no longer throwing hundreds of thousands of dollars at bozo buyers. Prices are now in the process of returning to market fundamentals modolo the bozo buyers, basically 2000-2002 price levels.
posted by tachikaze at 10:39 AM on March 26, 2008

I had to provide more documentation than I thought was reasonable including my college transcripts (what that has to do with a mortgage is anyone's guess) and I have great credit.

FWIW, college transcripts are *usually* requested because they're proof that you were a full-time (or part-time, or whatever you were) student at time T, and that's why you didn't have much of an income. (Unless, obviously, they're being requested to prove you had the grades you claim you did, but the former is more likely from a lender.)
posted by Tomorrowful at 10:45 AM on March 26, 2008

No, it's entirely correct when one looks at the economics.

The seller is agreeing to a price net commissions, ie. the cash in his pocket at the close.

If the commissions were $0 instead of $X, then the price the buyer paid would be less $X.

No, this is incorrect. The buyer pays the same amount regardless of whether or not a commission is involved. The commission is simply deducted from the seller's settlement. Go look at a HUD1 and you'll figure it out.
posted by baphomet at 10:51 AM on March 26, 2008

Baphomet: You're technically right, but if as a seller I want to clear $100,000, and the commission is 5%, by definition I need to set a price of $105,263 (and change). Saying 'buyers pay the commission' is kind of like saying 'renters pay real estate taxes' - well no, they don't, but that's where the money comes from that pays for it.
posted by Tomorrowful at 11:15 AM on March 26, 2008

subprime really hasn't anything to do with it.

No? Millions of foreclosures, depressed prices and oversupply won't have anything to do with the attractiveness of real estate investing?
posted by electroboy at 11:18 AM on March 26, 2008

You're technically right, but if as a seller I want to clear $100,000, and the commission is 5%, by definition I need to set a price of $105,263 (and change).

That's getting sort of tenuous. That's like saying my employer bought my house for me because their paychecks go towards my mortgage.

The selling price is generally set by the market, which doesn't care whether you make exactly $100k. It would certainly influence a decision on the final sales price, but it's not cut and dried.
posted by electroboy at 11:30 AM on March 26, 2008

electroboy, subprime affected subprime areas ie. the hood.

These areas are of course tanking hard now.

But "J6P" drove housing prices up in the suburbs thanks to the new, improved lending standards and products that went into effect ca. 2003.

Alt-A encompasses Prime borrowing with a curveball thrown in like no-down, IO, NegAm, SI/SA, NINJA, etc.

but it's not cut and dried

Sure it is. In a normally functioning market, the only person bring money to the closing table is the buyer, and everyone there is getting paid by the buyer, either directly or indirectly.
posted by tachikaze at 11:48 AM on March 26, 2008

Hi, Joe Sixpack (Josephine?) here.

*Qualified on a mortgage way over my actual ability to pay (would have taken over 50% of my take home pay).

*Made offers on over 5 houses.

4 of the offers were completely ignored on homes that had been on the market for over a year.

Finally gave up and went to renting, because it was easier.

My guess, either the banks weren't willing to take any offer under the asking price and home owners couldn't take a lower offer.

Yes, most of these homes are still on the market one year later.
posted by aetg at 4:10 PM on March 26, 2008

I think that all of the above reasons are good ones. I'll add to that:

If you think about Joe Sixpacks average salary, then subtract only gas allowance, food/household needs allowance. Both gas and food/household items have gone up in price in the past few years without much of a pay raise to counter that. When people are spending more and more money, without a pay rise, then it is only a matter of time before things like house buying become impossible. My boyfriend and I make more than a lot of average people with children, and we are struggling, can't afford to buy a house. We do live in Seattle, whose housing market is insane, but even renting here is expensive. An average price of $1200/month of a one-bedroom. Crazy!
posted by nikksioux at 4:22 PM on March 26, 2008

Easy. The market for homes was distorted by too easy credit. Too many buyers chasing too few homes, prices go up to unnaturally high prices. Now the buyers are gone- either they can't get a loan because they no longer qualify for the easy credit, or they already bought what they wanted.

So now the people who over-bought thinking the house was going to keep doubling in value are selling because they can't afford the payment. And the speculators want to dump the property they bought before taking any more loss. And people are getting foreclosed on. Now we have too many homes for sale and not enough buyers. That makes prices go down. Or stay flat.

Why was the credit too easy to get? Too much money chasing too few buyers. The securitized mortgages appear to have been over-rated by the credit rating agencies which made them more attractive to investors than they should have been. Investors bought them up hand over fist looking for easy money. Now they know it's not that easy and so that money has dried up and credit availability is returning to normal levels. Meaning buyers need down payments and income and other silly things like that. Not to mention, they need to sell their house too.

I'll add also that mortgage rates are still very low, meaning there is plenty of money out there for normal-risk buyers. If there was actually a meaningful drop in mortgage availability, rates would go up because of competition.

So, we have a buyers market with too few buyers. Further softening the housing prices. So prices will stay flat or keep dropping until there are enough buyers, and as that happens, prices will begin to rise again. First time buyers with down payments are in a good spot, as well as people who have a fair amount of equity already built up.
posted by gjc at 8:49 PM on March 26, 2008

subprime affected subprime areas ie. the hood.

I don't think you can support that statement. Subprime generally refers to lending to people with poor credit at higher rates. NINJA loans fall under that umbrella, Alt-A is slightly below prime and honestly I have no idea what J6P is. So you can certainly argue that subprime disproportionally affects poorer areas because the people that live there tend to have worse credit, but I'm willing to bet there's a lot of suburbanites that getting killed on it as well.

In a normally functioning market is the key phrase there. You can make a pretty compelling argument that the market of the last few years and the current one is not functioning normally.
posted by electroboy at 2:11 PM on March 27, 2008