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www.nahb.org
July 1, 2008
Q: There doesn’t seem to be an end in sight to the housing slump. By the time the market hits bottom, won’t housing be down and out for the count?
A: If the truth be told, housing has always been a very cyclical business. In the mid 1970s and the early 1980s and 1990s, housing production and sales dropped by more than 60 percent in a matter of months. During those cycles, we confronted and overcame many of the same problems we face today – large numbers of unsold homes, skeptical and reluctant consumers, tight credit markets and shortages of money for certain borrowers, declining home values, and prospective buyers who had difficulty selling their existing homes. The important thing to remember is that over time the market corrected and we rebounded to production and sales levels that beat or matched the records of the previous cycle. Remember, those who purchased homes in the early 1990s during the last big economic and housing downturn came out as big winners. The message here is that housing is a very tough and resilient industry. We will be back – stronger and better than before.
Q: Hasn’t the subprime crisis cut off the flow of mortgage money for qualified borrowers?
A: If you believed the headlines or the endless drum beat about subprime lending on cable television news, you would think that the pot of mortgage money has dried up completely. Nonsense! The vast majority of home buyers are seeking conventional, conforming mortgages at or below $417,000. These loans are purchased by Fannie Mae and Freddie Mac, both federally chartered organizations. While underwriting standards may have been tightened for all loans, credit-worthy home buyers should have no problems in finding conventional, conforming mortgages at very attractive rates – in the range of 6 percent for fixed rate, 30-year loans.
And Congress earlier this year passed a stimulus package that will allow Fannie Mae and Freddie Mac to purchase more mortgages in high-cost markets through the end of 2008. Plus, the Federal Reserve has moved aggressively in the past several months to cut interest rates and inject more liquidity in the financial markets. These developments will increase the availability of money for jumbo loans, although rates on those loans are a bit above their usual premium over conforming loan rates and downpayment requirements are higher. Nonetheless, these are the facts: Mortgage money is available at a very attractive price for credit-worthy borrowers.
Q: With the nation in a foreclosure crisis, why should I be looking for a new home?
A: While foreclosure rates have increased in the past year, almost all American home owners are making their mortgage payments on time. More than 96 percent of prime borrowers – the bulk of the mortgage market – are up-to-date on their payments. Most foreclosures are concentrated in the once super-heated markets in California, Florida, Arizona and Nevada and the upper Midwest states of Michigan, Ohio, Minnesota and Illinois, which have been hit hard by job losses, plant closings and depressed local economies.
But again, we need to put this problem into perspective. As noted above, California, Nevada, Arizona and Florida are at the epicenter of this problem. These four states accounted for 87 percent of the total increase in new home foreclosures, according to the Mortgage Bankers Association’s 2008 first quarter data. California and Florida alone account for 35 percent of all foreclosure starts in the U.S. and 49 percent of subprime ARM foreclosure starts nationwide. Nationally, about 83 percent of subprime borrowers are still paying on time every month.
It’s also important to remember than more than one-third of all single-family homes are owned debt free —without any mortgage – and home owners nationwide have built up $9 trillion in equity that provides a good cushion against any decline in values. Also, a high number of defaults on loans to date have been among speculators or investors who were looking for quick profits and subsequently walked away from their investments when the housing market cooled.
Last August, President Bush launched the FHASecure Initiative, an important new solution for subprime home owners. To date, FHASecure has helped more than 130,000 families refinance their mortgages and stay in their homes. That number is expected to reach 300,000 by year end.
And the HOPE NOW public-private partnership alliance whose mission is to maximize homeownership and minimize foreclosures, has announced that since July, more than 1 million struggling home owners have received a work out, either a loan modification or repayment plan that helped them avoid foreclosure.
Q: In today’s housing environment, isn’t the smart move to keep waiting for prices to fall even further before venturing into the housing market?
A: The current housing price correction is helping to restore affordability. In parts of the country where the housing boom was not as strong, price declines have been marginal, and there have even been a few exceptional areas where prices have remained on the rise. The bottom line for most existing home owners is that their homes will be worth significantly more than they paid for them once the market begins to recover – a process that is expected to begin later this year. The repercussion for prospective buyers is that the market has provided some breathing room from the sky-high prices prevailing a year or two ago.
Q: It seems that home prices will just keep going lower and never recover. What’s to stop this from happening?
A: It is a virtual given that over time home values will stabilize and then edge upward with the next recovery. To argue that home values will continue to decline and will never recover, somebody has to make a convincing argument that it will cost less to build a new home five years from now than it does today. That’s not going to happen.
Despite today’s housing slowdown, the price of bricks, mortar, lumber, copper and other products used in home building continues to go up due to worldwide demand and upward pressure on commodity prices generally. Look at anticipated population and household growth; consider the increasing scarcity of available land in metro markets where jobs are located and where people want to live. And the cost of getting land entitled will continue to go up because of more and more restrictions and fees being added by local governments. As inventories wind down, demand will rise and so will prices. Over time, all these factors will help drive up the cost of housing.
Q: The S&P/Case-Shiller monthly home price index showed that home prices declined an average of 15.3 percent in the nation’s 20 largest markets between April 2007 and April 2008. Does this mean that home prices in these markets -- and nationwide -- are in a major tailspin?
A: Different economic and job-market conditions directly affect demand for new and existing homes in every market. Treasury Secretary Paulson made the same point in a March 26, 2008 address to the U.S. Chamber of Commerce: “We do not have a national housing market,” he said, adding that housing markets are unique and those experiencing the biggest price corrections are in areas that had the greatest overbuilding.
Part of the problem is due to an influx of speculators in some large markets who helped drive prices up to unsustainable levels. For example, all the markets that posted the largest average decline in home prices during the past year – Las Vegas, Los Angeles, Miami, Phoenix, San Diego, San Francisco and Tampa -- have appreciated in value by more than 60 percent since January 2000, according to the latest S&P/Case-Shiller home price statistics. Two of these markets – Miami and Los Angeles – were up by more than 100 percent over this period.
It makes sense that the most super-heated housing markets in California, Nevada, Arizona and Florida are now experiencing the most serious market corrections. Areas in the Midwest are also undergoing price corrections due to stagnant economic conditions. For the rest of the country, however, the price adjustments have been relatively modest. Though housing is a cyclical business, experience shows that over time, home prices will stabilize and then move upward with the next recovery.
