Today's Housing Market Offers
Unique Opportunities for Home Buyers
Information provided by Building Industry Association of Southeastern Michigan
The nation’s housing downturns historically have coincided with economic recessions, but today’s slowdown is different than those that have preceded it, offering a unique set of circumstances for consumers who are looking to buy a new home.
The major difference today is that the U.S. economy is performing fairly well – despite the negative impact of declining activity in the housing industry. The job market is still relatively solid in most parts of the country, family incomes continue to rise and interest rates, while not at the rock-bottom levels of a few years earlier, generally remain at affordable levels.
Odds of a recession definitely increased in the late summer when problems in the mortgage market undermined confidence in the financial markets and reduced the availability of credit for prospective home buyers. However, the Federal Reserve and other government agencies responded quickly, and they have been taking actions to ensure that money remains available and that no lasting harm is done to the American economy. At the worst, housing analysts at the National Association of Home Builders believe the odds of a recession are one-in-three, and the likelihood of a full-scale recession is expected to diminish in the year ahead.
Despite the dire headlines that have appeared in the news, most Americans have reasonably good expectations that the economy will remain on their side for some time to come. A closer look at conditions in the housing market provides further grounds for optimism among prospective home buyers, and some of the negative developments in the marketplace can actually work to their benefit.
For instance, housing prices on a national basis have been losing some ground. While that can’t be welcome news for home owners, this development sounds far worse than it actually is. At the height of the housing boom, housing prices were rising at their fastest pace in history. In some of the hottest markets, prices doubled in a matter of years. These increases were clearly unsustainable, and it didn’t take too long before prices rose in all too many places to unaffordable heights. Those high prices were where the boom began to unravel.
The current housing price correction is helping to restore affordability. In general, housing price declines have been most noticeable in the markets where prices rose the sharpest. In parts of the country where the boom was not as strong, price declines have been marginal, and there have even been some exceptional areas were 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 in 2008. 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.
For home buyers, interest rates are always a major factor in the equation, and today’s rates generally remain favorable for home buying. This is especially true when compared to conditions during previous downturns. Interest rates are typically at their highest point at the outset of a recession, and follow a downward path as the Federal Reserve eases its monetary policies to get the economy growing again. While nobody can predict the course of interest rates, with the U.S. economy continuing to grow, the Fed in all likelihood will not be slashing short-term interest rates as housing returns to full health. Prospective buyers who are waiting for dramatically lower interest rates from those that exist today will probably be disappointed. And with rates as low as they are now, whether they realize it or not, home buyers are already looking at a good thing.
The final concern for home buying is obtaining a mortgage. And while it’s true that mortgage credit is not as easy to obtain today as it was at the height of the boom, today’s lending environment is actually closer to normal. Gone are the days when a borrower could buy a home with no downpayment, no documentation of their income and with a loan that, for a period of time, wasn’t even paying for the interest. But this lax lending was the source of trouble for too many buyers, who soon discovered that they had borrowed more than they could afford. The major difference today is that the lender will be scrutinizing the mortgage application to ensure that the borrower has the ability to repay the loan. That is only the prudent thing to do, and it is the traditional way of making mortgages.
Buyers who can qualify for a conventional loan limited to $417,000 (so that it can be sold to Fannie Mae and Freddie Mac) will find that not too much has changed today. Buyers who have some blemishes on their credit or who are looking for a mortgage above $417,000 will find more challenging conditions. However, working with home builders and lenders, financing opportunities are available. In addition, leaders in the home building community have been working overtime in pursuit of policies that will address the shortage of available mortgage credit so that it will be there when it is needed.
Housing is down today, but hardly out. While the market won’t be returning to boom conditions anytime soon, a backlog of demand is growing along with increases in the population and in the number of households across the country. In the meantime, the fundamentals of the economy and today’s buyer’s market suggest that now is an excellent time for prospective buyers to explore opportunities to buy a new home.
