Mortgage and Real Estate Blog

head_left_image

What came first, falling home prices or a slumping market?

Joe metzler Mortgage group www.Joemetzler.com 

What came first, falling home prices or a slumping market?

Chicken or the Egg?

While pundits galore will claim many different views, the answer is rather simple in economic terms.  After years and years of record home price increases, the market simply couldn't support the increases anymore. Buyers could no longer afford the prices. House prices started falling first simply because no one was willing to pay the price anymore.

Most loan programs like to see debt ratios no higher than around 40% of income. FHA for example is 43% on a manual underwrite. Again, simple economics apply here. If the average wage in Minnesota (where I am at) is $784 per week ($40,784 per year), assuming no other debt (not likely), 5% down, PMI, taxes and insurance, this person could buy around a $180,000 home. Start throwing in debt, car loans, credit cards, etc., and the maximum home price starts sinking as fast as a rock in water.

As home prices increased, buyers started switching to high risk, short-term loan products to make homes more affordable. As we can see by today's market, that was a short sighted plan that didn't work out well for many.

Therefore there really is only one way to get demand up and people to start buying again. Affordable prices. Simple supply and demand economics. Too much supply because of too little demand forces prices to drop. As unsold inventory clears, the result will be higher prices, but fewer sales.

The higher price but fewer sales, the normal supply and demand cycle was dramatically upset the past ten years as people threw caution to the wind and kept demand artificially high. Everyone wanted in and was willing to pay whatever price was asked. Everyone figured you could make a killing in the housing market. This was especially evident in the investment property market.

A killing has occurred. Just not the one most people expected.

So what do we do? Nothing. The market will correct itself as prices drop, rates stay attractive, and housing affordability returns.

(C) 2008 Joe Metzler - www.JoeMetzler.com

Comment balloon 0 commentsJoseph Metzler • May 07 2008 07:55AM
What came first, falling home prices or a slumping market?
share
What came first, falling home prices or a slumping market? Chicken or the Egg? While pundits galore will claim many different views, the answer is rather simple in economic terms. After years and years of record home price increases, the market… more
Tough market? What are buyers and seller to do?
share
The real estate market today is one of the toughest in recent history. A large number of foreclosed homes on the market is marking it tough on the traditional home seller. While every market is different, most areas have seen about a 10% drop. The… more
FHA to go to 3. 5% down?
share
Modernizing the FHA: They aren't going the right way! CONGRESS - Just leave it alone! Measures in the bill would overhaul the Federal Housing Administration's loan insurance program, which helps homebuyers with weak credit or little cash get an… more
NEW Appraisal guidelines - what does it mean to everyone
share
NEW APPRAISAL GUIDELINES This is another in a long list of dumb things coming out of the mortgage market meltdown. Consumer costs just went WAY up, there will be no such this as fast closings anymore, and the entire industry will be hand tied… more
Mortgage lender bucks industry collapse by selling new loan
share
The Metzler Group at Great Rivers Mortgage bucks mortgage industry collapse by selling new Home Ownership Accelerator® Loan. Introduced in the US in 2005, innovative all-in-one home loan combines personal checking with mortgage to help borrowers… more
Subprime defaults exceed 25%
share
Subprime Defaults Exceed 25% The default rate on securitized subprime loans hit 25. 2% in December 2007, up 185 bp from that of the previous month, but defaults on alternative-A loans are also surging, according to a recent reports. Alt-A loans… more
FHA Market Share to Expand in 2008
share
FHA Market Share to Expand in 2008 Maximum Loan Amounts Vary By County and State. Find out your limit with our FREE FHA LOAN LIMIT Lookup Tool In 2006, the FHA's market share was about 3% of total originations. Today, that number is closer to 10%… more
New FHA and Fannie / Freddie Loan Limits Look Up Tool
share
NEWSFLASH: NEW LOAN LIMITS Effective immediately: New FHA and Fannie / Freddie loan limits have been posted on HUD's website. For conforming loans, it appears unchanged. For FHA, it appears as if the Twin City (Saint Paul / Minneapolis) metro… more
Waiting to buy? Why now is a great time to BUY a home
share
IGNORE THE HEADLINES AND STOP WATCHING THE NEWS Saint Paul, MN. Foreclosure foreclosure foreclosure. That is all we see and hear. This would have you believing Chicken Little that the sky is falling. Yes, there are a lot of personal… more
The Death of 100% Zero Down Financing
share
THE DEATH OF 100% ZERO DOWN FINANCING? MINNEAPOLIS, MN: Lenders nationwide employ a variety of sophisticated risk modeling tools to help assess key factors that shape the future direction of the housing market, including housing supply,… more