You have probably read articles and heard news reports about the “slump in the housing market” and most recently you have probably heard quite a few reports about the “lending crisis” or “credit crisis”. These reports can be scary and confusing for buyers who want to purchase a new home and sellers who want to sell an existing home, yet this is not an uncommon situation in the housing market.
The housing market is cyclical; home sales and prices are known to fluctuate annually and will undergo significant price corrections every 7 to10-years. According to analysts, we have been in the current slow-down for a little over 2-years. A slow-down in the housing market is typically related to regional or national economic conditions such as when the “dot-com crash” that hit Silicon Valley in 2000 – 2002, or during the national recession in the early 1980's. When the housing market slows, it takes anywhere from a few months to a few years for it to recover completely. However, the good news to remember is this – the housing market will recover as it has before.
Home prices in the Bay Area have risen beyond anyone's expectations in the past 10-years. Price increases were driven by a lack of supply and increased demand for homes; this is common in the San Francisco Bay Area where housing has always been in short supply. The average annual home price appreciation in the USA was 10% over the past 5-years while the Pacific Coast (California, Oregon and Washington) averaged 16.75% annually according to The Office of Federal Housing Enterprise Oversight (OFHEO) in its August 30, 2007 report.
So why are there so many unsold homes in the Bay Area's considering the supposed lack of supply? Analysts predicted the current pricing correction for several years; we had several brief slow-downs, but nothing significant until now. As housing prices increased and with a stable economy, lenders and investors began to relax the underwriting guidelines. This presented an opportunity for more “creative financing”. While this helped qualified buyers afford the higher priced homes, it also helped “marginally qualified” buyers who could not normally qualify for a home under the traditional guidelines.
Starting in 2006, lenders began to see above average foreclosures that, in turn, led to a tightening of the underwriting guidelines. (Underwriting guidelines are the policies lenders use to lend money to borrowers). Stricter guidelines made it harder for buyers to get home loans and the housing market began to slow down. This affects well-qualified buyers who want to sell their existing homes and move up, forcing them to wait. Another factor affecting the housing market is the loss of investors who buy homes strictly as an investment to fix up and resell. In the Bay Area alone it is estimated 20% of all resale transactions are investors. Typically, investors stop buying when prices are declining. At this time, investors are actually back in the market and buying homes because of the exceptionally low prices. This is a good sign for both buyers and sellers.
Although we may not see 100% financing again, it is still a great time to buy and to get a loan! Buyers will need to come up with some down payment, typically 5% to 10%, of the purchase price, depending upon their credit score and income. Buyers who have good credit can get exceptional interest rates; there are still a lot of loan programs available and professional lending institutions with plenty of money to lend. Lenders are simply going back to traditional qualifying standards.
Regardless of the bigger market issues, buyers who are in the market to buy a home, really should buy now while prices are the lowest in years. Builders are offering incentives to help buyers cover closing costs and upgrades. In addition, the seller can help with the down-payment and monthly mortgage payments if allowed by the lender.
Homebuyers should not loose sight of the fact that a home is a long term investment - not a short term investment. Buying a new home now for all the usual practical and emotional reasons could be very wise – considering the current market conditions. Your home may not appreciate “overnight” (like it did a few years ago) but it should appreciate over time. A home for most buyers is a place to enjoy significant events in their lives; it's a place to raise a family, a place to be creative in, to enjoy decorating and simply a place to call home. Current market conditions should not hinder a buyer's enthusiasm about owning a home and enjoying the American Dream!
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