Wednesday, July 05, 2006

Home values expected to drop

In an earlier life I was the owner of a mortgage bank. Golden West Funding was a wholesale and retail lender who made residential loans and then sold the loans in the secondary market to large mortgage investors including Fannie Mae and Freddie Mac. Mandatory reading for operational staff was the quarterly housing report published by PMI Mortgage Insurance Company. PMI evaluates all the major housing markets across the country and issues their findings from which bankers and investors used to determine their level of risk for residential loans.

In a market where home values are expected to rise, our risk in making 95% or 100 percent loans were minimum since values were expected to increase along with our security. In areas where prices were expected to fall, we would be more conservative in lending especially with high loan–to-value loans or low and no-documentation loans where more emphasis is placed on the property’s value than the borrowers documented ability to repay the loan.

The most recent quarterly PMI publication has many local bankers concerned with their findings. PMI has determined that the Sacramento Region has a 58 percent chance of declining property values over the next two years. The region ranked fifth among the 13 U.S. cities most likely at risk for falling home values during the next two years. Eight of the 13 riskiest U.S. markets were all in California. So what does this all mean to the players in the real estate market?

Lenders will be more cautious in evaluating a borrower ability to repay the loan. What a unique concept! It could actually be healthy for the long-term housing market. No one wants delinquencies or foreclosures to increase. Borrowers who have no equity in a home are the first default candidates.

Sellers can expect to receive less for their house than their neighbor did last year. They missed the high price point of the last 5 years. Sellers should either drop the price of their home now before the market declines or postpone their selling plans for two years. Buyers will have more opportunity for making a really good deal on a home than at any time in the last five years. Many agents should investigate a new line of work.

The PMI Report included some good news about the area economy and PMI officials were quick to point out that our real estate market wasn’t going to crash only land softly. Job growth in the region has been strong, unemployment is lowest in the state and interest rates are still low in comparison to historical average. The report did not speculate as to how much property values will fall or how long until they rebound. A decline of 20 percent over this year’s record high would still make for a 170 percent appreciation rate over the past eight years.


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