Yes, Housing Will Get Worse. But How Bad?
Two ways the mortgage mess might play out
The Good (or at least not so bad). While the past few weeks have teetered on financial Armageddon, the big picture of the housing market isn't quite as bleak as the ongoing credit crunch might make it seem. The reason, first and foremost, is that its ultimate underpinnings—the good jobs that keep homeowners paying their mortgages and potential buyers showing up at open houses—remain both plentiful and better paying.
Indeed, the average American now earns about 7 percent more than he or she did when the housing market peaked in 2005. What's more, the economy has added some 4 million new jobs since then, helping boost national wealth to a record $56.2 trillion.
And with home prices in many areas already sliding back to where they were then, "it's actually more affordable to buy a house today than it was in 2005," says Lawrence Yun, senior economist at the National Association of Realtors.
To be sure, a conventional mortgage now costs more. But with house prices still falling and mortgage rates likely to stabilize or even fall back a bit as the Federal Reserve finally begins to lower interest rates, Yun expects affordability—the key to housing's long-term recovery—to keep improving. "The plain fact is that there's more financial wherewithal now," Yun says. "It's just that people don't have the confidence."
The coming months should make the latter abundantly clear, as already-reluctant buyers are made even more so by a dwindling, downright panicked collection of mortgage lenders. They have not only increased the premiums they charge for making risky loans but also raised the bar for qualifying for nearly all mortgages. The combination will undoubtedly shrink both the number of qualified buyers and the prices they're willing to pay.
Yet Yun thinks the impact won't last much longer than the current credit crunch—about three months or so—as lenders finally come to their senses and realize that the vast majority of homeowners can cover their monthly nut and that new borrowers can do the same.
"It won't take long before people get tired of earning just 2.5 percent on treasury notes," says David Wyss, chief economist at Standard & Poor's. "They'll realize that these mortgage loans are still good, safe investments. And as they do, more money will become available and rates will come down."
With sellers still desperate to unload their properties, the beginning of 2008 "could be a great time to buy," Wyss says.
The Bad (and maybe ugly). Few would dispute that the housing market is likely to get worse before it gets better. Even before the credit crunch hit, falling prices and inventories bulging at an 8.8-month supply had yet to show much sign of stabilizing. In California, for example, July was the slowest sales month since 1995—and would have been even worse if the figures didn't include thousands of foreclosure sales. And after the trickle of summertime buyers who signed contracts and locked in mortgage rates before the market suddenly froze up, housing economists widely expect the pipeline to run dry when sales figures for August and September are released later in the fall.