Yes, Housing Will Get Worse. But How Bad?
Two ways the mortgage mess might play out
Low-ball. Although many sellers will simply take their homes off the market until spring, those who have to sell may be forced to take the first low-ball offer that comes along, if one comes at all. That can mean only one thing: "a substantial downtick in home prices and an increase in [mortgage] delinquencies and foreclosures," says Moody's Zandi. He now expects prices in many areas to soon be down by double-digit percentages from last year's peak.
That downtick could finally begin to affect formerly insulated pockets, such as the close-in neighborhoods of Washington, D.C., and even New York City, where skyrocketing prices have forced buyers to take out jumbo loans—the very ones that many lenders stopped making in recent weeks.
Of course, the price swoon may lure bargain hunters back into the market. But such signs of continued weakness tend to feed on themselves. "The more prices go down, the more people expect them to go down," says Zandi, "and the more reason they have to wait."
Meanwhile, with credit still tight, those willing to stick their necks out will find it harder to qualify for a loan. Like Yun, Zandi expects the brunt of the credit crunch to ease in the coming months. Yet some parts of the mortgage market simply won't bounce back, especially the now tainted subprime sector. It has accounted for a growing share of the low-end housing market in recent years, supplanting more traditional Federal Housing Administration loans.
Congress, which had cut FHA funding in recent years, is now reversing course and may even allow the FHA to take over some subprime mortgages to keep folks in their houses. "The FHA will definitely gain more currency in the market," says NAR's Yun. "But it will still take a long time" for the changes to trickle down to borrowers.
By then, things could really have gotten ugly, as the effects of the contracting housing industry inevitably trickle into the larger economy—in the form of pink slips. After all, "you can't afford to buy a house—or stay in one—if you don't have a good job," notes mortgage columnist Lou Barnes, who points to the dour situation in economically depressed Michigan. "You can't give a house away in Detroit right now."
As for the rest of the country, delinquencies—already up by 36 percent compared with a year ago—will continue to rise as a slew of rate resets on adjustable-rate mortgages peak over the next 18 months. Those resets will increase monthly payments just as declining house prices push more and more borrowers underwater on their loans. Even if those who try to sell are lucky enough to find a buyer, the resulting "short sale" means they'll have to come up with cash at the closing, a fate that for many is worse than just walking away.
"There's going to be a lot of jingle mail this winter," Barnes says of owners who will simply pop their house keys in the mail in lieu of a mortgage check. That would make for a very unmerry Christmas, indeed.