Bargain prices and low interest rates are making real estate more affordable than it’s been in decades, but experts say that tight credit standards are excluding many Americans from the housing market and prolonging the 57-month-long housing recession.
Homes are more affordable than they’ve been in the past 35 years, according to Zillow Real Estate Research, but buyers lacking good credit ratings and substantial savings for a down payment are finding it all but impossible to obtain a mortgage.
“Courtesy of an unprecedented housing collapse that brought down home values and a wrenching economic recession that brought down interest rates, home affordability has never been better,” said Zillow. “Today’s median home buyer can expect to pay about 17 percent of his monthly gross income on his mortgage, compared to a 25 percent average since 1975.”
The housing bust has also made it more difficult to borrow. At the 2006 market peak, almost 25 percent of new mortgages were “subprime,” made to borrowers with credit scores below 620. Subprime mortgages are virtually nonexistent today, though one-third of borrowers fall into the category. Lenders are also requiring down payments of 20 percent, a significantly higher hurdle than the median down payment of 4 percent required on 2006.
Zillow has lowered its outlook for the market, predicting that home values will decline 7 to 9 percent in 2011, a downward revision from an earlier forecast of a 5 to 7 percent decline. The research company now forecasts the market will hit bottom in 2012 at the earliest, not in late 2011 as predicted earlier. Once the market has hit bottom, Zillow said, it will stay there for some time due to an excess supply of housing.
“The supply picture continues to look bad with approximately 2 million homes in the foreclosure process and another more than 1.5 million homes seriously delinquent,” said Zillow, predicting mortgage delinquency rates will remain historically high due to widespread unemployment and depressed property values. A record 28.4 percent of mortgages are now underwater.
Home values have fallen 3 percent since the start of the year, adding to a cumulative 29.5 percent decline in home values since the market peaked in June 2006. The percentage of homes selling at a loss hit a new record of 37.7 percent, while foreclosed properties accounted for 23.7 percent of all sales in March, Zillow said.
“The rate of seriously delinquent mortgages will trend lower during 2011, but continue to remain at extraordinarily high levels for an extended period,” according the May 2011 U.S. Economic and Housing Market Outlook produced by FreddieMac.
In spite of the many negative trends affecting real estate, the National Association of Realtors predicts an increase in existing home sales this year that will reach 5.3 million compared to 4.9 million in 2010. NAR forecasts home sales will reach 5.6 million in 2012. Mortgage interest rates should remain relatively affordable throughout this period, reaching 6 percent in 2012.
Mortgage rates reached their lowest level for 2011, according to the Primary Mortgage Market Survey released by Freddie Mac on May 12. The 30-year fixed-rate mortgage averaged 4.63 percent and the 15-year fixed-rate averaged 3.82 percent. The agency projects that home sales will increase 5 percent in 2011 compared to 2010.
Existing home sales rose 8.3 percent in the first three months of 2011 with lower priced and discounted homes realizing the biggest sales. The number of homes selling for $100,000 or less was 8.9 percent higher than the first quarter of 2010, and the share of cash purchases rose to 33 percent in the first quarter, compared to 27 percent for the same period last year.
“A huge volume of cash sales, supported by the recovery in the stock market, show that smart money is chasing real estate,” said Lawrence Yun, chief economist at NAR. “This implies that there could be a sizeable pent-up demand if mortgages become more readily accessible for qualified buyers. The problem isn’t with interest rates, but with the continuation of unnecessarily tight credit standards that are keeping many creditworthy buyers from getting a loan despite extraordinarily low default rates over the past two years.”
A return to normal, safe credit standards would increase home sales by 15 percent to 20 percent, Yun said, adding that some parents are buying homes with cash for their children, and offering them loans that provide better returns than bank accounts or CDs.
He predicts new housing starts will remain below long-term trends, but will reach 603,000 in 2011 up from 595,000 in 2010, and continue growing to 908,000 in 2012. He predicts new-home sales will remain depressed at 320,000 this year, then rise to 487,000 in 2012.
“A recovery in new homes will be slow because of the extra price discount in the existing home market,” Yun said.
The outlook for commercial real estate is slowly improving, though tight lending from big banks is posing a challenge to this market as well, said Yun. “Lending from regional banks has become an important source of funds. Investment funds through private equity and real estate investment trusts will play a bigger role as the commercial mortgage-back securities market struggles to recover.”