Can't anyone afford my home?
Prices have dropped. A lot. But it's still surprisingly hard to find buyers.
money.cnn.com
(Money Magazine) -- Maybe you've started thinking that now you can finally find a buyer for your house. After all, this summer the National Association of Homebuilders asserted that houses were more affordable than at any time during the previous four years. Prices have slid so far that many homes are now within the reach of people who couldn't buy during the bubble.
Other faintly cheery facts have emerged too. Sales of existing homes were 3% brisker in July than June, and in several metropolitan areas - among them Boston and Denver - the market seems to be turning around.
When examined closely, however, those glimmers of better times ahead seem to fade. Sure, lower prices can help you sell, but you also have to know whether there are enough people who can afford to pay the price you want.
That, in turn, depends on a mix of factors including the financing that buyers can get, whether there are enough of them who want to live where you do, their other housing options and how they feel about investing so much in an asset whose future appreciation is iffy.
"Price is just one of many variables that go into a decision to buy a house," says real estate analyst Michael Larson of Weiss Research, a Jupiter, Fla. investment newsletter publisher. "Many other factors are overriding price right now. That's why the market remains challenged."
The long fall
Price, though, is still the primary measure of affordability for any buyer. And while the median price for an existing house has tumbled 8% from $230,100 to $212,400 since its peak in 2006, according to the National Association of Realtors, many potential buyers still see asking prices as expensive.
And they're not wrong. That $212,400 house, after all, costs 39% more than it did back in pre-boom 2001 when it sold for about $153,100. Prices in red-hot markets such as Miami became even more inflated during the boom and are still up about twice as high as they were in 2001.
So while homes are selling at a discount, they're not on clearance - not yet anyway. Peak to trough, the median-priced home nationwide is projected to fall as much as 20%, bottoming out around $185,000 by late 2009, according to a July report from Wachovia.
"Houses may be more affordable, but they will probably be even more affordable next year," says Nigel Gault, chief U.S. economist at Global Insight, an economic forecasting firm. "So why buy now?"
Crunched credit
The price may be right, but if buyers can't borrow enough, the house isn't affordable. Difficulty borrowing is keeping many Americans from buying. "The industry went from little or no credit standards to credit standards on steroids," says Marc Savitt, president of the National Association of Mortgage Brokers.
According to the Federal Reserve Board, about 85% of lenders, worried about falling prices and rising foreclosures, have stiffened requirements for borrowers in the past three months. Those with a credit score of 600 or lower cannot get loans at all, says Keith Gumbinger of HSH Associates, a mortgage information publisher.
The upshot: 21 million, or 13% of those who have credit records, many of whom would have qualified for mortgages during the bubble, can no longer do so.
Those whose credit scores are high enough to qualify for a mortgage will likely pay more. Fannie Mae and Freddie Mac, which set the lending criteria for most loans, in November will require a 740 score, up from 680 for buyers to escape a surcharge that ultimately increases their interest rate.
As a result, the 33 million Americans whose scores fall between 680 and 740 (roughly 20% of adults with credit histories) may have to pay half a percentage point more to borrow. On a $300,000, 30-year loan, that would add about $100 to a buyer's monthly payment.
Adios, easy money
Back in the go-go years, lenders fell all over themselves to make no-down-payment loans. Those are gone, and lenders want some skin in the game, at least 5%. But to avoid paying extra, most buyers need the full 20% demanded in days of yore. To buy a $400,000 house, a family would now have to amass $80,000 in cash, up from $20,000 or less a few years ago.
Buyers also face higher interest rates, which allow them to borrow less. In mid-2004 a borrower with good credit could have qualified for a rate of 5.87% on a 30-year fixed $300,000 loan. That translates to a monthly payment of $1,774. Now, with the rate for the same loan at 6.57%, the same monthly payment could support a loan of just $278,500.
Back in the day, option ARMs and other exotic mortgages with low teaser rates helped struggling purchasers stretch to buy houses that they could not otherwise afford. Those deals have largely disappeared.
And while banks once allowed a homeowner's monthly principal, interest, taxes and insurance (PITI) to make up as much as 45% of a family's before-tax income, now buyers are restricted to using only 32% for a house payment. If PITI rises beyond that limit, banks consider the loan unaffordable and the family cannot receive a mortgage.
That limit boosts the amount of income a homeowner needs to purchase. Say your house has dropped from $425,000 to about $395,000. A couple of years ago a family needed an income of only $80,000 to buy. Now, even though the house costs less, a prospective buyer must have an income of $92,000 |
