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Top 7 Factors in the Real Estate Market Slowdown

By Roselind Hejl

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The serious decline in housing sales in many parts of the country is well documented. This downturn was preceded by several years of rising home prices in many areas. In some cases, prices rose beyond levels that were supported by local salaries, and were clearly not sustainable. The driving force that fueled the rise in home prices was the availability of low interest money. Easy availability of home mortgage money, plus historically low interest rates, allowed the demand side of the market to build. Here are 7 factors that contributed to the slowdown in many real estate markets.

  1. When buyers could expect 15% - 30% appreciation and get 6% interest rates, who would not be motivated to buy? It was a no-brainer! Of course, high demand leads to higher prices. And, high demand leads to more new homes, as builders respond to the demand.

  2. The flow of money for mortgages came from new and unregulated sources. In the not too distant past, government regulated entities, such as Fannie Mae, were the main buyers of mortgages from lenders. More recently, Wall Street investors entered the market for buying real estate loans. Alternative loans, interest-only loans, 100% loans, creative ARM's, no-documentation, and other high risk products became commonplace. Some of these loans began with a low interest rate that the borrower barely qualified for, and then switched to a higher rate after a short time. In many cases, the borrowers did not understand the risk that they were taking.

  3. For most of my experience in real estate, buyers usually put 5% - 20% down, with 28% of their income allowed for mortgage payment, and their income was fully documented. When we began to see 100% financing on contracts, we were a little concerned by the shortage of personal investment, or skin in the game, as they say. The underlying expectation was that the market value of the home would increase quickly, and the buyers would be covered, if they needed to sell. Home ownership became speculative.

  4. Sub-prime, alternative, no-doc, and other high risk loans are not limited to low income or poor credit buyers, and are not always predatory. Often, very sophisticated borrowers chose to keep their cash and leverage the purchase. In all price ranges, the easy availability of low interest money fueled the demand for home ownership, as well as investment in rental property. Inevitably, the demand for homes led to price increases, and elevated inventories, as builders produced more homes. Then the cycle was broken.

  5. What caused the break? Foreclosures. Investors soon realized that mortgage backed securities contained more risk than expected, and stopped buying them. Suddenly, lenders did not have this new market for selling many of their loans. Without the flow of funds for easy mortgages, demand for homes slowed down. Prices began to fall in many parts of the country, and oversupply conditions prevailed. This has created challenging conditions for many homebuilders.

  6. Of course, real estate markets are local, and some localities will fare better than others. Job growth, continued low interest rates, and reduced supply from builders are key factors that contribute to more balanced local real estate markets. But, in nearly all areas, the effects of the new tighter requirements for home mortgages will slow the market.

  7. For the next year, sellers will have to consider the fundamentals to attract a buyer. They will need competitive pricing, excellent presentation, and top level marketing. Buyers will have to have a down payment, good credit, and proper income for their loan. Builders will need to reduce speculative building to keep inventory levels as low as possible.

Roselind Hejl is a Realtor with Coldwell Banker United in Austin, Texas. Her website - Austin Texas Real Estate - http://www.weloveaustin.com - offers homes for sale, market trends, buyer and seller guides. Let Roselind help you make your move to Austin, Texas.
Austin Real Estate Guide

Source: http://Top7Business.com/?expert=Roselind_Hejl

Article Submitted On: October 05, 2007