PARADE Magazine: Where America Lives

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How the housing market looks in the coming year will largely depend on who is doing the looking: For many Americans, this will be a terrific time to buy a house, even as others struggle to hold on to their homes, and thousands -- perhaps hundreds of thousands -- succumb to foreclosure.
Sellers will have a tougher time closing a deal and may have to settle for less as prices around the country

How the housing market looks in the coming year will largely depend on who is doing the looking: For many Americans, this will be a terrific time to buy a house, even as others struggle to hold on to their homes, and thousands -- perhaps hundreds of thousands -- succumb to foreclosure.

Sellers will have a tougher time closing a deal and may have to settle for less as prices around the country stagnate or slide. Mortgages will be tougher to come by. And builders -- already competing with a fat inventory of existing homes -- will see demand for their wares further erode.

No wonder, then, that less than two years after the nation found itself in the grip of a house-buying frenzy characterized by sky-high demand and bounding prices, the industry’s exuberance has given way to unease.

"I’ve been in the business for 26 years, and there's more inventory now than I’ve ever seen," says Richard O’Brien, a real estate broker in Youngstown, Ohio -- one of a slew of Midwestern cities where home supply is outpacing demand. "Every day, 25 or 30 houses go on the market. Only three or four sell."

Nationally, "the market is the weakest it has been in 17 years," says Scott Anderson, a senior economist for Wells Fargo & Co., one of the nation’s largest home lenders. “Hang on to your seats," he adds. "It's going to be an interesting ride."

A good piece of the current slump was just inevitable: Most experts had predicted that the spectacular run-up in home prices from 2003 to 2005 simply couldn't last -- and, in some places, had soared well beyond the reach of most buyers and common sense.

The superheated markets of those years -- Las Vegas, Phoenix and much of California, for example -- are now nosing into corrections. Saddled with a condo glut, some Florida cities, especially on the coast, are tough places to sell. Ohio, Indiana and Michigan, suffering industrial woes that have spelled widespread job loss, also will see home prices shrink.

Buyers most often will have the upper hand elsewhere too, says David Lereah, chief economist for the National Association of Realtors. The typical American home will linger longer on the market -- how much longer will vary by location -- and already flat prices are likely to slip.

Mind you, real estate is local, and parts of the country will actually see appreciation -- a fact that is masked by gloomy national statistics. Sales and prices are robust in much of Texas, Lereah points out. And, according to the Office of Federal Housing Enterprise Oversight, a mini-boom saw house prices play catch-up in Utah, Wyoming and the Pacific Northwest last year.

Whether the rest of the housing industry reverses its cool-down depends, to a large degree, on the now-familiar woes of sub-prime lenders, who in recent years doled out millions of dollars to buyers lacking the income or credit for traditional mortgages. These loans have made home ownership a reality for Americans who'd otherwise be renting, but they also have proved dear. Adjusting interest rates have jacked up the monthly bills of already-strapped borrowers. Interest-only payments and 100-percent financing have left a legion of these home owners without a penny of equity.

"When you have the cost-of-living increases we’ve seen -- gas prices going up, utility prices going up, credit-card debt -- an adjustment in your mortgage of 200, 400, 500 bucks more a month is going to give you problems,” says George Roddy, who runs seminars on real estate investing and a foreclosure-listing service in Addison, Tex.

A December report by the nonprofit Center for Responsible Lending, a watchdog group, estimates that almost one in five sub-prime loans made in recent years has ended or will end in foreclosure, putting some 2.2 million families out of their homes and costing them $164 billion in lost wealth. That scenario is lent credence by the 1.2 million mortgage accounts that went bad last year -- a 42 percent increase over 2005.

"In this environment, maybe 20 percent of households have the wrong kind of loan," says Kenneth Rosen, a professor of real estate and urban economics at the University of California, Berkeley. "This doesn’t end well."

Part of the blame for this situation lies with overzealous -- and, in certain cases, predatory -- lenders. "There was some incredibly irresponsible lending," Lereah cites, describing it as "trying to get more water from the sponge." But without question, some buyers failed themselves by asking too few questions, seeking too much house or waiting too long to seek out help.

Whatever the case, default on so large a scale is bound to produce aftershocks nationwide. Among the first: Lenders are tightening their standards by requiring higher credit scores, lower loan amounts and bigger down payments. This means not only that many buyers won’t qualify for new loans but also that home owners already saddled with sub-prime mortgages will have a tough time refinancing to better terms -- and may be driven to hand over the house keys.

With fewer qualified buyers on the scene, an already-fat housing inventory will take longer to slim down, Lereah says. How much longer? Months, he suggests. Years, Rosen worries.

In the meantime, foreclosed homes entering the market will exacerbate the problem and further depress prices. That, in turn, may idle a home construction industry already short of work: In January, private-sector housing starts were down nearly 38 percent from a year before.

If anyone stands to gain from the mess, it’s buyers with good credit, who should be able to navigate the lending straits without hassle, find plenty of inventory to choose from and have the luxury of time to mull their purchases.

"You'll certainly be able to negotiate -- especially with the home-building industry, if you're buying a new house," Rosen says. "You'll probably be able to get a really good deal in the next year."

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