Affordability rather than leverage is the way homebuyers are looking at mortgage loans today. In an environment where interest rates are fluctuating, adjustable rate mortgages no longer appear as attractive as long as others are losing their homes due to the inability to meet higher mortgage costs along with higher energy costs. That could be the impact behind the slowing housing market.
What's interesting is that most of the cities that are showing increased foreclosures aren't the speculative coastal hot-spots of the last five years. Indianapolis, Atlanta, Dallas, Denver, Memphis, and San Antonio lead the list of cities with the most foreclosed properties, according to RealtyTrac , an online marketplace for foreclosure properties.
Further, most are considered to be relative real estate bargains with housing that is neutral or underpriced by national standards. Tracking median house prices quarterly are National City Corp , a financial holding company, and Global Insight, a financial information provider which found that in the first quarter of 2006, Atlanta was overpriced by 1 percent, while Dallas was underpriced by 19 percent. Denver was deemed overpriced by 6 percent while Memphis was underpriced by 10 percent. San Antonio was underpriced by 11 percent.
That suggests the problem may be more complex than the high home prices and adjustable rate mortgages blamed by the popular press for the slowing housing market and increase in foreclosures. Dallas, for example, has been below the national median for home appreciation for well over 15 years.
Mortgage data differs, but the numbers are ominous. Fannie Mae says that nearly one-third of mortgage debt is set at an adjustable rate. Adjustable rate mortgages are about 25 percent of all outstanding U.S. mortgage loans, says Economy.com, with about $400 billion in loans to reset to higher fixed rates this year, and another $2 trillion in 2007, reports Chuck Jaffe, of CBS Marketwatch. Further, notes Jaffe, the prime rate two years ago was about 4 percent and it's nearly doubled, which means payments on some ARMs will double, too. That could increase defaults by as much as 10 percent.
What's troubling is that foreclosure process begins months ahead of their final disposition, when homeowners are at least three months behind on their payments. RealtyTrac says its foreclosure listings have grown by as much as 39 percent in the last year, with houses going for as little as 70 percent of their current market value, writes Linda Stern for Newsweek.
Foreclosures will get worse before they get better, and will add more pressure to the softening housing market.
But some silver linings in the clouds have appeared, which could prevent housing from losing more value on a national scale.
Perhaps seeing the "underwriting" on the wall, the Federal Reserve paused in raising short term interest rates holding at 5.25 percent. Long-term mortgage rates follow, and should remain well below the psychological benchmark of 7 percent. This could reignite the housing market for those who have been sitting on the sidelines waiting for buying conditions to improve, as well as allow many borrowers whose adjustable rates are about to reset to refinance at a lower fixed rate.
Next, the building industry has curtailed production, which should lower inventories (absorption) over time. And the recent buyer's market, nationally speaking, has prevented many new borrowers from getting into the same fix as some of their neighbors. This has put pressure on rents as buyers have dropped out of the market, but as rents continue to rise, they may well jump back in, but to more affordable homes.
