3 Major Factors Working Against the Housing Market in the Second Quarter of 2010

What I’m going to outline for you now is how this will impact us and why it is so urgent for your sellers and prospective seller to act NOW.

1.Climbing interest rates
2.Worsening lending guidelines
3. Expiring tax credits

Rates:
Interest rates have been at their historic low point (5%-5.5%) for so long now, most people have forgotten that the average 30 year rate is somewhere between 7% and 7.5%.

On March 30th, the Federal Reserve will cease buying all the low rate mortgage bonds. This means buyers will qualify for “less” house since interest rates will likely be around 6%-6.5% by June and probably in the 6.5%-7% range by the end of the year. This is the optimistic forecast. If inflation shows up we’ll see rates spike sooner.

Worsening Lending Guidelines: 
Buyers will qualify for “less” house because lending guidelines continue to become more restrictive. The pendulum is not done swinging. We can currently qualify buyers at 50% of their gross income. This will fall to 41%-45% by mid year and we are unlikely to see any improvement until we’ve had a few years where loans stop defaulting. Also, the minimum credit score required to purchase FHA is about to move from 620 to 640.

Looking at those three factors we can see less demand, tougher qualifying through higher rates, and tougher qualifying through lower debt standards. These three combined will put another layer of significant pricing pressure on housing over and above some of the REO pressure that exists already.

Tax Credits Expire: 
Buyers will no longer be provided incentives by the government to purchase houses. You probably have some decent statistics about what % of sales over 100K are 1st time or move up homebuyers. This will put a significant dent in demand.


Here is a tangible example of what I'm talking about:
Today Sally Seller sells her 200K home to Billy Buyer. Billy gets a 200K loan at 5.5% and qualifies for the $1135 payment…everyone is happy. Months from now Sally Seller tries to sell her home to Billy Buyer for 200K but the market is at 6.5%. Billy can't qualify for the extra $130 per month. For Billy to qualify for that $1135 payment when rates are 6.5%, Sally has to sell her 200K house for 180K.

This is JUST due to interest rate pressure, we’re not even considering Billy’s debt ratio or the fact that because the tax incentives are long gone, there will be fewer of Billy.

Your sellers have no idea what waiting means in this market.
They believe waiting means give it a year and the REO will be out of the way and we'll be fine. The reality is as interest rates climb on a 200K house they will lose 20K in sales price for every 1% increase to rates. We're at 5%-5.25% now and we're headed into the 7%-7.5% range. You can do the math quickly.

Your sellers must take advantage of this opportunity to sell NOW.
Your listing appointments must understand what,"waiting out the market" means. Some people will feel they don’t want to "give away" their house. But the reality is, they can cash out for significantly more value in the first half of this year, especially in the first quarter, than they will in the next 2-3 years.

Remind them that when the REO is off the market, their competition to sell is then everyone who bought an REO or undervalued home. And they will sell for significantly less. Do not let your sellers and prospects lose tens of thousands of dollars chasing a market that will take 10 years to recover.

While not my usual, “roses and sunshine,” I nevertheless hope you have found this information as useful, actionable and urgent as I feel it is for you. These timelines are very real, but unfortunately no one is talking or being educated about it properly.

My hope is you can help your clients realize and capitalize on this valuable information.