Real Estate Market Trends: Understanding the Sub-Prime Market Changes

Real Estate Market Trends: Understanding the Sub-Prime Market Changes

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Elaine VonCannon, ABR, SRES, Associate Broker, Notary Public, Team Manager

In the last month there have been numerous contradicting reports about the stability of the real estate market. As the spring season of 2007 moves into full swing real estate analysts, lenders and agents will be carefully watching the trends. What develops in the next few months will be an important indicator of what is to come in 2008. Homebuyers will need to be educated about their options and consulting an experienced real estate agent that has their client's best interests at heart will be essential.

What is the Sub-Prime Market?

Mortgages can be a tricky thing to understand but knowledge and clarity about lending is key to a successful real estate transaction. The sub-prime market is a specific part of the mortgage market that involves homebuyers who borrow with a lacking or bad credit score and history. Sub-prime borrowers generally cannot qualify for mainstream prime financing terms and are approved for mortgages such as ARMs or adjustable rate mortgages. Sub-prime lenders can be independent or they can be affiliates of mainstream prime lenders who need to refer those who cannot qualify for prime mortgages. Homebuyers with a very low credit score may not be approved at all, but buyers with moderately low scores can often be approved when a variety of factors are considered. The down payment, ratio of debt to income, ability to document assets and income, purpose of the loan and type of property desired all affect a sub-prime borrowers chance of qualifying.

How Can the Sub-Prime Changes Hurt Real Estate Growth?

According to the article "How Sub-Prime Crisis Could Hurt Home Sales" by Phoebe Chongchua on March 20, 2007, "The sub-prime crisis has turned into quite a nightmare for some homeowners and the lenders who originated those loans". In an interview with economist Zoltan Pozsar, of MoodysEconomy.com, Chongchua explains how the sub-prime problems are currently affecting the housing market. "Delinquencies and foreclosures are going up because rate re-sets are kicking in on exotic ARM loans," states Pozsar. "The way lenders have qualified these borrowers is by saying, 'let's look at the teaser rates-it's two percent for the first two-years of the loan'-and sure [borrowers] could qualify on that. Lenders were basically not looking at whether the same borrowers could qualify when the rates re-adjust to six or seven percent," Pozsar continues.

ARM loans often require less documentation and lower credit scores, but adjustable means the rates stay the same for two years and then increase, in some cases to more than the homeowner can afford. As foreclosures happen the money invested in mortgage lending institutions could dry up and what Pozsar calls a "mini-credit crunch" is possible in the sub-prime market. If mortgage lenders go out of business due to a lack of funds the separation between investors and loan originators begins to deteriorate. Pozsar believes this leaves investors in a more vulnerable position. Eventually if investors and hedge funds suffer the prime market may be affected and prime borrowers may not qualify. This would result in a decrease in home sales and construction. However, don't give up yet! This is just a possible scenario.

Good News: There is Hope for the Real Estate Market on the Horizon

On March 19, 2007 Realty Times published the article "NAR Optimistic About 2007 Housing Recovery Despite Subprime Woes" written by Blanche Evans. Evans notes that unusual weather patterns and sub-prime lending problems are causing buyers, sellers, lenders and real estate agents to be cautiously optimistic. In an interview with David Lereah, chief economist for the National Association of Realtors (NAR), Evans reports that "Underlying trends point to a housing recovery in 2007, but it will take a couple of months for us to get a better handle on it." "Existing-home sales are expected to slowly improve from what appears to be the cyclical low last fall, but we think there will be some additional pain in the new home market, which hopefully will start to rise later in the year," Lereah continues. Lereah concludes that sub-prime lending problems may build and possibly inhibit future housing activity, but he believes these issues will be contained and not affect the prime mortgage market. In 2007 it will be imperative for homebuyers and sellers to make decisions with the help of a real estate agent and mortgage lender who can help them make a sound financial decision despite the sight instability of the market. To read more about real estate, mortgage lenders, ARMs and buying and selling in Virginia visit http://www.VoncannonRealEstate.com.