For months, deep pessimism has been the rule when forecasting the direction of the U.S. housing market.
Bob Walters, chief economist at Quicken Loans, acknowledges that many homeowners are experiencing tough times. But he says today’s housing woes also present a historic opening for millions of prospective homebuyers.
“The next 24 to 36 months — somewhere in there — is going to represent one of the best buying opportunities for residential real estate in our lifetime,” Walters says.
As home prices fall, rare bargains are sprouting in neighborhoods across the country.
“It’s important to understand some of the absolutely stunning levels of pricing out there for people to take advantage of,” Walters says. “Every market is different and they’re all situational, but there are some stunning, stunning things going on.”
Of course, buyers who score great deals often do so at the expense of desperate sellers saddled with mortgages they no longer can afford.
“There’s a gloom and doom, obviously,” he says. “There’s certainly a lot of pain if you own a home and you look at the value and maybe you’re upside down and you wonder if you can refinance.
“I don’t make light of that in any way.”
Pain before gain
Shoppers who buy a home at a discount also should remember that
prices may continue to fall after they’ve made their purchase, Walters says.
A self-reinforcing cycle is at work in today’s market, he says. It starts when home prices drop, losses are incurred and credit tightens. These conditions make fewer people eligible to buy, which causes additional losses and further tightening.
“We’re in a vicious cycle,” he says. “We used to be in a virtuous cycle — ‘Wow, look at how home prices are rising, so we can be very lax in credit.’ Now, we’re on the opposite side of that vortex.”
It’s also “an absolute given” that prices in many communities will dip below their true worth before values begin to rise again, Walters says.
“That’s just how markets work,” he says. “They are overly optimistic when things go well and they are overly pessimistic when things go poorly.”
Still, many shoppers can benefit from taking a long-term view and plunging into today’s market, Walters says.
Such people include first-time homebuyers and homeowners looking to trade up to a bigger home — even if it means taking a small loss when selling their current home, Walters says.
“This is a wonderful time to buy, especially if people are looking at five- and 10-year periods of homeownership,” Walters says. “Whether the bottom is today or the bottom is in 12 months becomes immaterial if you’re going to be in the home for 10 years.”
So far, there is little indication that people are rushing in to scoop up bargains. Steady price declines continue to unnerve many potential buyers.
However, the price drops won’t go on forever, Walters says.
“People need to fight their fears,” he says. “Can we absolutely say that it’s rock bottom today? Of course we can’t. But we can say that it’s dramatically less than it was not too long ago. And home prices aren’t going to zero — I can promise you that.”
Although the real estate downturn has created housing bargains, fewer people are able to take advantage of the opportunity, thanks to a credit crunch that Walters says is much worse than many Americans likely believe.
“The story needs to get out that credit is getting tight,” Walters says. “It has tightened more dramatically than most people would ever imagine (and) there is much more to go.”
As a result, “the number of people who can get a mortgage has dropped substantially,” Walters says.
This is not true for everyone. Home shoppers with steady incomes and solid credit should have little trouble getting a loan, he says.
“If you have 10 percent of equity, and you have pretty good credit and you can fully support your income, you’re going to be able to get a loan,” he says. “Those people are not really being affected.”
Orawin Velz, senior director at the Mortgage Brokers Association, agrees that homebuyers with solid finances can score a great deal if they look hard enough.
“There’s a bargain available for people with good credit rating and some good equity,” she says.
However, people facing financial challenges are much less likely to get a loan.
“If you don’t have a good credit score, if you don’t have good equity — even (with) the declining home price market, that’s going to be pretty tough, no matter what the Fed does,” Velz says.
Lenders are likely to turn away homebuyers who can’t scrape together a solid down payment, or who have credit scores below 660. Other obstacles to a loan include incomes that aren’t easy to document and requests to borrow amounts that are high relative to the homebuyer’s income.
“Those are the people who are being frozen out,” Walters says. “They had no problem getting a loan a year ago, none. Now, they’re being frozen out.”
Such shoppers must double their efforts to secure a loan by consulting with several lenders until they find one willing to take their business.
Velz says a borrower’s individual circumstances dictate how much work is necessary to find a willing lender. For example, she says people who are in the jumbo market — typically, loans that exceed $417,000 — are likely to “have to look around more.”
“I think consumers have to really search,” she says. “Look around a lot at some companies that might specialize in the niche that you are in.”
Working with a broker or other real estate professional can increase the odds of success for buyers with poor credit or other money issues, according to Walters.
“A lot of times when markets get this crazy, there are no hard and fast rules we can give to people other than work with somebody who is in the market and really can help you identify opportunities and also risks,” Walters says.
Plunging real estate values make this an excellent time to buy a home. First-time homebuyers and others of modest means are particularly likely to find bargains in a market that is more affordable than it’s been in several years.
But if you buy a house, don’t expect your equity to grow fast. The housing shakeout is likely to continue for a while.
“I think it gets significantly more painful before it gets better,” Walters says.
In addition, credit conditions are likely to further tighten in coming months, Walters says. As a result, he urges shoppers to “absolutely act sooner rather than later” before loans become even scarcer.
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