Friday, October 05, 2007
Too broke to sell
As has been widely reported, transactions in the US residential real estate market have slowed considerably. There are several reasons for this. One is the characteristic lag in price response to falling real estate values. Sellers are reluctant to lower the price of their house below what they think it is worth, regardless of market reality. Potential purchasers now understand that real estate prices are falling, and are no longer reaching. The result is a gap between bid and ask that has to close before a sale can occur.
A second reason for the slow down in home sales is the tightening of credit that occurred in late late summer and is likely to persist for the foreseeable future. The much maligned sub-prime mortgage market no longer exists, eliminating a large group of once potential home buyers from getting financing. Disruptions in the mortgage-backed securities market have resulted in tighter credit standards across the board, making it harder for credit worthy borrowers to get financing. So even if a buyer and seller do agree on price, the deal is that much harder to get done.
Today's Chicago Tribune reports a third factor impacting real estate transactions, one that might not be intuitive for people accustomed to rising real estate prices. It seems that a growing number of sellers, after closing costs and commissions, are unable to come up with the cash to pay off their mortgages.
Via Calculated Risk.
A second reason for the slow down in home sales is the tightening of credit that occurred in late late summer and is likely to persist for the foreseeable future. The much maligned sub-prime mortgage market no longer exists, eliminating a large group of once potential home buyers from getting financing. Disruptions in the mortgage-backed securities market have resulted in tighter credit standards across the board, making it harder for credit worthy borrowers to get financing. So even if a buyer and seller do agree on price, the deal is that much harder to get done.
Today's Chicago Tribune reports a third factor impacting real estate transactions, one that might not be intuitive for people accustomed to rising real estate prices. It seems that a growing number of sellers, after closing costs and commissions, are unable to come up with the cash to pay off their mortgages.
A survey of mortgage brokers suggests that one in three consumers who recently signed purchase contracts canceled in August -- up from just 4 percent three years ago, according to the research firm that conducted the survey for Inside Mortgage Finance, a trade journal. "Our office had four sales in one week that failed to close because the seller didn't have the cash," said the real estate agent, who declined to be identified because she feared office repercussions.Over the past ten or fifteen years a lot of people seem to have lost the notion that when you take out a loan, you have to pay it back. The roaring real estate market led people to think that their houses were generators of wealth, and would pay back their loans, and fund other purchases, on appreciation alone. For some who timed things perfectly, this was in fact the case. But like in all bubbles, timing is everything, and most don't get out in time. This mess will be unwinding for years.
Via Calculated Risk.
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