It’s Hard Out Here For A…

You thought I was going to say “seller,” didn’t you?

That’s the obvious answer, after all. It’s fairly easy to connect the dots these days: abundant inventory + credit crunch + record foreclosure rates + slowing economy = a long, painful, oftentimes unsuccessful selling process. It’s been no secret that sellers have really been taking it on the chin, and it could be a long haul down the road to stabilization.

The market since March of 2006 has generally been considered to be favorable for buyers. Prices have been dropping slowly (although recently, reductions have happened more quickly and in a more dramatic fashion), seller concessions have become the norm, and buyers now have the time to actually weigh the pros and cons of a particular home before they put in an offer.

But the truth is that the past year hasn’t been easy for buyers, either. Loudoun County, while less expensive than areas closer to DC, is still a relatively expensive place to live. (I feel tremendously sorry for first-time homebuyers looking in Northern Virginia; my husband and I would not be able to afford today the townhouse we bought as our first home back in 2000.) The credit crunch has made it difficult for all but those with tiptop credit scores to qualify for enough loan to buy a place they’d actually want to live in, or that would be worth the investment. And single family prices are still so high that most on the market would require a jumbo mortgage, which is even harder to qualify for than a conforming mortgage.

The Washington Post recently reported on a new insult to add to the injury: the labeling of the DC area market (including Loudoun County) as a “declining market” by loan underwriters. (As a Loudoun homeowner, I’m trying not to take that personally.) To lenders, a “declining market” label is a risk factor (one that is heavily weighed), and it’s going to mean that buyers are going to have to pony up a bigger down payment. The Post article includes a story about a couple whose attempts to purchase a Cape Cod in downtown Leesburg were torpedoed by their lender after already having been approved and having had their offer accepted by the sellers. They were literally days from closing when their lender contacted them and said that the “declining market” flag on Loudoun County meant they were going to need a down payment, even after they’d been approved to finance 100% of the purchase. The couple passed on buying the house, which went under contract again a few days later to another buyer.

You can read the entire article here:

http://www.washingtonpost.com/wp-dyn/content/article/2008/01/12/AR2008011200269.htm

The ramifications are pretty obvious. By making it difficult to purchase homes in a higher-priced area through use of a “declining market” flag, lenders are virtually guaranteeing that the market here will continue to decline.

The truth is that it’s hard out here right now for anyone who owns, buys, or sells real estate. It’s not all bad news, though; interest rates are now the lowest they’ve been since 2005 (with another rate cut coming soon), and prices are continuing to drop. I truly believe that there is a good chance we’ll see an overlap of those 2 factors this spring, and it could provide the type of break we’ll need to get things moving again.

Questions? Comments? I’m pretty chit-chatty and I’d love to hear from you! Feel free to add your input below.

  • http://www.VirginiaBuyersAndSellers.com Susan Jacobs

    Great article. Yes, most sellers are having a tough time right now. I’m just glad to see someone is looking at the real estate market from the buyer’s side as well. Sellers forget that Buyers have had a tough road to haul for the last several (5-6) years. Then Buyer’s had to compete to buy a house. Now they are writing offers and told to wait 3,4,5.. weeks till the bank decides what they are going to do. And the ones with good credit are being penalizes because the area has been deemed a declining market. So who is really having a tough time with the real estate market?

    Susan Jacobs
    Broker/Owner
    Assist 2 Sell Jacobs Team Buyers And Sellers Realty
    http://www.VirginiaBuyersAndSellers.com

  • http://washingtondc.redfin.com/blog/author/kira.mayrides kira.mayrides

    Thanks, Susan. I appreciate your comments! I think the constant messages about it being a buyer’s market may actually be adding to the stagnation of the market. I really do not think that either side has it easy right now.

  • Eric

    This blog is spot on. Despite the high inventory, the few buyers who can meet all the lender requirements are competing only for the cream of the crop, and avoiding most bank owned, as-is, and foreclosure properties. End units, hardwood floors, great condition townhomes go fast if priced right.

    Buyers know that in this market their “plan B” homes will still be on the market for several weeks, and are waiting for prices and rates to continue to drop. In the area that I’m monitoring, about 1-2 “good” properties go under contract each week, while 3-4 new properties are listed or have significant price drops. After seeing some of the foreclosures first hand, they will sit indefinitely no matter how low the price drops, despite being in a great location or great neighborhood, because the property has just too much work needed and I don’t think the average buyer in this market has the available cash, motivation, or time needed to devote to such a property. My guess is that most buyers now are either first time buyers, new to the area, or are investors, and are not settling for fixer-uppers.

    Homes that are in poor locations or in poor condition will sit. Buyers have options and so far seem to be patient, poised to catch the next “big fish”.

  • Elayne

    How would these conditions affect people looking to re-finance or down-size??

  • Nick

    Most people site the 1% rule when looking at refinancing. In most cases one might be able to overlook this guideline if you were planning on remaining in your home for longer than 5 years or unless you can get an exceptional deal on the refinancing fees.

    Down-sizing would put you in the shoes of a buyer and seller at the same time. I would think with the overall economic plunge, it would be wise to wait and see if possible, and hope the rebound brings full value from your current home and easier terms on a new purchase. Your current home is probably the cornerstone of your investments if you are looking to downsize, so choose wisely.

  • http://washingtondc.redfin.com/blog/author/kira.mayrides kira.mayrides

    Elayne,
    As Nick indicated, it’s the loan-to-value ratio lenders will look at in order to determine whether or not it’s something they’ll approve, or if they do, what kind of rate you’ll get. Declining market conditions won’t necessarily preclude a refi, but will tighten the parameters under which a lender would approve it.
    In terms of downsizing, I agree with Nick on that as well – waiting it out might be your best option. Although you might find a great deal on something to buy, it’s a really terrible time to sell a house and it’s probably better to wait for a better balanced market. As Eric said above, we don’t know if we’ve hit rock bottom yet, so the buyers who are well qualified are biding their time.
    Thanks for your comments!

  • http://washingtondc.redfin.com/blog/author/kira.mayrides kira.mayrides

    Eric,

    Thanks for your terrific comments. I’m seeing the same thing you are, and have been for a while: Properties that are priced correctly and in good shape are still selling, almost regardless of the price. Where I live, I’m seeing properties in the 7, 8 and 900s sell while others in the 5 and 600s sit. So it’s not that nothing is moving, it’s that a lot of properties are missing the “magic” combo of price and condition. I believe overpricing is still a pressing issue here. And yes, we definitely have buyers who are waiting to catch the next “big fish.”

    In Loudoun, we are in the unique position of having many foreclosures that are actually brand new and have never been lived in. The sellers built them when the market was at an all-time high but then couldn’t sell them before the market turned. The houses were overpriced, sat, fell prey to “stale house syndrome” even after being repeatedly reduced, and then were foreclosed on. Even when they’re in good condition, buyers sometimes can’t get past the “foreclosure” image.

    I appreciate your insights. Thanks for stopping by!

  • Ben

    Any thoughts on whether recent Fed rate cuts will help stabilize the declining DC market? Seems to me that lower lending rates may help expand the pool of buyers a bit, thus having either a slowing or stabilizing effect on declining home prices.

    At least, that’s my (optimistic) theory and I’m sticking to it.

  • http://washingtondc.redfin.com/blog/author/kira.mayrides kira.mayrides

    Ben,

    Thanks for stopping by! Yes, that is what I meant in my last paragraph, when I was talking about an overlap of factors that I think will help move things along. Hopefully, lower rates + lower prices = more sales. It’s not necessarily guaranteed, though. As Eric said, many buyers are content to wait it out to get the best deal they possibly can.

  • Eric

    Ben – The rate cuts are great, but the “limiter” for me seems to be how much a buyer has in cash for the down payment and closing costs. If you don’t have enough cash (10% or more), then you will have to pay mortgage insurance. Lenders are hesitant to offer loans if you don’t have cash available. I think sellers with properties in good condition who are willing to pay closing cost will probably attract more buyers even if the list price is still a bit high.

  • Eric

    As far as the rates stabilizing the DC markets, I think it will take a long time…2 years or more. Fairfax County has about 7,000 active listings, with many more to come (short sales, foreclosures, retirees, etc). There are fewer buyers because of the stricter lending standards. Many homes have been listed and vacant since last summer and are still on the market despite huge price drops.

    I think the rate cuts make it easier for buyers, but doesn’t necessarily increase the number of buyers.

  • http://washingtondc.redfin.com/blog/author/kira.mayrides kira.mayrides

    Eric and Ben,
    I found a story on Inman.com about the efforts of Congressional leaders to raise the conforming loan amount to $625k, although it might just be a temporary move. I think that would provide huge relief in this area, where many home purchases require a jumbo mortgage. You can catch the entire article here: http://www.inman.com/inmannews.aspx?ID=65896

  • judy

    Great info and so true!

  • NoVA resident

    Is this a joke? I should feel bad that a buyer couldn’t get 100% financing? The lender should have been fired and shot on the spot for even considering 100% financing. How do you think we got into this mess in the first place?? LOOSE underwriting standards. 100% financing is ridiculous and makes no sense in a “declining” or any market. What happened to savings 20% down? And don’t tell me “that’s too hard when the average home costs $500K.” If you can’t save $100K, you shouldn’t be a homeowner. The discipline in savings is a lost art that will haunt the next generations for years to come with absurd indebtedness levels.

  • http://washingtondc.redfin.com/blog/author/kira.mayrides kira.mayrides

    Dear NoVA resident,
    It is indisputable that loose underwriting standards and predatory lending are having some pretty severe consequences for the real estate market and the economy, and that the crackdown we are experiencing now is necessary if we are to get back on track.
    We always look forward to hearing different perspectives; in particular, we appreciate comments that are respectful and considerate of our other readers.
    Kira

  • Eric

    Over the past 5 years or so, home prices have doubled. I think it is silly to think that potential buyers would be able to double their savings over the same period. I think 10% + closing costs is a reasonable requirement to be a home owner these days. Very few first-time home buyers have 20% or more to put down. If lenders required 20% down, guess what? Home prices would plummet and homes will sit on the market twice as long or more!

    Could I have saved 20% down? Probably if I focused on it. Instead, I spent my money on my two children, as well as traveling the world, living in Europe and Africa, and doing volunteer work, and I have no regrets. $100K can do a lot more for a person than just sit in a bank or mutual funds. I have a lot of friends who have cash out the wazoo, pretty cars and pretty houses, but they have yet to see the world, have no kids, and have different life experiences that I do. To each his own, one size does not fit all.

  • Eric

    Kira – What about a blog comparing single family detached to townhomes? I’m finding some single family homes with 1/3 acre lots falling into the same price range as the townhomes that I’m looking at. Which do I choose and what factors are important to differentiate between the two?

  • NoVA Resident

    Eric – try following your thought-process through to its logical end. If lenders require 20% down and home prices plummet (or return to normal levels), then what do you think happens to that magic 20% number? It goes down! 20% is a percentage, not a nominal figure.

    Also, why are you discussing trade-offs when no one else is? There’s nothing wrong with renting and doing all of the things you mention. There’s also nothing wrong with doing all of those things and saving money for a house down payment. I’ve done both. No one is talking about one-size fits all. What we’re discussing are time-tested, logical approaches to wealth management and responsible personal finance. Committing yourself to a $500K mortgage without having shown the discipline to save a modest amount of money ($100K) is a high probability method for trouble. The median income in the DC area is not low. You can save $100K in less than ten years making only $50K a year. Not sure how? There are numerous fixed-fee financial advisors in the region.

    No one is lambasting your personal choices. If you bought a house with less than 20% down, more power to you. It doesn’t change the fact that lenders regularly making those types of loans are doing a disservice to their shareholders with poor underwriting standards.

  • NoVA Resident

    The Dow Jones (probably the poorest performing index) over the last five years has returned 80%. Factor in compounding and dividend reinvestment, you could have easily doubled your money in the last five years with moderate portfolio risk.

  • http://washingtondc.redfin.com/blog/author/kira.mayrides kira mayrides

    Eric,

    I love that idea about doing a “What You Get for the Money” type of post – thank you for suggesting it! If you let me know (even generally) where you’re looking, I’ll be happy to incorporate as much of that as I can into the post. I’ve got a post of price reductions going up later today, but I think I could definitely do something like what you’re suggesting next week.

    Thanks!
    Kira

  • Eric

    That would be great! “What do you get for the Money” in NoVa…not much! Older single family detached, townhomes, new condos, and some new constructions all all mixed in together in the same locations and price ranges, and it’s difficult to determine what is the best value.

  • http://washingtondc.redfin.com/blog/author/kira.mayrides Kira

    Hi Eric,

    I cover Loudoun County, so my post would be restricted to areas in Loudoun. Are you looking in Loudoun, or elsewhere in NoVA?

    And yes, I agree that it can be hard to get a lot of bang for your buck anywhere in NoVA!

  • Eric

    I’m looking in Fairfax but Loudoun County would also be interesting to see comparisons.

  • NoVA Resident

    I’m so glad these tarts originally hired by Redfin have stopped blogging. Like realtors, they have zero economic training and should not be providing any commentary on real estate.

  • Anon

    It’s unfortunate for the rest of the world that you decided to spend the past year becoming an even bigger a**hole than you already were. Then again, it’s easy to show your true colors when you can safely hide behind the cloak of the Internet.

  • NoVA Resident

    And you’ve added so much value to this site with your piercing analysis…