BluefoxToday blog : Upper half of the housing market feeling the heat now

Upper half of the housing market feeling the heat now

Early on in this real estate meltdown the subprime mortgage drew all the attention with its high foreclosure rates. As the default numbers mercilessly accelerated in the lower half of the market the prices in this category headed in the other direction, at an increasing pace. To many optimistic housing observers, including yours truly, the overall damage would largely be contained in the lower end. The argument went that prime borrowers knew how to budget better, that they had other investments to rely on in case of trouble, that they already were familiar with what home ownership entailed, and so on.

Well, now the foreclosure curse is spreading into the prime territory, into the upper half of the market spectrum. And proving the earlier theory dead wrong. Mortgage Bankers Association sums up the current situation like this: "The foreclosure rate on prime fixed-rate loans has doubled in the last year, and, for the first time since the rapid growth of subprime lending, prime fixed-rate loans now represent the largest share of new foreclosures." There it is.

High unemployment attached to this nasty recession is clearly having a large impact on this trend. That's logical.

Perhaps an even bigger factor is the rapid erosion of home values. Let's say that a house in Las Vegas was bought for $900,000 in 2006 with a 100% mortgage, somewhere near the peak of the bubble. Since then prices have dropped at least 50% on average in Southern Nevada, but maybe only 30% so far in the higher end, so using that 30% figure this property is now upside down $270,000. A good chunk of money thrown into the wind. To many homeowners that might just be too much to take. Even if they could afford to make payments, the temptation is there not to do so. They may also calculate that for values to climb back up to their mortgage balance will take, say, 15 years, and then conclude it's not worth it. 15 years is a long time.

Moreover, if the homeowner in the above example wanted to sell the house and move out of town he couldn't do that unless he had an extra $270,000 on hand to close the deal. Anyone would think twice about that.  

Nevertheless, the cycle theory is clearly at work here. First the lower half of the housing market plunged into the abyss and is currently clawing its way out of there, it seems. The upper half hung in there longer, but is now being sucked into the same cycle of market forces and has to go through the same painful motions before seeing better days ahead.

 

 

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Provided by: 

Esko Kiuru
Mortgage, real estate and apartment industry analyst 

www.BluefoxToday.com - syndicated mortgage, housing and property management blog

eskokiuru@gmail.com
My cell: 702-499-1006

Comment balloon 12 commentsEsko Kiuru • June 19 2009 10:20PM

Comments

Esko: Part of the problem has been the job losses at the high end. Several prime borrowers are either unemployed or had to take a position that now pays less. No one is immune in this crisis. The good news is I believe there is now light at the end of the tunnel. Previously there wasn't. Now, I expect a gradual improvement from here on out. Take care.

Posted by Paul McFadden, Pest Control, Seattle, WA. (Paratex) about 9 years ago

We are starting to see the upper market move a little more.

Hope you do too

your friend in Charlottesville Virginia!

Posted by Charles McDonald, REALTOR®, Blogger, Principal Broker®, Owner (Charlottesville Real Estate Solutions) about 9 years ago

Esko:

What happened to a lenders requiring a 20% down payment?  The most likely scenario in your example would be an 80% first mortgage with a simultaneous second mortgage at a much higher rate than the first, resulting in a big commission for the loan officer.

If the borrower in your example paid a $180,000 down payment, the situation would be a lot more workable, owing $720,000 on a property worth $630,000.  Who knows, the borrower might have even bought a smaller, more affordable home if he didn't have the $180,000 down payment available.

Greed on the part of borrowers and lenders (and yes, even appraisers willing to push values to get business) have put us in the situation we're in right now.

Posted by Jesse Skolkin (Independent New York State Certified Real Estate Appraiser) about 9 years ago

Esko, the current economic conditions are being felt by everyone, and no one is safe of losing their jobs.

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) about 9 years ago

Paul,

Yes, the recession is reaching into every corner of the society.

Posted by Esko Kiuru about 9 years ago

Charles,

Vegas is having a hard time right now.

Posted by Esko Kiuru about 9 years ago

Jesse,

Agree, things got out of control a few years ago.

Posted by Esko Kiuru about 9 years ago

George,

This slump is shaking us hard.

Posted by Esko Kiuru about 9 years ago

And you know what the cycle is expected to get next?  Commercial real estate is expected to be the next big problem. 

Posted by Brian Griffis (Realty Choice) about 9 years ago

Brian,

Here in Vegas we are already seeing that. Scary.

Posted by Esko Kiuru about 9 years ago

Yeah, I heard the TI was sold off for scrap value.  That is scary.  Funny thing is, when I was there recently, the buffet lines were still pretty long lol.  Must have been a rodeo or CES week. 

Posted by Brian Griffis (Realty Choice) about 9 years ago

Brian,

The town is still rather busy with all the terrific deals on rooms, shows etc.

Posted by Esko Kiuru about 9 years ago

Participate