Jan 17, 2008

Last summer there was monstrous news that rocked the financial markets and then the real estate markets - the sub-prime mortgage crisis. In hindsight, more of us should have seen this coming. Yesterday I met with the head of local mortgage brokerage and we both agreed that the difference in rates for borrowers with great credit and those with less-than-great credit was too narrow. Somehow the risk premiums associated with lower credit scores seemed to have disappeared. Borrowers who had only so-so credit scores were able to borrow at rates that didn't necessarily reflect the associated risk. In some products, the difference was approximately only 1/2 point in their rate versus the high credit score borrower.

In August the news hit. Someone woke up and decided that these lower score borrowers were risky; then we started looking at the ARM resets. On the chart below you can see just how dramatic the effect was - while buyers continued to buy, there was not only a dramatic slowdown in transactions but the rate of buying was substantially below that for 2006.

(click on the image for a larger view)

It's instructive to see the slowdown graphically as above. The inflection point in early August is certainly obvious and goes a long way towards explaining the build up in inventory. For buyers, especially those with strong credit, there are great financing options available. Even better for them, home prices are trending down, reflecting a more rationally-based shift towards a Buyer's Market.

Sellers, it's still a very challenging market. The focus needs to be on value and quality. You need to approach the sale of your home as the sale of any product - the price need to reflect the condition of the product. The house must be presented in a fashion that enables a buyer to "see" themselves living in it.

There's a lot of inventory still; how the house is marketed (in every sense of the word) will determine how well the sale goes.

DS