Fear is a Foe

Implications:

To date, lender tightening news has primarily been directed to the business world- not the consumer. This article, front page news written for Joe Consumer, is different. It talks of buyer dreams being shattered and one builder’s potential loss in sales being 10% in 2007.

Analysis:

At the beginning of 2007, buyer traffic surged in most submarkets; although traffic figures were below those recorded in the peak years of 2004 and 2005, they increased enough to make most industry followers optimistic about the new year. Prices remained volatile, but speculative supply levels were stable, a sure sign that prices would soon stabilize. Developers and builders were talking about the market’s impending turnaround (planned for mid-year). The local media was writing and talking about how it may be the right time to buy a new home, with prices at possibly the lowest point they would go.

Then, news of tougher lender underwriting guidelines came, followed by business page headings of subprime lender bankruptcies. The effects of the tightening, which have largely themselves been speculative up to this point, are now being calculated. Belfiore Real Estate Consulting’s (“BREC”) latest 2007-2008 forecast reflects a 5% downward adjustment in new home sales activity as a result of tighter lending requirements in place today.

To date, lender tightening news has primarily been directed to the business world- not the consumer. This article, front page news written for Joe Consumer, is different. It talks of buyer dreams being shattered and one builder’s potential loss in sales being 10% in 2007.

As if the downside of tightening credit were not enough, builders will soon likely have another demand foe to contend with: consumer fear. Fear was a top reason potential buyers cited in 2006 for not home shopping. While its affect on the market is difficult to gauge, negative news does affect consumer behavior.

Some new buyers may become fearful of loan disapproval; they may fear the embarrassment of not getting approved. Others may fear they would be wasting time if shopping for a new home (“We are not going to be approved, anyway”). There are those that will fear the market is still heading downward after reading a few stories about home sales declining further in 2007. Homeownership dreams may be put on hold.

Home builders would be wise to counter attack negative news soon, touting their ability to find the financing necessary to keep new buyers- particularly low down payment, credit challenged buyers- coming into sales offices. Some will not qualify, but some of those that may soon become fearful, will qualify for available financing.