For Buyers with Income, Feelings are Problem, not Financing

Implications: An improvement in consumer sentiment will lead to an improvement in new home traffic and home sales, as well as an improvement in other areas of the economy.  Buyers that “feel” good make confident purchases.  Watch consumer sentiment and confidence indices, as well as BREC traffic count figures, for improvements, which we expect late in 2008.

Analysis: Business students are taught not to let their feelings get in the way of business because emotions often lead to irrational decisions.  If consumers were taught the same thing, housing market conditions would be a little better today.  

In May, consumer sentiment, as measured by Reuters / University of Michigan, hit its lowest mark since June 1980, according to the subject article.  Every month over the last 2 years, Belfiore Real Estate Consulting has tracked new home sales office traffic counts throughout the Phoenix metro area.  During this time, traffic counts, like consumer sentiment and confidence indices have fallen dramatically.  In some Phoenix metro submarkets, year-over-year traffic has fallen as much as 70%.  Sentiment is the reason.  

Potential buyers are nervous about the economy; they are nervous about their jobs, worried the value of their largest single asset (their home) will fall further, worried about food prices rising further, concerned about retirement income and who will become the next President.  Their nervousness is reflected in the sentiment index and in BREC’s traffic count figures, and consequently, in the pace of home sales.  

Mortgage underwriting has taken some of the blame for slowdown in home sales during the last 24 months.  Undeniably, conventional 100%, no documentation loans- so-called “liar’s loans”- are nearly impossible to attain; these loans are largely the reason the home sales became so inflated in 2004 and 2005.  

Downpayments have made conventional financing difficult, particularly in more affordable market areas like the Phoenix metro area.  Buyers have become accustomed to no or minimal downpayments.  With many areas now being deemed “declining” market areas by lenders, downpayments of 10% to 15% are necessary to attain conventional financing.  

Interestingly, for buyers purchasing in most metro area submarkets, attaining financing with absolutely no downpayment is easy… as long as the buyer can provide proof they can afford a home.  Nearly all homebuilders are offering FHA loans.  Builders coupling these loan offerings with 3% in closing costs, and a third party 3% downpayment gift are finding that most buyers take advantage of the no-down financing option.  Clearly, financing for those seeking homes priced within FHA loan limits, is not a challenge for buyers that can afford to make payments on the homes.  

An improvement in consumer sentiment will lead to an improvement in new home traffic and home sales, as well as an improvement in other areas of the economy.  Buyers that “feel” good make confident purchases.  Watch consumer sentiment and confidence indices, as well as BREC traffic count figures, for improvements, which we expect late in 2008.