The Direction of the Housing Tide and Tightening Credit

The tide of the housing market appeared to be headed in during recent months, as inventory supply conditions stabilized, and builders began what we considered a last round of price cuts. The waters appeared clearer heading into the summer selling season. In recent weeks, though, we’re finding the water muddied and a tide that may be headed back out. Tightening credit appears to be putting the breaks on improving market conditions.

A few weeks ago, Belfiore Real Estate Consulting (“BREC”) personnel set out to determine just how many people have been using and continue to seek 100% financing when purchasing a new home in the Phoenix metro area. We focused on 100% financing because the majority of credit tightening is occurring with this financing. After speaking with finance professionals and home builder representatives, we concluded:

• During the last 12 months, many move-up buyers have sought out 100% financing for new homes. In move-up, infill submarkets, an estimated 13% of buyers used 100% financing. In some cases, these buyers did not need the full 100% financing, but took it because it was available, and they could easily attain the financing.
• In emerging submarkets, most buyers attempted to attain financing for the full price of the homes they were purchasing. For instance, in the North and South Buckeye Submarkets, builder representatives estimated 75% to 85% of buyers (the average leans towards 85%) finance using 100% financing. Many of these buyers have marginal credit- below new subprime underwriting standards.
• Up to 35% of 2006 metro area buyers utilized a subprime loan to finance their purchase. The number of buyers purchasing with 100% financing, BREC found, was unattainable.
• A fairly large number of buyers have been stretching beyond their means to purchase a home.

Collecting the information was a lot easier than utilizing it to calculate the effect on the housing market. We’re currently considering several scenarios, but believe the following is certain: tightening credit will have both an immediate and longer-term effect on Phoenix metro area home sales. Builders are reviewing purchases that have not closed and are finding a number of the “buyers” they have sold to, will not close on their homes due to credit tightening. March and April cancellation figures will be high, as a result. Some of the potential buyers still considering a purchase with 100% financing or that may have considered a purchase later in the year will be forced to come up with a down payment of 3% to 5%. Those unable to attain the down payment will be forced out of the market.

With high cancellations expected, BREC now anticipates speculative inventory increases during the next 60 days. New home pricing remains volatile. Resales continue to increase and more builders are reporting cancellations due to buyers’ inability to sell existing homes. Data collection is underway for April edition of the KnowledgeBase Current and Future Market Conditions Insight publication, which should provide a better picture. For now, though, it appears as though the tide may be headed back out, and 2007 may be another tough year for the residential market.