Housing crisis hits home

Declining market designation causing industry shakeup

Columbia’s designation as a declining real estate market by the federal government’s Housing Price Index touched off widespread concern in the local real estate industry, compounded by tighter mortgage-writing guidelines and volatility in the financial markets.

Bankers and mortgage brokers say the designation, caused by a drop in average appreciation, and the tougher guidelines will make buying a home this spring harder for people who don’t have high credit scores and can’t make substantial down payments for conventional loans.

The Columbia Board of Realtors is contesting the designation and points out that housing sales remain relatively strong and average prices continue to rise.

Some industry veterans, however, say the adjustments are a return to normal and believe the shakeout is healthy in the
long run.

“There are a lot of unusual dynamics going on in the marketplace,” said Ralph Gates, founder of Mid-America Mortgage Services. “A bunch of flaky mortgage companies and flaky appraisers are going to get flushed out of the market.”

Gates and others say that while foreclosures are increasing and there is an oversupply of homes and lots, interest rates are likely to go down this year, and the rule changes actually will be a blessing to people with good credit. The overall conditions make Columbia a buyer’s market.

Gates, who has been in the business since 1968, said, “This is absolutely the best time to buy a house in Columbia.”

In a conference room at The Bank of Missouri on Wednesday, President David Keller convened a panel of real estate agents, mortgage brokers, bankers, appraisers and builders to discuss the dynamics of the local housing market.

Keller said the HPI decline shocked people who have the perception that Columbia “is impervious” to national market conditions.

“It’s fear,” said Tom Kamps, a former builder and a bank board member. “We’re not used to this type of a market. We’re just going to have to tighten up and ride it out.”

Dennis Lynch of RE/MAX Boone Realty and other Realtors said numerous applications for 100 percent loans have had to be redrawn because of the changing mortgage-writing guidelines, and some deals fell through completely.

Carol Denninghoff of House of Brokers Realty said, “The biggest challenge besides public perception is dealing with all the mortgage changes.”

“Our market has been extremely volatile,” Bank of Missouri loan officer Tom Stone said. Buthe added that the declining HPI is not such a big deal when you consider that Columbia is coming off several years of record real estate sales.

Columbia was ranked 202 in housing appreciation out of 291 Metropolitan Statistical Areas and was the only declining MSA in Missouri, according to the Office of Federal Housing Enterprise Oversight’s HPI.

The HPI fell in the third and fourth quarters of 2007 and was down .72 percent in last quarter of 2007, compared to the same quarter the previous year. This is one of only a few times in the past 20 years that Columbia had two consecutive quarterly declines, and apparently is the first time that Columbia has had the declining market designation.

Nationwide, home prices fell 1.3 percent in the fourth quarter of 2007, according to the federal= housing agency. The quarterly report analyzing housing price appreciation trends found that 192 MSAs had positive fourth-quarter appreciation and 99 had price declines, including Columbia.

The CBOR released statistics showing that 105 homes were sold in Boone County in February 2008, fewer than the number sold in February in 2006 and 2007 (143 and 132, respectively) but higher than the month of February during the three previous years. The charts show that over the course of five years, sales volume and the median and average sales prices are all up.

However, the index used by the federal housing oversight agency and the two government-sponsored mortgage agencies – FannieMae and Freddie Mac – measures average price changes in repeat sales or refinancing on the same properties.

“Everybody is reading this and trying to figure out what it means,” Elizabeth Mendenhall of RE/MAX Boone Realty told CBT.

The HPI is used by Freddie Mac and Fannie Mae, the government-sponsored enterprises (GSE) that buy the bulk of U.S. mortgages and have widespread influence on how home loans are structured. However, as of Wednesday only Freddie Mac had designated Columbia a declining market, and Fannie Mae had designated he market “soft.”

The guidelines do not apply to non-conventional loans, including those that go through the FHA or the Veterans Administration.

R. Glen Walker, vice president of loan operations at Callaway Bank, said in an e-mail that if an appraisal report indicates the market is stable and the appraiser justifies the conclusion and the lender agrees with that conclusion, the lender is still able to offer maximum financing even though the OFHEO index indicates the overall MSA is in decline.

With some exceptions, people applying for a conventional loan with less than a 20 percent down payment will have to put down 5 percent more than they would in a non-declining market. In other words, if a buyer qualifies for a maximum 95 percent loan-to-value ratio, they would only be able to finance 90 percent because of the designation.

The designation relayed to lenders last week is particularly problematic for first-time home buyers because it makes purchases less affordable, according to bankers, brokers and Realtors interviewed by CBT.

“It’s certainly going to take some first-time home-buyers out of the market,” said Deborah Graves of Boone County National

In general, credit scores will drive loan costs now more than in the past. It will be tougher for a potential buyer with less than 3 percent to use as a down-payment and a credit score that’s below average – about 690 in the U.S. overall and 700 locally.

“It’s a really big deal because it hurts the segment of the market that can least afford to bear this burden,” CBOR director Carol Van Gorp said.

Gates said people with good credit “will not have a problem buying a house. We’ve got all kinds of money available if you have good credit. There are local banks and savings and loan institutions that know the difference between a good loan and a not so good loan.”

Gates said there have been abuses in the appraisal process in some cases and far too much leniency in mortgage-writing guidelines in general.

“After foreclosures, we’re finding out that property is not worth anything close to what it was appraised for,” he said.

Gates added, “We got into a mode of thinking in this country that everyone deserves to own a home. The reality is everyone has the right to earn the right to own a home. Some people are not financially capable of owning a home. The 125 percent home equity loans that were used to pay off other loans, car loans – that was an illusion.”