Media Appearance: KSTP News on Declining Markets

by Alex Stenback on February 11, 2008

Just completed a quick interview with KSTP News’ Chris Keating discussing the impact of what are known as "declining market" lending restrictions on our real estate market.  It is planned for air at 6PM.

Update: Drug bust bumped our story to 6PM, Tuesday the 12th

Tune in.
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For the uninitiated, declining market restrictons work like this:  If a property is in a declining market, the minimum down payment is increased by 5%.  This effectively elliminates the zero down conventional mortgage in our marketplace, as most of the Twin Cities Metropolitan Statistical Area has been deemed declining by either the *lenders, the mortgage insurers, or both.  These rules are put forth by Fannie Mae. See this announcement [PDF!] from Dec 5th 2007 for more detail.

As of this writing, it is still technically possible to purchase a home, using conventional financing, without a down payment, (since not every address in the Twin Cities has been flagged as declining) but we expect that to come to an end within the next 90 days, if not sooner.  FHA remains at 3% down and does not have similar declining market restrictions.

The key take-away here:  Many (if not the majority of) first time home buyers purchase a home with little or nothing down, and the elimination of conventional zero down financing will sharply reduce the supply of available buyers until they are able to accumulate a down payment.  This will obviously bring added pressure to sellers, espcecially in the first time buyer price bands of $100-275k.

Good news is once they save that down payment, prices will be lower.

[*One technical aside: Fannie/Freddie actually leave the determination of a declining market up the originator and the appraiser.  All Fannie does is include language in it's underwriting decision that states (words to the effect of): "This property might be in a declining market, further investigation required." This will soon be a moot point, because the mortgage insurers won’t insure a zero down loan in our market – well, there is still one left that will, under certain circumstances, but we digress.)

{ 4 comments… read them below or add one }

Amy Caron February 11, 2008 at 4:48 pm

This makes me want to ralph.

raspeberry5 February 12, 2008 at 1:06 pm

I am glad that sanity is returning to the home lending market. We binged in the last five years and now it is hangover time. I hope that 20% down payment becomes the norm. It is 50% in Japan and 40% in Germany, countries where people are thrifty. Enough of this monthly payment mindset.

Alex/Editor February 12, 2008 at 2:02 pm

Well, you’ll get your wish as to the increased down payment requirement, though it will wind up being less than 20% when all is said and done. FHA, for instance, would have to be pried from the cold dead hands of nearly every congressman, and only requires 3% down.

Bigger down payments will make our real estate market healthier over the long term, if at the expense of some short term pain.

Getting philosophical for a moment, our tradition of housing that is accessible to the middle class is one of the reasons that we have not had violent political paroxsyms in our country from time to time (see your Germany and Japan.)

The average person, for the most part, can get a stake in the system, which makes people less apt to march on the capital and lop off heads once in a while.

The pendulum swung too far towards “accessible” into “fog a mirror” and caused values to inflate, pricing out much of the middle. To let that pendulum swing too far in the other direction would be just as damaging.

For many people, saving 50% of any reasonably priced home is just as unattainable as making a payment on one that has been artificially inflated by loose credit standards.

Jackson February 26, 2008 at 5:30 am

Since an increasing number of borrowers are turning to piggyback loans in order to avoid PMI, the mortgage insurance industry came up with this solution claiming that it lowers monthly mortgagespayments to the same or lower level as a piggyback loan. With this option homebuyers pay a single premium on their insurance and it is amortized over the term of loan.

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