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
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.)