First Time Homebuyers with Good Credit Will Benefit from Housing Problems

Declining home prices hurt those of use who own. Our equity is slowly deflating. But for many people who decided to wait to purchase a home, the last week has put in play additional forces which will lower home prices.

On Monday, the Fed signed off on new mortgage regulations that make it tougher to get a loan. The new rules force lenders to document income, and also require lenders to ensure that homebuyers can afford the purchase once insurance and taxes are calculated into the payment. They are good rules but they will push many out of the housing market or lower what buyers can afford.

On the same day, the Wall Street Journal reported that mortgage insurance is becoming much tougher to get. The paper stated that:

"While it's difficult to guage the severity of the impact, industry executives concede that insurers' tigher standards are affecting the market." Michelle Collins, an executive at Shorebank, Corp. a community-development bank in Chicago said that "easily 70% of the previous set of borrowers will not be able to buy."

For those of you unfamiliar with mortgage insurance, it's often required by the mortgage lender if a buyer has less than 20% to put down on a house. It protecets the lender from a buyer who has little equity in their homes. Over the last couple of years, buyers got around mortgage insurance using 80-20 mortgages. The buyer would use a mortgage to finance the first 80% of the home and then use a second mortage or home equity loan to finace the remaining 20%. That practice has been wiped out, leaving buyers who don't have a downpayment with mortgange insurance as the only alternative. Now, for many even that option is closed.

Banking trouble will also depress home prices. With banks facing steep losses and having trouble with their balance sheets, they will reduce lending to all but the most credit worthy.

All of this means that there will be fewer people and fewer dollars in the market. Supply and demand tells us that if demand drops, so must price. And prices have fallen. The National Association of Realtors says that:

"The aggregate median existing-home price is projected to fall 6.2 percent this year to $205,300, and then rise by 4.3 percent in 2009 to $214,100."

This quote came out on July 8, a week before the current embroglio. I think based on recent events, their 2009 calculation is wishful thinking. I bet the fall in 2008 will be steeper than 6.2% and prices will continue to decline in 2009 and possibly into 2010. Prices will have to fall another 20% to get them back to 2001 levels, when things started to get crazy. The stock prices of major banks are falling back to 2001 levels so I think it's possible that housing could follow a similar trajectory.

All of this is somewhat depressing for a homeowner, of which I am one. But it's great news for first time buyers with good credit. If only I could have stayed in my apartment a few years longer.