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Lending changes shape a new housing market

Analysis: Local Realtors expect real estate recovery to gain momentum

Posted: February 16, 2011 1:55 a.m.
Updated: February 16, 2011 1:55 a.m.

Activity in the real estate market’s expected to create a “new normal” for housing prices, in contrast to the artificially inflated prices before the Great Recession. Conditions are ripening for the market to recover, and now may be the time to get back into the housing market.

Editor’s note: Last in a three-part series analyzing the housing market in the Santa Clarita Valley.

Buyers who have been sitting on the fence waiting for prices to come down further may find themselves losing the opportunity to get into a home at an affordable price, some experts say.

With home prices showing modest growth during the past three months, home affordability in California was estimated to have hit its peak in the third quarter of 2010.

Higher prices require larger down payments, making it tricky for first-time buyers if they wait too long to get into the market.

Responding to a query posed by The Signal on Facebook and Twitter, Penni Innerarity Kern said she only put 3-percent down when she bought her home eight years ago. Lenders are requiring more now, the homeowner said, and that may squeeze some prospective homebuyers out of the market.

Lenders are exercising more strict scrutiny in approving loans than they have in the past, making it more difficult to secure financing for both first-time buyers and those who are moving up.

Interest rates are unlikely to go any lower, and in fact, have been gradually increasing. Mortgage rates will continue to rise by the end of this year, according to a forecast from Frank Nothhaft, chief economist with Freddie Mac.

Replying to The Signal’s community-feedback request, a local loan officer reminded buyers that Federal Housing Administration loans offer affordable down-payment options for buyers.

“FHA 3.5-percent down-payment financing (is available) down to a 580 FICO credit score,” said Brian Woolley, of Santa Clarita. Woolley is with Prospect Mortgage in Sherman Oaks.

Certain down-payment assistance programs allow buyers to put 1 percent down, Woolley said.

“Smart buyers know if they’re going to be moving up in a down market, they’re getting property at a much greater discount now,” said Mike Bjorkman, broker and partner of RE/MAX of Valencia.

The new normal
Buyers and sellers alike cannot afford to look at pre-recessionary levels as an indicator of a “normal market.”

It wasn’t normal.

Home values were overinflated, driven by shoddy lending practices, subprime loans and lax mortgage approvals by lenders.
People bought homes they couldn’t afford, and others bought homes with predatory loan deals that would have pushed the buyers out of their homes long before the loss of a job had the same effect.

Artificial growth in the market came to a crashing halt in 2007. Home prices plummeted an estimated 54 percent in a two-year period since 2007, according to DataQuick.

And we’ve seen this before.

In the housing crash of 1992, the savings and loan industry sought to take advantage of the real estate boom and high interest rates during the previous years, lending more money than analysts felt was prudent.

Combined with a slowdown in the finance industry, market conditions led to the failure of more than 700 savings and loan associations and a crash in the real estate market. Homes went into foreclosure, dramatically dropping home values.

It took nearly five years to recover from the housing market crash of the early ’90s.

As with the crash of ’92, today’s real estate market has to adjust, experts say. And in order to adjust, distressed properties need to be placed on the market to clear out a backlog of inventory.

Only then can the market recover and achieve “normal” conditions.

But it will be a “new normal” as prices adjust to better reflect true property values.

What’s next?
“I fully expect the housing recovery to gain momentum this year,” said Sal Aranda, president of the Southland Regional Association of Realtors’ Santa Clarita Valley Division and president and CEO of U.S. Eco-Green Real Estate of Valencia.
“It may recover more so in the Santa Clarita Valley than in other regions throughout Southern California,” he said.

With employment showing signs of growth and mortgage rates creeping up, more buyers may come into the market with the release of distressed properties that lenders have been holding back, local Realtors say. The timing could be good.

If banks would cooperate more with short sales, houses would move faster and could all be absorbed by now, Bjorkman said.

“There are more buyers than foreclosures,” he said. “People are lined up to buy houses.”


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