PARAMOUNT MORTGAGE - LENDER'S BLOG

“The housing market, like all markets, is based on supply and demand. And while foreclosed homes and short sales continue to create a supply glut driving prices down in certain areas it is a regional problem, not a national one,” states Mike Castleman, Sr., CEO of Metrostudy, a real estate consulting company.

A Metrostudy report found construction of new homes has fallen to historic lows across the U.S., but this aspect of the housing market has been completely ignored.

“There were fewer than 80,000 new homes either under construction or vacant and for sale,” which is “a fraction of the 340,000 new homes five years ago,” says Castleman.

“Most regions are not suffering from what would normally be considered an oversupply of housing; they are experiencing underdemand,” which is forcing down prices.

Potential buyers aren't buying because of three major concerns, job security, declining home prices and tighter lending standards. But Castleman is optimistic. “The job market is, very slowly, starting to trend back up.”

Metrostudy maintains the largest database of primary housing market information in the U.S. In specific regions of the 19 states and 50,000 subdivisions Metrostudy regularly monitors, Castleman says the “monthly cost of renting now exceeds the cost of owning which makes buying a house more attractive.”

While the fear of continued falling prices may drive some buyers to postpone their purchase, current mortgage rates are so low that locking them in will likely offset any price declines.

“Let's say you decide not to buy a home this year and house prices drop another 10%,” explains Castleman. “If today's extremely low interest rates climb by just one percentage point, your monthly mortgage payment on a 30-year fixed-rate won't be any lower” regardless of the 10% lower purchase price of the home you waited to buy. In fact, if interest rates climb more than one percentage point, “your mortgage payments will be higher.”

One big sticking point in home purchases is the availability of attractive mortgages which are offered only to “extremely qualified borrowers with credit scores of 740 or higher.”

“The reason isn't the lenders – it's the government.” Castleman points the blame to “federal bank regulators” and “government-subsidized programs such as Fannie Mae and Feddie Mac which have severely tightened their lending policies.”

“The housing market will rebound strongly when the federal government starts to encourage, rather than discourage making mortgage loans.” Castleman says this will happen within 12 to 18 months. Why? Next year is an election year.

Politicians seeking reelection know the most effective way to decrease unemployment is to increase home construction, which normally provides a huge number of jobs. The most effective way to boost home construction is to make it easier to obtain mortgages with buyer-friendly lending policies.

Home prices have stopped falling in numerous markets and are starting to rise according to Metrostudy’s report, but real estate is regional. “Even if the Bears are right and home values have an additional 10% or so to fall, this is still a good time to buy,” offers Castleman.

Pay attention to your local market. For example, home values in southern California and the Virginia/Maryland suburbs appear poised to skyrocket. Demand for homes in those regions is virtually guaranteed to exceed supply once the current difficult lending environment is behind us.