Media pundits are tripping over themselves to be the first to “call the bottom” of the housing market now that the Fed has stepped in to lower the Fed discount rate. Remember the discount rate is the rate that banks pay the federal reserve to borrow money; its not the rate you borrow money from the banks.
As Dr. Housing Bubble points out, regardless of the recent Fed action we’re still very much in the throws of the housing bubble. Dr. HB looks at markets across the country and ascertains correctly that we’ve only just begun to unwind a massive, spectaculor, devestating credit and housing bubble.
Here are a few signs that we’re only going to feel more housing-related pain in the coming months:
- Credit is still materially more expensive than it was 6 weeks ago. This reduces borrowing power of home buyers which will depress prices. The additional credit cost also makes a percentage of refinance candidates ineligible due to the increased debt burden of any new loan.
- Tie the above credit cost with severely tightened underwriting guidelines to drastically reduce the number of home buyers and home owners who now qualify for financing. Products that were commonly leveraged over the last 5 years by homeowners as “affordability” products are gone. Negatively amortizing option ARMs, interest only products and 40-year amortizing loans are disappearing (or already gone).
- Reduced documentation and stated income loans are disappearing or have been curtailed to the point of irrelevance. People who bought too much home, who made up their income, and took a short-term loan are now stuck and won’t be able to refinance.
- The freeze of market liquidity for non-agency loans-particularly jumbo loans-is just beginning impacting the hereto well-performing high-end housing market.
- The country’s continued negative savings rate leaves the first-time homebuyer market dead in the water as banks eliminate the majority of 100% financing options.
So you can see that we are clearly looking at continued correction; and that as scary as last week was it is only a small part in the overall correction process that the housing market will go through. We will continue to see foreclosure properties pile up, credit guidelines for non-traditional programs get repriced to their true risk levels or eliminated all together, and the continued reduction of stated income loans as the market realizes that capacity and not credit score is the true driver of loan repayment.
Stay tuned, the roller coaster is just picking up speed and we’ll be in the 1st car with our hands in the air…
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[Source: Blown Mortgage]
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