Nearly three and a half years into a spiraling downturn, our nation’s housing sector looks like a mere shadow of itself. Some of what remains today is good; and some of what remains today is not so good.
Gone are the wanton days of subprime and Alt A lending. Once 40 percent of total originations at the height of the real estate boom, the nontraditional lending business has closed its doors. Also gone are overly accommodative underwriting practices that flooded the marketplace with low down payment loans and no documentation loans. Left in its wake are a mounting number of foreclosures and an increasing number of households unable to meet their mortgage obligations.
Today, lenders are pursuing responsible lending almost to a fault. Mortgage credit is tight; there are few mortgage products and down payment requirements begin at 20 percent. Adjustable-rate mortgage products are scarce and the jumbo market has shrunk to irrelevance.
Gone are two of the most powerful corporations in the world-Fannie Mae and Freddie Mac, who once wielded enormous political and business influence over the housing sector. Today, the two nationalized mortgage giants behave more like wounded soldiers in a war not yet over.
Gone is an irrelevant and weak FHA boasting little market share. Today, FHA has become a major player with a 20 to 40 percent market share, depending on the region of the country.
Gone is the high level of second home buying for resort and for investment purposes. During the height of the real estate boom, second home purchases accounted for almost 40 percent of total home sales. Today, second home purchases account for less than 20 percent of total home sales; while foreclosure properties account for almost 40 percent of total home sales.
Gone are the days of 7 million existing home sales in a given year (2005); and over 1.3 million new home sales in a given year (2005); and 1.7 million housing starts in a given year (2005). Similarly, gone are the days of steady and sometimes surging home price appreciation.
Today’s housing landscape is so much different; our nation’s housing sector has literally shrunk in size. Existing home sales were an annualized 4.77 million in May, while new home sales and housing starts were a mere 342,000 and 532,000, respectively. Home values have plummeted over the past several years. According to Economy.com, the Case-Shiller home price index for twenty cities is expected to fall 38 percent from peak to trough before there is a housing recovery.
It is not overstatement to say that our nation’s housing sector has experienced dramatic changes during these past several years. The housing pie has gotten smaller and the composition within the pie has also changed. More and more low income and minority households are being denied the opportunity of homeownership because of today’s tight credit underwriting. The composition of homeownership is clearly shifting away from low income and minority households. We are entering a new era in the nation’s housing sector. It is a housing market that has shrunk by almost 40 percent in home sales during the past several years; and a market that offers households fewer mortgage products but exhibits more responsible underwriting. It is also a market that is partly closing its door on households that need to take that first step to homeownership. At least for the time being, all of the major housing players will have to adjust to this new reality.