Falling home prices are the main culprit behind the big fat mess the American economy finds itself in now. The colossal $700 billion bailout plan Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke are trying to push through this week is supposed to provide relief for the real estate market -- and ultimately stabilize prices.
The core premise of the plan is this: The government will buy mortgage-backed securities in the open market, allowing lenders to get dubious loans off their books. This comes just two weeks after the government agreed to give Fannie Mae and Freddie Mac up to a $200 billion capital infusion. Both actions are meant to stabilize the mortgage industry – giving lenders the confidence to extend mortgages, and financial firms the confidence to buy, hold and sell them.
But what does this mean for the little guy? The American who’s looking to finally sell his home, or buy a new one? The short answer is no one really knows. Still we posed the questions to experts in the field to get their insights.
Will consumers see a reduction in mortgage rates?
Maybe. "It's hard to know at this point," says Keith Gumbinger, vice president at mortgage-information firm HSH Associates. "Until we know the shape and size of the proposal [to buy up banks' bad assets], it's too early to know how the market might react to it," he says.
The 30-year fixed-rate mortgage averaged 5.98% Wednesday, according to Bankrate.com, up from 5.73% the previous week. Both are lower than the 6.66% borrowers could get in August 2007, when the credit crunch began to pick up steam.
It’s worth noting that these rates are quite good by historic standards, says Eric Tyson, co-author of "Mortgages for Dummies." Indeed, mortgage loan application volume increased 33.4% for the week ending Sept. 12 (after the government's bailout of Fannie and Freddie), according to the Mortgage Bankers Association's weekly survey. But during the following chaotic week (ending Sept. 19) -- which included a general undoing of the financial-services sector -- the index fell 10.6%. The association foresees more volatility until the markets can see what Congress ultimately passes.
Bottom line? No one can say for sure that rates will be a whole lot better, say, six months from now.
Will it be easier to get a home loan?
Borrowing requirements haven't changed much in the last few weeks. The tougher lending standards are still in place. To get the best rates, you’ll likely need a down payment of 5% and a credit score of 720 or higher, says Gumbinger. Another requirement: a lower debt ratio, which is the percentage of your income that goes toward paying debt. Before, you might have been able to secure a loan with a ratio as high as 55%, but these days the maximum is around 43%, says Gumbinger.
The good news is we probably aren’t going to see the requirements get any tougher – and down the road we could see those standards ease up, although we’re not going to return to the days where all you needed to do to qualify for a mortgage was prove you were breathing.
It's near impossible to say exactly when underwriting criteria will moderate, says Jason Bloom, president of the Washington Association of Mortgage Professionals. The consensus in the housing industry suggests that borrowing requirements won't see big changes until the market stabilizes. When housing values level off, "that seems to be when we'll see the markets and the lending industry revert back to some semblance of normalcy," allowing more consumers to qualify for mortgages, he says.
Still, if you qualify, now is a good time to be in the market. "If you've got financing, you can buy a house at prices 30% to 40% of what homes sold for a couple years ago,” says Guy Cecala, publisher of Inside Mortgage Finance, an industry newsletter. See tips on how to increase your credit score.
Will home prices begin to rise?
That’s the $700 billion-dollar question. Obviously, "you're not going to get top dollar selling today," says Tyson. But waiting this out may not necessarily be the right move either. While prices may stabilize over the next year, we aren’t likely to see the kind of rapid appreciations that will add significantly more dollars to your pocket any time soon, he says.
The National Association of Realtors is predicting that housing prices will start to recover in 2009. Most recently, the group reported that while existing home sales fell in August, total housing inventory saw a 7% drop. Sometime next year "we think inventory will be drawn down to a point where aggregate prices will begin to rise," says Walter Molony, NAR’s spokesman.
