The American dream of homeownership is still attainable. Buyers just have to deal with a new set of realities.
A year after the collapse of the housing market triggered the financial meltdown, lenders are demanding more money up front, high credit scores and proof of income. Paperwork must be in perfect order. Patience and persistence are required. And don’t even bother asking about a subprime mortgage.
It’s a vastly different set of rules from earlier this decade, when home prices soared and mortgages were easy to come by.
In some ways, it’s a return to the standards that emerged as the World War II generation bought its first homes in the suburbs: Buy what you can afford. Stick to a 30-year, fixed-rate mortgage. View your home as a place to live, not as a piggy bank.
Housing bubbles have happened before and, experts warn, could happen again. But real estate agents, mortgage brokers, economists and homebuyers across the country say they’ve noticed a shift in attitudes that they expect will last for years.
Selling your house
Real estate agent Scott Patterson is rushing to meet with potential buyers of a condo with an ocean view near Plantation, Fla. When he arrives, he turns on lights and opens doors in the four-bedroom place. The prospective buyers, a couple from Venezuela, walk around, ask a few questions – and leave.
Business may be up in South Florida, but the power has shifted to the buyer. And price is the key. “If you’re not getting showings, you’re overpriced,” said Patterson, an agent with Esslinger Wooten Maxwell Realtors Inc.
The record number of foreclosed homes on the market gives buyers even more leverage. “They can afford to wait,” says David Baran, a broker with Prudential Preferred Properties in Chicago.
Getting a mortgage
Jim Sahnger, a mortgage broker in Jupiter, Fla., still chuckles over one borrower three years ago who landed a mortgage with no down payment and two foreclosures and a bankruptcy in his past.
Now, lenders pore over bank statements, tax returns and job histories. The average mortgage application today starts three times thicker than what it was at the start of the housing boom, and often gets thicker as the process drags on.
Sometimes all the extra documentation still isn’t enough. Sahnger recently had a customer with a good job and a 20 percent down payment who couldn’t get a mortgage because the lender said there were too many delinquent mortgages in the neighborhood. “Now, they want to know everything about the buyer,” Sahnger says. “It’s a true and full underwriting process on every particular loan.”
It is common to require a down payment of 20 percent – sometimes more. And it is virtually impossible to get subprime mortgages, which were written for people with poor credit histories and helped cause the meltdown when the interest rates jumped and borrowers defaulted. In 2005, one in every five mortgages was considered subprime. This year, it’s less than 1 percent.
Another category of risky loans, Alt-A mortgages, which required little or no documentation of the borrower’s financial health, have plunged to $3 billion this year from $400 billion in 2005.
Closing the deal
It’s not uncommon nowadays for closings to take 60 days. One big reason: Appraisers have become more strict – or, some would say, more accurate.
During the boom years, agents and brokers often pressured appraisers to “hit the number” that the buyer and seller had agreed on so the deal would close and everyone could collect fees. Under new industry rules, mortgage brokers are barred from ordering appraisals themselves. Instead, lenders order appraisals in-house or hire independent firms.
Nearly everyone in the real estate industry agrees on this much: Another dramatic boom-bust cycle isn’t likely soon. Albert Saiz, assistant real estate professor at the University of Pennsylvania’s Wharton School, expects that new regulations and a different consumer mind-set will help real estate return to a more traditional cycle.
There will be some ups and downs, Saiz said, but in the long run, prices should move higher. “In the end, the United States is still growing,” he says. “We’re going to need more housing.”
Pava Leyrer, president of Heritage National Mortgage in Michigan, notes that the majority of people are still paying their debts. She’s confident the market will rebound once the unemployment rate begins to fall. “I really can’t imagine we would go back to the same situation, because it took an exact wrong mix of everything for that to occur,” she says. “If it ever did happen, I’ll be long dead.”