Think home-price slide is over? The worst appears yet to come,
The rationale goes something like this: There's a finite supply of homes and plenty of pent-up demand from potential home buyers. That demand will put the brakes on the housing decline before it turns into a rout.
But people often forget that the economic concept of “demand” also includes “ability” – i.e., ability to pay. As lenders tighten their standards on mortgages – standards that never should have gotten as lax as they were in the past few years – fewer San Diegans will have the ability to buy homes at their current prices.
By any standard, even after a year of decline, San Diego's home prices are still out of whack.
OK. So we live by a beach. And we have great weather. And we've got a great football team (so far this year, at least). But you can only stretch a dollar so far. Which is one reason why – for the past several years – we've had more people moving out of San Diego than moving in from other parts of the country.
Back in the good ol' days when nobody was paying attention to what was written on a loan document – i.e. before January – it was possible for a median-income San Diegan to buy a median-priced home with the help of a little fibbing.
When home buyers didn't make enough money to qualify for a loan, they could just say they did and – voila! – the home was theirs. They didn't even have to make a down payment or pay off any of the principal.
There was just one itsy-bitsy problem: The buyers couldn't afford the homes! This led to a wave of delinquencies and foreclosures, besides putting quite a few mortgage lenders out of business. Now, lending practices have changed. And that's going to make the market rockier in coming months.
Here are some points which, I confess, are not totally my own. They are based on commentary by San Diego mortgage broker Greg Brooks on brokerforyou.com, a Web site operated by real estate broker Bob Schwartz.
First, most borrowers now must prove how much money they're earning. This will result in a substantial cutback in the number of buyers in the marketplace, which could not have thrived the way it did between 2002 and 2006 without the thousands of liars whose homes are now entering default and foreclosure.
Second, most borrowers will have to actually make a down payment on their home. That usually means at least 10 percent of the price. Which leads to two questions: How many home-seekers in the San Diego market have $47,500 to plunk down on a $475,000 median-priced home (here I'm using the DataQuick median, which seems more realistic than the Realtors)?
Third, once you've got your $475,000 home, you have to make the monthly mortgage payments. Brooks notes that after making a 10 percent down payment on a $500,000 home, a borrower would end up paying $3,700 a month, after factoring in principal, interest, taxes, insurance. That kind of borrower (or dual-income couple) would have to make about $120,000 per year to qualify for the loan.