Good and Bad News About Your House

SMITH BRAIN TRUST -- Median home prices have surged past the U.S. record set in 2006 at the peak of the real estate bubble, but don’t expect a repeat of the Great Recession. Instead, a mortgage risk expert at the University of Maryland’s Robert H. Smith School of Business expects an eventual market slowdown driven by a mixture of negative and positive factors.

“Home prices at a national level are not anywhere near to cratering like they did back in 2007, 2008 and beyond,” says professor Cliff Rossi. “I don’t think anyone has to worry about some significant downturn in home prices in the next 12 months or even in the next 24 months.”

Rossi, also the chief economist for mortgage insurer Radian, had an insider’s view during the runup to the subprime mortgage crisis as a senior risk executive at Citigroup, Washington Mutual and Countrywide. He shares the following good and bad news that homebuyers and sellers should consider.

Good news: Tighter controls

Gone are the days of reckless mortgages that lured families into way more debt than they could afford. Aggressive subprime lending, piggyback second-lien products, booby-trapped adjustable rate mortgages, and stated-income loans — where borrowers did not have to prove their employment or assets — are no longer common.

“There really isn’t much funny business going on with loans,” Rossi says. “Back in the bad old days, buyers didn’t even have to make a down payment, so you got into this go-go market of everyone buying a house that didn’t have skin in the game.”

He says most buyers today must make down payments of at least 3 percent of their homes’ value. “Those are still very viable, very good mortgages for first-time homebuyers,” he says. “They are very solid products.”

Bad news: Millennials squeezed out

One concern that worries Rossi is weak participation from first-time buyers. This group typically accounts for about 40 percent of new mortgages, but most U.S. markets have seen levels closer to 30 percent or 33 percent in recent months.

Rossi says people squeezed out of the market include many Millennials. “They suffer from lack of job opportunities and student debt,” he says.

Other families have been left behind as real estate prices outpace household income growth. “That’s probably the best argument for why there could be some sort of a technical correction in home prices,” Rossi says. “The affordability angle is problematic.”

Good news: Less speculation

During the recent housing bubble, Rossi says markets such as Las Vegas, Miami and Phoenix were inundated with speculators looking for investment properties. Some of that still goes on, but not at the same levels. “There isn’t this artificial demand,” he says.

A bigger factor driving price hikes has been low inventory. Rossi says homebuilders have slowed construction, while banks continue to move foreclosed properties through the pipeline cautiously.

At the same time, potential homebuyers forced on the sidelines due to bad credit are starting to repair their FICO scores. “They have emerged from foreclosure and bankruptcy proceedings that happened around the time of the crisis,” Rossi says. “That puts them in a position to reenter the home buying market.”

Bad news: Looming TRID chaos

Many housing reforms have hit their marks, but Rossi says at least one pending regulation could backfire. The "Know Before You Owe" TRID, an acronym made from other acronyms, promises greater truth in lending by blocking any changes to a contract in the final days before settlement.

If a home inspector finds a problem that requires attention — or if other late-stage issues arise — buyers and sellers no longer will be permitted to negotiate addendums on existing contracts. They must start the process from scratch. Enforcement, originally set for Saturday, has been put on hold until Oct. 3 while lending professionals prepare for the disruption.

Rossi says TRID will mean more than just increased paperwork. “It potentially will put settlement dates in a state of chaos, where buyers won’t be able to get into the home, and sellers won’t be able to contract for the home,” he says. “I don’t think policymakers have actually thought that out well.”

Good news: Low interest rates

Another factor has been low interest rates, which fell to a seven-week low on Tuesday for 30-year fixed mortgages. Although low interest rates discourage saving, they also translate into lower debt service payments for homebuyers. “It creates an environment for people to actually get into a home,” Rossi says. “Debt-to-income ratios are not as high as they have been in the past.”

When weighing real estate risks, Rossi reminds people to consider local conditions. Even within the same state or city, factors can vary by ZIP or segment — such as median income versus jumbo properties. “There isn’t a national housing market,” Rossi says. “There are 3,000 or more housing markets.”

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