The Housing Chronicles Blog: A housing rebound will favor the entry-level markets

Sunday, January 20, 2008

A housing rebound will favor the entry-level markets

It's a good thing that builders have been reducing standard features and redesigning floor plans for a more entry-level buyer, because that's where the rebound is most likely to start first. Writing in his New York Times column, writer Floyd Norris summarizes an opportunity for young buyers not yet homeowners as well as for banks who can ramp up deposits in order to provide mortgage-related liquidity:

The ideal home buyer now — in a reverse of what was true for years — is a renter who is not burdened with a house. Such a buyer will need a down payment from somewhere, and he or she will need enough income to meet the monthly payments for the foreseeable future, including any increase in adjustable rates that seems probable.

But not owning a home, which may be hard to sell, is a big plus.

A year ago, having a home that had appreciated in value meant that an owner could trade up to a more expensive home. Now it means that the homeowner cannot move until the old home is sold, and that is getting more difficult.

First, the seller has to find a buyer who can get a mortgage. Second, the price has to be high enough to pay off the old mortgage and leave enough cash for the down payment on a new home. Both were taken for granted a year ago. In many markets, neither is a sure thing now.

That has created a daisy chain of delays and cancellations that has frustrated builders, homeowners and real estate agents.

So do we prevent a further meltdown from occurring?

At some point, the pressure on the government to step in will be intense. Its efforts so far have been mixed. Tougher lending standards ordered by regulators may only increase defaults, but efforts to persuade banks to renegotiate loans may reduce the dislocation for some homeowners.

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