Interest rates up. Home prices down. What’s it all mean?
Where is Salt Lake City headed in the real estate market now? What are interest rates for Utah borrowers going to do? Is my house in Sandy losing value?
All good questions and ones I get asked often when someone finds-out I am a mortgage broker. So here’s my predictions for why Salt Lake City in particular, and Utah in general are going to be better-off than the rest of the country when it comes to real estate and mortgages.
- Utah is a growing state. Whether that growth is coming from outside the state or from within, we are growing. Utah culture is good for real estate. The underlying idea in Utah is get married, buy a house and start a family. And that family usually consists of four or more children. Utah leads the nation in the number of children per household. All those kids are going to need homes to raise more kids. So unless something drastic happens and Utahns stop having kids at the rate they are, there will always be demand for homes.
- People are moving into Utah. Utah is attractive to those fleeing bigger cities. Salt Lake City is not too big, but also not too small. For someone from a large city it’s just right. Also, Utah is a non-union state, so it is very attractive to companies who wish to set-up shop here for cheaper labor than in other parts of the nation. Utah also has a very tech-savvy population, so high tech companies have a huge employment pool here. These companies also bring-in their own employees, thus creating a need for homes, and hiring Utahns allows them to afford homes.
- Utah has one of the lowest unemployment rates in the nation. The number one reason for foreclosures is not sub-prime lending. It is not option arms. It is loss of some or all of a family’s income. Check the statistics. The highest foreclosure rates in the U.S. coincide with the highest unemployment rates in the U.S. (California and Nevada being the exception since much of that is “investors” that screwed-up the markets there). Utah has a low unemployment rate and one of the lowest foreclosure rates in the U.S.
- While other areas in the U.S. are seeing sometimes double-digit drops in home values, property values in Utah has actually increased 2.5% over the first six months of 2008
All that said though, what is going to effect us is this:
The days of Stated Income loans is not gone, but what is left is highly unattractive to buyers and very demanding of them.
Why does this make a difference? Because a house is worth whatever someone will pay for it. Stated Income loans, in my opinion, were a huge contributor to unrealistically driving-up home values. It artificially created a sellers-market. A seller could list their home for whatever they pleased, and if an interested buyer couldn’t qualify for the home via the full income documentation (Full Doc) route because they just didn’t make enough, they could go Stated Income and not have to show the loan officer or the lender any of their proof of income. Therefore they could now qualify to buy a home they otherwise would not have been approved for. And once that home home sold for an inflated amount, it created a comparative (comp) for someone else in the neighborhood to base the value of their home on, and so on, and so on, and so on.
It’s for this reason most of all that I feel we are going to see a drop in home values in Utah. Not for lack of demand, but for lack of qualified buyers for homes in their current price range. This is why this is:
According to the Utah Association of Realtors, the average price of a single family residence in Salt Lake County in the first quarter of 2008 was $286,321.
According to the Bureau of Labor Statistics the median household income in Salt Lake County in 2007 was $60,589 (remember back to math class, median is the exact middle of a set of numbers). So half of Salt Lake City and County residents have a household income of less than $60,000 a year and half have more. $60,000 a year qualifies a home buyer for a $195,000 loan.
So half of Salt Lake County households won’t qualify for the average home in Salt Lake City or County since they have to prove they have the capacity to pay for that home. Income hasn’t gone down in Utah over the past 10 years, but homes have skyrocketed in price because buyers could stretch the truth a bit about their capacity to repay and get that bigger home they so badly wanted.
Well, those days are over. Under the current loan underwriting guidelines the industry has gone back to the “Three C’s” of lending: Proof of Credit, Capacity to repay and collateral.
Credit. Credit standards have gotten much stricter. Even FHA now has a minimum FICO score requirement, where six months ago they didn’t. Someone with a 560 FICO used to be able to buy a house. Now, the minimum most lenders are underwriting is 620 (although some will still go down to 580 on an FHA, but they are few and far between).
Capacity to repay. Full income documentation rules right now. A borrower has to be able to prove they have the income available to afford the home they are buying. Many self-employed borrowers can’t prove they make as much as they do, and the lending industry defines a self-employed person anyone who derives more than 25% of their income from commissions or bonuses. Stated Income loans were designed to address this borrower’s needs, but the programs were abused terribley by those that could prove their income but wouldn’t because they wouldn’t qualify for the house they wanted.
Collateral. Appraisal fraud was a huge issue in Salt Lake City, Draper, Sandy and Utah overall. Nowdays, appraisals are undergoing “desk reviews” at the lenders and are being heavily scrutinized. Many a deal has been killed because an appraisal would not hold-up to close examination. This is why a good and honest appraiser is worth their weight in gold. An honest value means an honest sale price means a loan that will close and a buyer will be able to move into their new home.
So I feel that the big contributor to home prices declining in Salt Lake City and County, and Utah in general will be for the simple reason that in order to find qualified buyers home sellers will have to discount their home into the realistic price range that the majority of Utahns can qualify for. For this to not happen, lenders are going to have to get creative on ways to qualify the top 50% of Utah earners who are the small businesspeople that write-off most of their income to minimize their income tax burden. There are lots of people in Utah that can honestly afford a $400,000 plus home, they just can’t prove on paper that they can… for now.
So there you have it. The thoughts rolling around my head this week. Take care, and happy house hunting.