There has been a lot of furor the last several weeks about subprime mortgages and the impact that they might/will have on the housing market and the economy as a whole. One of my favorite posts about it is at Business Week.
But … what will be the impact on the Charlottesville market? To help develop a better guess, one of the factors in the equation is – what percentage of loans written in the Charlottesville MSA are/were subprime? (I would also like to know what percentage were short-term interest-only …) The table below can help us ascertain the potential risk (taken in the context of the entire report -pdf), but understand that these are for refinancings not new loans:
From the report:
This study provides the first comprehensive and systematic look at the geographic variations by region and metropolitan area for the soon to be released federal government data covering lending activity in 2005.
The subprime market provides loans to borrowers who do not meet the credit standards for borrowers in the prime market. These loans are generally more expensive for borrowers with interest rates higher than prevailing prime rates, presumably to compensate lenders for the added risks associated with lending to borrowers with weaker credit histories. Most subprime refinance borrowers use the collateral in their homes for debt consolidation and other consumer credit purposes. Subprime lending has grown rapidly as a segment within the conventional mortgage market, growing from 5 percent of mortgage lending in 1994 to 20 percent in 2005.
The Charlottesville area is about in line with the national average of subprime refinancings, so we may be no better or worse than many others.
So – what will the impact be? I find that by preparing oneself, mentally and financially, for a “worst-case-scenario” one is both happily surprised and able to cope when the outcome is not so bad. Callously, there may be quite a bit of opportunity for those in a position to take advantage of the market. On the more direct side, there may very well be some significant pain for those who are unable to make their payments. Foreclosures may increase. Neighboring property values may decrease due to the lower sale prices of short sales (which have their own inherent risks). Perhaps lenders who do not have solid foundations will find that as the easy money goes, so does their business (and business model). Be prepared.
Check out the third slide in this excellent post on tightening lending standards.
Business Week’s Map of Misery shows the statewide averages of subprime woes.
I have asked a couple of local lenders where I might find this sort of data, with not luck. One email to the inimitable Calculated Risk, and here we go. How I wish that there were someone locally analyzing and posting more comprehensive analysis more often!
** Charlottesville MSA = Charlottesville, Albemarle. Greene, Fluvanna
** Consumer Fed is not the most “Realtor-friendly” organization
Update 11 March 2007: Rain City Guide has an excellent post and comments, from which these two comments came:
Don, you think many real estate agents are aware of what’s happening in the subprime market and how it will impact their clients?
…
No I talked to a couple of agents yesterday and they had no clue. These are good agents but like many agents, they are oblivious to financial markets. I have other pursuits that make it neccessary to follow the market daily. I can only say that I think it will profoundly impact the market. How can it not? A huge percentage of the buyers I have dealt with over the last few years have little or no money. Since down payments will be standard at least for a while it will reduce the buying pool. Will be interesting that is for sure….. The market will adjust it always does.
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Well this is certainly a unique sentiment from a Realtor!
“I find that by preparing oneself, mentally and financially, for a “worst-case-scenario†one is both happily surprised and able to cope when the outcome is not so bad.”
In any event, I don’t think the impact is going to be devastating to the market in that many subprime loans are cash-out transactions and such. HOWEVER, what isn’t being as widely reported are the growing limitations and stricter credit standards being applied to first-time homebuyers with respect to FICO, documentation, reserves, etc. (While they may not meet the typical subprime profile, many do have thin credit files, higher debt, lower incomes and less savings, resulting in 600-range FICOs.) That’s where the impact could be felt, and locally you’d have to think the condo market would be where the worst of it hits.
Is that so unique?
Regarding tightening standards – I think that that is a “good thing.” Many (most?)of these subprime loans were probably written to folks who simply had no business buying in the first place.
Interesting that you mention the local condo market – I think that the traditional condos won’t be so affected, but some of the condo conversions very well may be.
Jim,
Great post! Like you I’ve been wondering how to gauge the likely impact on our local market. I definitely saw a few deals last year where I didn’t feel comfortable about the buyer’s long term ability to pay the mortgage. But I’ve learned that trying to talk people out of doing what they want to do is mostly futile!
The data provided here isn’t quite as bad as I’d feared so I’m hopeful!
Thanks! Julie
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