The Mortgage Loan Market Controls the Real Estate Market

One of the things I keep telling folks about the real estate market, whatever area you live in, is that it is controlled by the loan market. If you want to understand where real estate in general is headed, look at the loan market and the financial markets that generate them.

Right now, the loan markets are in full panic mode. In the last week or so, all non-governmentally guaranteed loans for more than 95% of value have disappeared. This means that VA and FHA are all that is left above 95% loan to value ratio, and you've pretty much got to be A paper full documentation to get 95%. Since 100% Loan to Value ratio financing has been the universal financing vehicle for borrowers for the past several years, this constricts their choices. Comparatively few people have money they could use for a down payment if they wanted to. Not everybody qualifies VA or FHA. VA requires military service, and FHA has loan limits that aren't going away. As I'm writing this, we're still waiting for hard numbers on what increased loan limits will be, but I strongly doubt that they are going to be raised as high as most people seem to be assuming that they will.

Furthermore, all of the other loan programs to get 100% loan financing have gone away, and all of the supplemental programs to extend buyers' ability to qualify have rather sharp income limits, and those income limits are not going up at all. They actually effect San Diego less than most areas, but even here, they constrict the ability of buyers to qualify. Both the mortgage credit certificateand all of the municipal first time buyers programs have income limits that mean people can't make over a certain amount of income - and even if they have no other bills they can't qualify for the loan on property over a certain loan amount, because even if they have no other bills, their debt to income ratio will be too high. You can't cheat on this - all of these programs require full documentation of income. Above about $420,000, even if they conforming limit goes up, even if the prospective buyers make the maximum amount per year for the program and have no other bills, they won't qualify based upon debt to income ratio.

The moral of this story is simple: If you want to sell your property above a given price, you're not competing for first time buyers. You are competing for people who have sold (or are about to sell) their property for a profit and are now ready to move up. No matter what the conforming loan limit is or becomes in your area, if the prospective buyers don't qualify for the necessary loan based upon debt to income ratio, they can't buy.

Any time you raise the price you want to sell by a certain amount, there are people that no longer qualify to buy your property. You have priced them out, and no matter how much they might want to buy your property, the fact remains that they cannot.

As for buyers making the median family income in San Diego of $72,100, their limit on 100% financing is about $270,000. So unless they have a significant down payment, a family making $6000 per month is looking at a condominium. Just a cold hard fact.

There will always be buyers around the edges who are exceptions. People who have saved or inherited a substantial down payment in defiance of demographic trends. But those are the exceptions, and for every one of them, you have a dozen of more unqualified buyers engaged in wishful thinking. I just spent the most of the morning unsuccessfully looking for a stated income loan to save the home of a guy who called me out of the blue this morning. At this point, I'm 99% certain there's nothing I can do, because the loan program to help him doesn't exist today. Six months ago it would have been a slam-dunk - there's plenty of equity. Before you ask me what relevance this has to buying and selling, I'm going to answer: Every time a lending program goes away, there go some buyers who otherwise could have qualified. Right now, there is no stated income. Doesn't bother me much, as 95% or more of my clients have always been full doc, but for those who are used to the opposite ratio, it's the apocalypse. Ditto for sellers and listing agents who don't understand what it takes to qualify, and who price their properties as if the loan market for two years ago was still going gangbusters. When the property sits for months because the people who might buy can't qualify for that big of a loan, that's a problem.

With all this said, the people who do have the cash or the ability to qualify for a loan are in the driver's seat now. You may be getting tired of hearing this from me, but veterans can qualify for about 20% more loan than someone without military service for the same income. People with 5% or more down are in an even stronger situation, and people who have both things going for them have an incredible amount of negotiating leverage. When the loan market will approve anyone who can fog a mirror, your competition is everyone who can fog a mirror. When the loan market wants to see guarantees and cold hard cash going into the property in the form of a down payment, your competition is, by comparison, non-existent.

Caveat Emptor