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Thursday, July 24, 2008

Existing Home Sales Still Slumping

Sales of existing homes fell more sharply than expected in June as the housing industry continued to be bruised by the worst slump in more than two decades.

The National Association of Realtors reported that sales dropped by 2.6 percent last month to a seasonally adjusted annual rate of 4.86 million units. That was more than double the decline that had been expected and left sales 15.5 percent below where they were a year ago.

The downward slide in sales depressed prices, too. The median price for a home sold in June dropped to $215,100, down by 6.1 percent from a year ago. That was the fifth largest year-over-year price drop on record.

As an insider, I firmly believe the latest figures have much to do with Fannie/Freddie's recent move to change all sorts of underwriting guidelines. I have already discussed the phenomenon surrounding adverse markets. Adverse markets is only one of several changes that both have made that have brought confusion and consternation to the market. The end of June brought the last of the stated loans. Both have changed their guidelines for investors and investment properties. Furthermore, the insurers that provie Mortgage Insurance have tightened up their own restrictions. We are now seeing more and more difficulty in obtaining mortgage insurance. This means any loan that is above the 80% LTV limit becomes nearly impossible to do.

The confusion has also caused banks to change some of their own guidelines. What we are seeing is a very quick move from a market that was built on low and no money down loans to a market that will be built on loans with a minimum of 20% down. As if things couldn't get worse, FHA defaults are approaching a critical level.

FHA may become the only outlet for low money down loans. It continues to have programs that require as little as 3% down. Yet, if their default levels continue to rise we will see FHA move to tighten their own guidelines.
All of this combined together spells serious problems for real estate values.

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