By John W. Schoen Senior producer
msnbc.com
updated 12/2/2007 7:35:46 PM ET 2007-12-03T00:35:46

The news from the American housing market seems likely to get worse before it gets better. That has some would-be home sellers wondering: should I sell my house now, before the market gets worse? Or wait until next year hoping it will  get better? And just what caused this housing slump to begin with?

Should homeowners looking to sell put their house on the market now or wait till next summer?
— Ellen M., Huntington Station, N.Y.

There’s no way to know the answer to this one. If anyone tells you they do, take anything else they say with a big grain of salt.

The housing “market” is really a series of hundreds of local “markets” made up of thousands of neighborhoods, so current market conditions vary widely from place to place. There are some regions where conditions are still reasonably strong: prices are holding up or even rising and houses are selling relatively quickly. And there are always people who need to buy a house: they get married, took a job in a new location, or need more space for a growing family.

In other areas, there are many more “For Sale” signs than there are buyers, and houses are sitting on the market for months with little foot traffic. Some sellers can’t wait: they’ve bought a new house, they ran into financial trouble and can’t afford their mortgage, or the owner died and the heirs need to sell.

One quick way to measure conditions in your neighborhood is to compare the current number of unsold houses for sale with the recent pace of sales. If this “inventory” is rising, or much higher than historical norms, that’s not a good sign. It means sellers are still appearing faster than buyers. (You can get this information from a good local real estate agent or state real estate trade association.)

Unfortunately, that number doesn’t tell you how many other sellers there are in your shoes: those who are not actively marketing their home, but hoping to do so sometime soon. Demand for houses typically picks up in the spring, especially among families looking to move between school years. Many would-be sellers may be holding off now waiting for an upturn next year. If they all list at once, that delayed selling may introduce still more inventory on an already sluggish market.

A lot depends on factors that — at the moment — are really unknowable. The first is whether the economy is able to dodge a recession. Most major recessions since World War II have been preceded by a housing slump, and there are signs that the pattern may be repeating itself. One reason is that the housing industry is directly or indirectly responsible for something like one out of every eight jobs. If the housing bust drags on, those jobs are at risk. And when people lose their jobs, they have less to spend and the conditions for recession are in place. But it’s far from certain yet that we’ll have a recession.

Another major variable is the large group of homeowners who are struggling to keep up with increased mortgage payments on a variety of adjustable rate mortgages that became popular with both lenders and borrowers at the height of the boom. If they default on their loans, and their home is sold in foreclosure, that adds even more inventory to a weak market. Even if they don’t default, the higher mortgage payment means they have less to spend on everything else. That tends to slow consumer spending, which makes up about 70 percent of the U.S. economy.

If a solution can be found to refinance those loans to fixed rates at levels people can afford, and the rate of foreclosures goes down, the housing market will recover more quickly. But that chapter in the story hasn’t yet been written.

Keep in mind that in any housing market there is always a buyer — if the price is right. One reason houses aren’t selling well in some areas is that some buyers who are waiting for prices to recover are unwilling to acknowledge that they may have to settle for a little less. If asking prices remain stubbornly higher than recent sale prices, it will take longer for the level of home sales to pick up again.

What led up to the housing slump?
— Brandon D., Carey, Ohio

The simple answer is that housing prices got too high for too many people to afford. Most markets have a way of getting ahead of themselves from time to time; when that happens they have to “correct” — with prices falling — before they can get back to normal.

But sellers couldn’t have raised prices as fast as they did without buyers with lots of cash to spend. As economists and analysts sift through the debris of the housing bust, it seems clear that what we were all calling a “housing boom” was really a “lending boom.” With so much credit available to so many buyers, the competition for properties sent home prices soaring. 

So where did all the money come from? In the early 2000s, the Federal Reserve helped push interest rates lower to try to offset the lingering effects of the stock market crash and a mild recession. That meant that people who bought fixed-income investments like bonds were getting relatively low returns.

As a result, Wall Street fell in love with the higher returns it got from mortgages because bonds backed by pools of these loans — according to Wall Street’s computer models — came with relatively little extra risk over lower-yielding, safer bonds like U.S. Treasuries. Subprime loans, made to people with not-so-great credit scores, carried much higher interest rates. The thinking was that by bundling these loans together, the overall risk could be better managed.

So investors kept pushing money at lenders who (after taking their fee) pushed the money at mortgage brokers who (after pocketing commissions) convinced home buyers (mostly first-timers who trusted them) that they could afford a big enough loan to buy the house they wanted. The biggest fees went to the highest–cost mortgages that many borrowers are now having trouble paying.

All of that money hitting the system pushed home prices higher. In some cases, lenders and appraisers committed fraud by inflating the stated value of the properties. In other cases, lenders paid no attention to whether the borrower could afford the loan; they didn’t care because they quickly sold the mortgages to Wall Street which (after collecting another fee) chopped them up and sold them as bonds to investors

But it turned out the computer models were wrong: they didn’t count on fraud and a breakdown of lending oversight. Now that the initial “starter” rates on those loans are expiring, monthly payments are going up — in some cases a lot, and a lot more than borrowers were told. Some of those borrowers are not able to keep up. But in cases where, for example, payments adjusted to more than half a borrower’s monthly income, the mortgage brokers and lenders clearly had to know that the borrower couldn’t afford the loan after it reset.

Many readers find fault with these borrowers: There’s no doubt that some percentage were property “flippers” who got caught without a chair then the music stopped.

But, from what we're hearing from honest brokers and appraisers, regulators, foreclosure attorneys, community housing groups — and lots of reader mail — many borrowers were duped. These loans were very high cost — much higher rates than traditional ARMS, which go up and down. These only go up. Many were told “don’t worry, you can refinance before the payments reset higher” — which they can’t do now that house prices have fallen and they owe more than they own in equity. No reputable broker would have made that promise.

As one foreclosure attorney we spoke to put it: if a new car model failed as frequently as these mortgages now seem to be doing, it would have been recalled long ago.

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