Tight money: DQ sees 'little or no money to lend'

A couple of follow-ups on DataQuick's monthly reports on home sales, both here and in the Bay Area:

DataQuick President John Walsh made an excellent point Wednesday that often gets lost in day-to-day coverage lately (mine included) of the housing meltdown and the government response to it: Credit is extremely tight. Walsh: "Policy decisions about underwriting don't really mean much if there's little or no money to lend. Even some very well-qualified households aren't getting mortgages these days, although this could all change fast if liquidity comes back."

Another way to put what Walsh said: The Fed's move this week to limit "shady" mortgage lending is somewhat irrelevant to today's market; it's a crackdown on some loan products that don't exist any more. Yes, it's probably the right thing to do, but it doesn't have much effect on the mortgage market as we know it today.

One more from DataQuick worth noting: In today's report on home sales in the Bay Area, DQ sees signs that California's coastal market is weakening. "Credit remained tightest for potential high-end buyers on the coast, where sales were generally anemic and prices showed signs of increased erosion, the real estate information service reported. .... 'So far it's been mostly the inland areas where prices have dropped enough to rejuvenate sales,' Walsh said. 'Our latest stats might be signaling greater price reductions on the coast, where sales have been severely restrained by several factors: higher prices, tighter lending guidelines, inadequate liquidity for jumbo mortgages and depreciation in inland areas that's left homeowners there with less equity with which to purchase a home on the coast.' "

-- Peter Viles
Comments? Thoughts? E-mail story tips to peter.viles@latimes.com.

Photo: Bloomberg News

Comments

[Giacomo]

Falling prices and tight credit? It's a cash buyers' paradise ahead (wait a year without worry, then assess the situation- even then may be too early to buy).

[LeftLA]

There's still lots of private money out there. You just have to know where to look.

[Nick]

The idea that credit is tight is BS, as far as I can tell. I have yet to see a bank or credit union which has stopped offering, or even advertising, mortgage services. Too many people are incorrectly generalizing the absence of high-risk and low rate loans which were prevalent during the bubble as a lack of credit or money available, but that's an obvious BS distortion. Credit and money are both readily available to people with enough money for a sufficient down payment, enough income to make the payments for the life of the loan, and no recent examples of defaulting on loans.

To DataQuick: Show me an example of a family with clean credit, sufficient money to put 20% down, buying a house that costs no more than 3x their annual verifiable gross income, with net income at least 3x the fully amortized payment amount on a traditional 30 year fixed mortgage, who can't get a mortgage, or STFU. It's time somebody (or preferably many people) called out all these "news" reports of lack of credit and money: put up examples of qualified borrowers not getting credit, or shut up and stop the BS.

[anon1137]

If credit is so tight, why are interest rates on mortgages still near historic lows? In a captalistic economy, isn't demand supposed to drive prices up, including the price of capital?

I agree with Nick, I think it's all BS. When people say credit is tight, what they mean is that banks are making loans to dead bodies anymore.

[sfvrealestate]

Peter, "liquidity" is the reason we need Fannie and Freddie, and why I think they should be bailed out.

Giacomo and LeftLA, cash? You know about people with cash? Is it too late for me to marry them for their money?

[Cal]

Money isn't gone it is just lent under tigher more realistic conditions. Downpayments and proving income.

Traditional lending.

While a lot of products have disapeared they went away because they were never sustainable to begin with and only products of the boom.

Another factor is that the interest rates are being adjusted for risk in a more appropriate manner than was happening during the boom.

Now that the cost of money is higher (interest rates) you get the triple whammy of tighter lending standards, more risk aversion and more expensive rates.

A return to rational lending is all that has happened so far.

[Fred]

Nick - these buyers that live in your imagination who sport 20% down, and 3x price-to-income abilities - they don't really exist en masse at current prices. The $200k income crowd isn't looking to buy a $600,000 house (b/c there are very few $600k houses in nice areas for those fancy-pants people).

Credit is actually very tight, because those buyers who've just named aren't really around in sufficient quantities. Without the exotic mortgages of the past, hardly anyone can buy houses at current prices. Certainly not enough to put a dent in declining prices.

[Rich]

As with Nick's comment above, I'm pretty sure a borrower could get a mortgage for a house that their income would justify--but that's the problem, isn't it? Most people coming into the market won't be allowed to borrow over their heads on appraisal-inflated properties the way the current owners of San Francisco real estate have been allowed to, which means the pyramid scheme is ended and the current owners are stuck with the loss...

[Fred]

An addendum to my last post: credit is tight and it's the only thing keeping buyers out of houses. Because there are enough stupid people out there who think that they can get a house now "at a discount" and would willingly catch that knife if the bank let them. Thankfully there are very few qualified buyers who can get loans.

[NoCal SC]

I just refi'd my 5/1 ARM to a 15 year fixed. No problem getting a loan here.

[anonymous]

LeftLA and Nick are absolutely correct.

These articles are painting a gloom and doom picture for people who won't qualify under sound lending practices.

All those poor, poor souls who live beyond their means are actually going to have to tighten their belts, improve their credit scores and save money to get a loan. *gasp* the injustice of it all!

[Long time listener . . .]

Fred, re your first post, your exactly correct. And that's why prices in the nice areas will deteriorate until those fancy-pants people making over 200k can actually afford those areas. There just aren't enough buyers who can qualify for a 600k house let alone a million dollar house.

[Roger Moore]

I'd say that now is a good time to tighten lending standards. It's a lot easier for the Fed to impose tighter standards if the banks are already inclined to follow them. If they wait until credit loosens up to the point that the new standards are immediately relevant, the banks will fight tooth and nail to keep them from being imposed.

[Giacomo]

sfvrealestate -- sorry, already married, LOL!
We have cash after selling a house in early 2006. We're still sitting on the money, spread out in multiple banks/accounts (with FDIC protection.)

We were being offered CRAZY money for our little bungalow in Pasadena, and I persuaded my wife that it was a good time to get out (it helped that Pasadena was becoming more and more congested, and less and less a pleasant place to live). Some of our favorite neighbors - he taking early retirement from the L.A. Times, BTW - sold at the same time and moved out-of-state.

I'm sure we're not the only ones that escaped with money in hand. I wonder how many others sold at the peak and have waited this long to buy again? It's been 2 years renting for us, and our patience has saved us about 100-150K so far.

[Giacomo]

Thankfully lending standards will now be getting back to normal; probably they'll overshoot to the "tight" side as banks and investors lick their wounds.

Ultimately, we'll have to get back to affordability: first timers shopping in the high 100K's, young professionals in the 200-300's. Normal incomes simply not rate 400K+ houses, and there aren't enough big incomes to buy all the 400K+ houses on the market right now.

[CD]

Giacomo,
Welcome to the Happy Renters' Club. Our "next house' will be paid in cash.

[eprobert]

Gia - Both my parents and my in-laws sold at bubble prices, like you, to rent. My parents decided to take their windfall and retire a few years early, but my in-laws are now renting in a much nicer neighborhood than they lived before, in a nicer house.

Parents - January 2005, In-laws - June 2006

Both timed their respective markets (San Diego and Long Beach) almost perfectly.

To anyone who says you can't time markets I have two family examples to point them to. Both profited handsomely from the crazy housing bubble.

[TheUrbanHouse]

I agree with all of you.

Money is tight but it is available for those who qualify and have a down-payment.

The larger issue at hand is back to basic economics of supply and demand. With the old lending standards gone and out of the market, there is very little demand (or people who can qualify) for many of these homes at their current prices. That essentially means, unless lending requirements become less strict (which I dont think anyone on here thinks that is going to happen), demand is going to remain anemic for some time. With such low demand, the prices have to adjust to wherever the demand permits.

Mortgage rates are artificially low still and helping keep the prices it up. It's not because there is a surplus of capital out there, it's because the Federal Government is keeping the real rate of money artificially low and we are all paying for it through inflation. If interest rates were priced where they should be (inlfation+cost of money+some margin) we would be well into the 8%+ range for mortgages at the very least.

Interest rates are about to take off in my opinion, unless the govt keeps them artificially low, but then that means housing prices are being kept inflated from low cost of money. Ultimately before the cycle is over with, this will all correct itself.

With unemployment rates in California approaching 7% (and probably over 7% when the new data comes out), demand is continuing to diminish. Incomes are not rising and the affordability of home ownership is going to become lower with interest rates increasing.

We can thank President Bush by forcing Greenspan to push interest rates lower to 'increase homeownership' which artificially created a bubble for this one.... all in all... we have some ways to go before this is settled in my humble opinion...

[Cal]

eprobert :"To anyone who says you can't time markets"

This is an adage from the stock market and isn't nearly as applicable to housing.

The stock market is infinitely more complex and because of all the moving parts and fast moving nature people are at an informational disadvantage.

Housing is much simpler and moves much slower. You can watch available financing, interest rates and employment and have a pretty good idea what sales will be like in the coming months. Credit easing, interest rates dropping and more jobs means prices go up, credit tightening, rates going up and rising unemployment means prices go down.

There is of course more to it than that but the informational disadvantage a person has in the stock market isn't nearly as great and can be overcome when related to the housing market. IMHO.

[Maggie Knowles]

I always recommend my clients go to a particular lender at BofA for their loans, because she always puts the terms in writing and when we get to closing, there are never any surprises, the estimated statements always match up to the actual closing statements. I was talking with her today and she told me of 2 clients she worked with recently who decided to go with Countrywide (before the BofA takeover). Guess what - they came back to her after closing because they didn't get the loan they had been promised VERBALLY (why didn't they get it in writing? you never sign off on contingencies or close before getting an estimated closing statement so you can review the costs.) Now they're trying to refinance because they claim the lenders at Countrywide lied to them. She can't help them, credit is tightening up.

[LilarLA]

I agree, this crap about Banks not lending is plain BS. I recently applied for a loan just to see what I can get and I was approved for a $250k loan without any problem. Of course, I had $90k in down payment and income over $75k.
Banks are still lending out money hand over fist. They are just lending the way they used to lend them out in 2003. 20% down and a stable income. This 0% down and buying a house that was 20x your income was not normal. Enough with the credit tightening lies!!!! Banks just aren't lending to crack addicts anymore.

[dilbert dogbert]

FED:
Horse Gone
Door Open
Barn Burned To The Ground
Close Door

[Tim K.]

"you can't time the markets" is a gross oversimplification.

The thing is, most of the time, predicting the direction of the market is very difficult, because most of the time, the market is in relative equillibrium. However, there are a minority of times when the market is TOTALLY out of sync with fundamentals, and then you most certainly CAN time those moments.

With stocks, you can do that whenever a good company sells off on irrational news that is not core to their business. You do have to be *relatively* quick about it, i.e. you usually must be able to move on it within a day or a week.

With housing, it's much, much easier. Housing moves at such a glacial speed that the only time it gets totally out of sync with fundamentals is when mass hysteria occurs, and those events are remarkably slow to build and slow to end.

So, it's unlikely you will be able to flip houses for the majority of your lifetime, but about once a decade or two, a no-brainer situation will come about. This just happens to be one of those times.

[Tim K.]

To expand on my market timing explanation, here are two good examples:

Example 1: When it's "hard" to time the market.

In 2004, when prices were racing to the moon, it would have been "easy" to say we're overpriced, and that selling a house would net you a nice profit. However, it would be "hard" to state, within a 1 month timeframe, when the highest prices could be reached. In that sense, it is hard to time the market as a seller, of exactly when to sell to reap the maximum reward.

Example 2: When it's "easy" to time the market.

In 1995 and in the indetermined next few years, it will be "easy" to decide when it is the right time for you to buy a house. It's when it's about equal to paying your mortgage as it is to rent an equivalent property. It might be "hard" to time when the house you want will be the absolute cheapest it will get within a 1 month timeframe. However, it will be "easy" to determine whether YOU can afford it over the ENTIRE time you will be staying there, planned or not.

Oh, and I agree that there is plenty of money for lending still out there under traditional lending standards. The only money that has gone POOF is stupid 0% down money.

[Keith]

Nick,
You don't know what you're talking about. I have had bank officers from large banks here in LA tell me that downpayment requirements have been increased significantly and that many banks have maximum monthly loan quotas - i.e. they have a limited amount of money to lend. This is because so many loans have gone bad and so much collateral has decreased in value that in order to not violate banking regulations, the banks have to effectively cut back on their operations.
They still advertise because they are lending, but only to the best borrowers. That's what it mean for credit to be tight.

[Cal]

LilarLA:"I recently applied for a loan just to see what I can get and I was approved for a $250k loan without any problem. Of course, I had $90k in down payment and income over $75k."

I've seen comments like this on several different boards and it a breath of fresh air.

Imagine being approved for a loan in line with your income.

For those sellers and RE agents out their expecting a recovery anytime soon you have to ask yourself how it will happen.

I notice more and more discretionary sellers pulling their homes off the market (I'm guessing at the advice of their agents). If they are doing so to wait for better times they are making a huge mistake. Real prices (inflation adjusted) won't be in this ballpark again for a very long time.

[Samuel]

The only reason any loans are being being made now is due to the government sponsored entities loaning money. Without them 90% of mortgage money would dry up. Socialized finance really pays off.

[rwh]

Credit is available. I was recently approved for a $250,000 loan if I could put 20% down. Unfortunately that means I'm not going to find much of anything decent for a family of four to live in, so even though there are many eager sellers out there, I'm certainly in no position to buy their homes, possibly ever, since I only make around $80,000 a year. LA is definitely only accessible to the wealthy.