Bad Credit Mortgage Woes Will Lead to Massachusetts Home Price Declines
The subprime-mortgage sector’s sudden implosion is putting some frost into forecasts for the Massachusetts housing market’s crucial spring season.
“I was looking for a recovery - or at least stabilization - in Massachusetts home prices this spring, but now I think we might see a little more deterioration,” said economist John Bitner of Boston-based Eastern Bank.
Word of major problems in the subprime-mortgage industry emerged last week just as Massachusetts moved toward spring, the No. 1 home-selling season. Last Tuesday, two big subprime lenders sent the Dow Jones industrial average tumbling 243 points by disclosing significant financial problems.
The news focused attention on the fact that around two dozen subprime lenders have filed for bankruptcy or closed in recent months. Subprime lenders - which write high-interest mortgages to people with weak credit - are facing growing problems from bad debt.
Many homeowners who took out such mortgages in the past year or so have fallen behind on payments.
That’s prompted big financial institutions that bought up the loans as investments to demand their money back from the subprime loan companies. However, many subprime firms didn’t have enough cash to comply, declaring bankruptcy or going out of business instead.
Now, experts say the subprime industry’s virtual collapse could raise housing supply while cutting market demand.
The Mortgage Bankers Association predicts tightened mortgage lending standards will mean 1 percent to 2 percent fewer house hunters will get loans this year. At the same time, experts predict a growing number of distressed properties will hit the market going forward.
The Center for Responsible Lending estimates 17 percent of Massachusetts home buyers who received bad credit home loans in the past two years will ultimately lose their properties.
Economist Jim Campen of the University of Massachusetts-Boston said that translates into thousands of extra properties for sale - and he thinks the CRL figures “may turn out to be conservative.” Campen and others also think the meltdown will affect more than just subprime borrowers.
“If one of your neighbors goes into foreclosure and their property sells for a below-market price, that will bring the value of your property down,” said Jeremy Shapiro of market-tracker ForeclosuresMass.com, noting that buyers generally base offers on what nearby homes sold for.
Experts add that bad publicity surrounding the subprime market might prompt some Massachusetts mortgage seekers to stay on the sidelines this spring.
“The knee-jerk reaction will be: ‘There’s going to be a lot of foreclosed properties coming onto the market. Maybe we shouldn’t be so hasty about buying,’ ” Eastern Bank’s Bitner said.
The economist recently revised his forecast for Bay State housing downward, predicting prices will decline until summer, then remain flat until early 2008.
Nationally, Merrill Lynch analyst David Rosenberg last week predicted U.S. home prices could fall almost 10 percent this year.
To read the rest of this Boston Herald article, click here.