Dismal Short-term Future for Mortgages

Industry experts predict that the slowdown of mortgages and property sales will continue through the third quarter of 2008.

A wave of the hands and a few chants over a crystal ball won't reveal anything new about the mortgage and home equity loan industry. According to the folks at the Mortgage Banking Association (MBA), all indicators are saying that the slowdown will continue well into next year.

A gloomy forecast

Each year, the MBA presents an economic forecast to its members. This year's presentation contained some grim news: The housing recession, which has been fueling a more general economic slowdown, is set to continue into the second half of 2008.

According to the MBA, home sales will be down for 2007, and are likely to remain depressed into the third quarter of next year. An expected 12 percent decline for 2007 will be followed by a 10 percent drop in 2008. For 2009, the MBA is predicting a modest 5 percent increase in home sales.

The slowdown is essentially related to an extended imbalance between supply and demand. There are too many homes for sale, and not enough buyers. A full housing recovery won't happen until the excess supply of properties is sold off.

Unfortunately, the selling off of excess supply will be challenging as buyers face the pressures of a tight mortgage market. Conservative underwriting standards and a short supply of funds are keeping some buyers from obtaining mortgages, particularly loans of the non-conforming variety. These are mortgages that fall outside criteria specified by Fannie Mae and Freddie Mac, and include limits for the loan amount, loan-to-value ratio, and the borrower's debt-to-income ratio. The loan maximum of $417,000 is particularly restrictive, because it often takes much more than that to buy residential real estate.

Rethinking the decision to sell

The ongoing, depressed condition of the real estate, mortgage, and home equity loan markets may strongly influence any plans you had to sell your home. Buyers have many choices right now, and some of those will be priced more competitively than your home. When you do find an interested buyer, the deal may fall through if your buyer can't get the right financing.

It's wise not to ignore market conditions, even if you're selling because you need the money. Pushing the sale at the wrong time could make things worse for you financially. If property values have dipped too low and buyers still want to deal, you may need to shell out money just to unload the property. As an alternative, consider taking out a home equity loan or home equity line of credit to protect your cash flow until the market recovers.

Crystal balls, tarot cards, and psychics can't pinpoint exactly when things will turn around in real estate. As consumers and homeowners, the only option, therefore, is to listen to the more financially savvy experts and plan accordingly.