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August 15, 2007

Need your prediction: How far will rising cost of jumbo loans drive prices down?

Askingprices_globe1_3 If you are a home buyer or seller reluctant to drop your asking price, MarketPlace.org's segment tonight on jumbo loans is required listening:  "Jumbo loans feel subprime weight."

During the past several weeks, The Real Estate Cafe has helped buyer clients in Greater Boston prepare offers on luxury condos and a single family homes in the jumbo price range.  Thus far, sellers with broker listed properties have been reluctant to drop their prices, while FSBOs are ready to deal.  Maybe it's too early for the trend documented below to show up in broker "comps" (ie.  recent sales):

"...more than 10 percent of his deals have fallen through in the last few weeks — up from less than 1 percent. He says many people just can't get the loans they need. The same thing is happening in New York, Boston and San Jose."

Will the rising cost of jumbo loans drive housing prices down in Boston and beyond, or as one economist fears, have a broader "jumbo impact on the U.S. economy."  What's your prediction?  You can follow what real estate agents and others are saying on HomeThinking, what the public is predicting on My-Currency, and what the pros are modeling on Wall Street.  You can also leave a comment below, or add the location of homes selling below their assessed value value on our Boston Bubble map or RealEstateBubbleMap wiki. 

Before you make your prediction, take The Real Estate Cafe's analysis of seasonality in the past into consideration:

According to [our] analysis of listing data between 1996 and 2002, one in five Massachusetts properties that went under agreement between Thanksgiving and New Year's Day sold for at least 10 percent below the original asking price.

Cross-posted on The Real Estate Cafe's new, experimental social networking site.

Bill Wendel | 07:52 PM in Bubble map, Housing forecasts, Market trends, Price trends, Real Estate Bubble, Timing the market | Permalink

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In an efficient fixed rate market, every 1% point rise in interest rates corresponds to about a 10% drop in prices. See Wiki's United States housing bubble. Problem is, falling prices feed on themselves, and predicting the final outcome is impossible.

The reality is that this will effectively lock many potential buyers out of the market, whether they like it or not.

With these much higher rates, everybody's in the same roller coaster ride now.

Posted by: Frothy | Aug 16, 2007 7:43:57 AM

I think that the mortgage industry is targeting people that are biting off more than $417k. This could mean a first time buyer looking to get into something a bit larger, or someone who already owns wanting to really trade up. The banks are saying right now, don't bite off more than you can chew. High income earners who may have the right percentages and fundamentals necessary to service a note over $417 are going to be hurt more than most. Boston, being more affluent than other regions as well as having an expensive housing stock will have many in this scenario. Further, if many current deals are congingent on a seller securing a home, or a buyer securing financing, many deals might fall through.

Personally, I feel that people in the adjustable arena are getting a bit screwed in this because the benchmarks and margins that they are tied to are not behaving like the stable reliable points of reference that they were meant to serve. This is due to the fact that we have a depreciation of the dollar and that hedge funds are adding volatility to the market place and the bankers want those adjustable folks to absorb this risk. I think politically they might be able to get away with it because most folks don't feel any compassion for those that they see have overextended and could have seen an upside to their risk if things had gone another way and further that their behavior added to the bubble which hurt those who played by the rules. My feeling is that although all that is true, a policeman can not pistol whip someone for running a red light. That is what is happening here.

Lastly, the big issues here are 1: How can the market be moving upward on the one hand and we have the President telling us that things are fine and risk is low? 2: Bankers can isolate and target risk to whomever they choose. 3. An index unrelated to housing can be affected by volatility due to currency and hedge fund activity can be used to assess risk and future value of money and housing for a housing transaction. For this to be fair it would need to be based on inflation not being contained and a very dismal housing forecast and economic forecast. 4. If banks have the authority to focus and target on any segment they choose, they can just wait for a point like this when they know a large bubble of people are set to readjust, they can tilt the topography so that they can profit and isolate risk and not have it uniformally distributed among the financial system. The big, big problem with this is say you have retirees that are tied to a banking index for their COLA's, if the banking industry can manipulate the index unfairly or in a manner which is independent from the complexion of the overall market, they can manipulate the payout for retirees. This is really, really dangerous and people will get fighting mad if it happens; like our generation has never seen mad. If people don't pay attention and let this group get unfairly punished it will set a precedent for future manipulation by the banking industry.

Posted by: john p | Aug 17, 2007 12:12:10 PM

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