Home-buyer demand throughout metro Phoenix has been far below normal levels this year, and local housing experts are hopeful that proposed changes to mortgage rules will provide a boost and pull the Valley's housing market out of its rut.
In August, the Valleywide median home price stood at $213,500, according to Arizona State University’s latest housing report on Thursday. While that was almost unchanged from July, it was up 11 percent year-over-year.
But Michael Orr, the housing expert at ASU’s W.P. Carey School of Business and the report’s author, said the price bump is misleading.
First of all, the number of home sales in August dropped 15 percent from last year. Because homes priced below $175,000 are hard to come by today, those August sales were mostly higher-end homes, which Orr said skewed the overall median price upward.
"It looks like prices are going up, but it's not really. That's a distortion because of the change in the mix," Orr said.
The drop in sales is an indication that buyer demand is weak. It’s a problem that started over a year ago when prices were rising so high and so fast that investors and cash buyers, who had flooded the market in the earliest stages of the recovery, began pulling out of Phoenix.
But traditional buyers haven't been picking up the slack, and there are many theories as to why.
"The number of people who are locked out just because they've had a foreclosure in the recent history, or the number of Millennials who just don’t fancy buying because they prefer renting," Orr said.
But Orr and other housing experts argue the biggest reason is lending.
Before the housing crash, if you had a pulse you could get a mortgage, as the saying goes. Today, it's the opposite, which means people with only the best credit scores and the smallest amount of debt are getting loans.
Recently, Orr said it's been getting worse. Within the past six months or so, he said government-controlled Fannie Mae and Freddie Mac have been forcing more lenders to buy back troubled loans for the most ridiculous reasons, such as a "suspicious" signature on one page of a loan document that was signed in the 1990s.
"It increases their (Fannie and Freddie's) profit, because instead of having to take the loss themselves, they can push it back to the originator," he said. “And I don't know if you've noticed, but Fannie and Freddie are making massive profits these days.”
For lenders, it means taking a loss on loans that were booked as profit years ago. It also means they're increasingly picky about who they lend money to as a way to reduce risk of having to buy back loans in the future.
“There’s been very loud complaints from lenders, saying 'You're making the whole area of mortgages unprofitable for us. If you’re going to continue to do this, we’ll just stay out of that market,'" Orr said. "And that's not really what the government as a whole wants. They want to free up lending."
On Monday, Mel Watt, the director of the Federal Housing Finance Agency, addressed the problem during a speech in front of thousands of bankers at the Mortgage Bankers Association’s annual conference in Las Vegas. Watt said the FHFA will soon roll out new rules to crack down on Fannie and Freddie’s practices.
The new rules will also ease up on borrowers with less-than-perfect credit, and drop down payment requirements to as low as 3 percent. Today, the standard for Fannie- and Freddie-backed loans is 10 to 20 percent.
The goal is to make home buying easier, and therefore trigger demand. But the challenge is not reopening the door for the bad lending practices that got the economy into trouble in the first place.
