Every Home Must Go!

Analysts are predicting a correction in sales prices of luxury homes. What does that mean? Get ready for a Fire Sale! Everything must go!

From Star-Telegram in jump: “almost 1,650 houses are for sale for more than $900,000 in Dallas-Fort Worth. If sales continue at their current rate, it would take 16 months to work off the inventory.”

And I’m pretty sure Candy posted this story: “In other words, higher rates have trimmed the buying power of luxury-home buyers by 10% to 15%. Throw in the fact that some buyers can’t get a mortgage at any rate right now, and you’ve got all the makings for a national price correction for luxury homes.”

Mortgage mess hurts high-end homes, too
By MITCHELL SCHNURMAN
Star-Telegram Staff Writer

Look out, luxury market.

The housing bust that’s left a mark on starter homes in North Texas is
beginning to affect higher-priced homes, too.

And it’s likely to get worse, thanks to the meltdown in subprime mortgages.

The area’s most-expensive homes have been a bright spot in local real
estate, growing at double-digit rates this year. But trouble is brewing.

Inventories have climbed sharply, the number of spec homes is roughly double
the optimum amount, and foreclosures are spiking among houses that sell for
$500,000 and more.

Expensive homes always take longer to sell, as well as to build. But at
current sales levels, it would take more than a year to work off the
inventory of high-end homes — twice as long as for moderate-priced
dwellings.

There’s plenty of supply but not enough buyers in this category. One local
real estate agent says that corporate relocations — long a strength of the
high-end market — have practically dried up.

The crisis in subprime loans adds to the negative momentum.

In the past month, subprime mortgage defaults have roiled investors around
the world and led to a cre- dit squeeze that makes it harder and more
expensive to get a loan. Fixed interest rates for jumbo loans, which top
$417,000, have increased by 1 to 2 percentage points in the past few weeks,
while rates on conventional loans have remained generally flat.

The premium reflects the fact that the larger notes aren’t backed by
quasi-governmental agencies like Fannie Mae and Freddie Mac, and thus carry
a bigger risk for investors.

Last year, the difference in rates between the two types of loans was 8
basis points, which is negligible. This week, Colonial National Mortgage was
offering fixed-rate jumbos for 150 more basis points than a conventional
loan, plus an additional five-eighths of a discount point.

That’s serious money over the life of the loan.

In California, where median home prices can approach half a million dollars,
the change creates a potential crisis for the economy, because it locks out
so many prospective buyers. In North Texas, where $150,000 can still net a
good three-bedroom, the impact of the jumbo rates is limited to the upper
end.

That’s still a big deal for Southlake, Colleyville, Las Colinas and parts of
Fort Worth, where big-dollar homes are dominant.

In general, local housing experts don’t usually fret about these homes.
Houses that cost more than $500,000 account for 9.5 percent of the current
listings on the North Texas Multiple Listing Service and a much smaller
share of sales.

They also account for less than 10 percent of all the foreclosure postings
in the area, according to Foreclosure Listing Service of Addison.

There is a perception that customers in this class can also handle
short-term hiccups, such as the cur- rent credit scare, while lower-income
borrowers are less able to wait out a downturn.

“The high end of the market is still going to be vulnerable,” says Jim
Gaines, research economist for the Texas A&M Real Estate Center. “They may
have a better chance of working things out, but they won’t be unscathed.”

Foreclosure postings in North Texas have increased 12 percent this year. But
among the high-end homes — over $500,000 — postings soared 51 percent,
says Foreclosure Listing Service.

And 63 million-dollar homes were posted for foreclosure this year, an
increase of 66 percent, the company says.

That adds to the inventory problem, but at least builders have cut back. The
numbers of high-end spec homes built and sold are almost even over the past
12 months, says Ted Wilson of Residential Strategies, a research firm in
Dallas.

Still, almost 1,650 houses are for sale for more than $900,000 in
Dallas-Fort Worth. If sales continue at their current rate, it would take 16
months to work off the inventory.

Two years ago, fewer than 1,000 such houses were listed, according to data
from Texas A&M and the North Texas Real Estate Information System.

It was much easier to get credit in 2005, when the housing industry was
approaching its peak. This year, lenders have tightened terms — requiring
bigger down payments, more documentation of income and evidence that
borrowers can handle the payments when an adjustable interest rate resets.

An estimated 10 million to 12 million subprime loans have been made since
2003, primarily to borrowers with weak credit, and at least two-thirds have
adjustable mortgages, Gaines says. Most of the so-called teaser rates for
adjustables, some as low as 1 percent, will be resetting in the next year or
so, and many borrowers face sticker shock.

Financing can still be had for luxury homes, says David Motley of Colonial
National, and he recommends adjustable mortgages for qualified buyers. The
interest rate on a prime jumbo ARM is only 12 basis points higher than a
conforming ARM; of course, the borrower has to be comfortable with a loan
that will adjust to market rates in the future.

“Credit is still available,” Motley says. “You just have to demonstrate the
capacity to pay off the debt.”

The question is how many will be able and willing to do that?
Mitchell Schnurman’s column appears Wednesdays and Sundays. 817-390-7821
schnurman@star-telegram.com