The One Thing That Can Turn the Housing Slump Around in Seriously Troubled Markets Is …

The Office of Federal Housing Enterprise
Oversight released data today that showed home prices had yet again dropped in the biggest quarterly decline since the OFHEO started keeping records 17 years ago.

A few highlights:

  • Home prices dropped 3.1 percent in the first quarter compared to
  • Prices declined in 43 states.
  • California (-10.6 percent), Nevada (-10.3 percent), Florida (-8.1 percent) and Arizona (-5.5 percent) showed the most severe depreciations, according to USA Today.

The culprit? That pesky housing supply of unsold homes.

"The large overhang of real estate inventory awaiting sale continues
to force price declines in many areas, but particularly in places that
had seen very sharp appreciation," Patrick Lawler, the agency’s chief
economist, said in a prepared statement, according to the New York Times.

By now, we’re used to bad housing reports: And we’re used to speculation that the decline isn’t over.

And we’re also used to groups like the National Association of Realtors putting a positive spin on things to make the even most negative news.

But OFHEO is a government agency–and unlike NAR has no reason to want consumers to believe that the market is improving. Yet OFHEO Director James Lockhart was quick to point out that lower prices do benefit one group–buyers.

"For homeowners and financial market observers, these declines
spell further erosion in home equity levels and potentially more
trouble for mortgage markets," Lockhart said. "To
prospective home buyers who have been shut out of homeownership because
of affordability constraints, these declines may be welcome news, as
are continued low mortgage rates."

But, given that the markets that showed the greatest depreciations–California, Nevada and Arizona–in the past quarter are the ones that have seen some of the biggest, most consistent drops during the slump, it’s not necessarily true that declining prices mean buyers are jumping up and down in joy.

Consider also that PMI–the country’s second-largest mortgage insurer–recently released its Spring 2008 Risk Index, which said Vegas home prices have a 91 percent chance of declining in the next two years.

That’s an increase from the 89 percent the company predicted in its Winter 2008 Risk Index, according to the Las Vegas Review-Journal–and something that’s likely to make borrowing much, much more difficult in the Vegas market.

Cheaper homes are great; but if buyers can’t get financing, the market is unlikely to see a lot of action.

And Vegas isn’t alone in its risk-related financing troubles. The PMI index ranked other locations–like Riverside-San Bernardino-Ontario, Calif., which received a 93 percent rating–as being extremely prone to further price declines in the next two years.

If prices keep falling in the hardest-hit areas, financing will keep tightening up: And how are we ever going to get out of this seemingly eternal housing slump?

It’s a never-ending cycle, but it’s one that needs to stop. The question remains, however, who needs to step up and make the first move.

It’s highly unlikely that buyers and sellers will unite to start offering and accepting higher home prices. Which leaves lenders–and it might be time for them to take a role in turning the market around.

Lenders are understandably hesitant. And they’ve done a good deal of work to ensure mortgage loans given out now are more realistic: More proof of income and assets is required, and many of the no-equity/no money down programs of years past are no longer available. Lenders have learned that squeezing borrowers into homes–and loans–that they can’t really afford in the near future doesn’t help anybody.

But for the market to rise from its ashes, it really seems that lenders need to now loosen up a bit. We’re not saying loans should be given out indiscriminately–but working closely on an individual basis with borrowers to get a loan–the right loan–should be a priority for lenders in high-risk markets.

If it isn’t, this cycle of higher risk leading to lower prices leading to a stagnant or declining market is sure to continue–fueling the nationwide housing slump along with it. And that’s something no one–including lenders, the OFHEO, buyers and sellers–want to see happen.