Real estate pros weigh in on future of the local market

Real estate pros weigh in on future of the local market

Written by Christi Snow Saturday, 07 April 2007

 

Importance of buyer credit score increases with loan shortage

Local home values have increased in the last few months, and a couple looking for their first house will probably have to spend closer to $120,000 instead of $80-100,000 available in past years, said Larry English, a Re/Max realtor in Pflugerville. Plenty of land is available and the employment market is booming.

In the last year, he has seen two positive trends he anticipates will boost his business—an increased and diversified job base and the opening of Toll 130.

Still, buying a home might not be as easy as it was in the past. Lenders have—in a sense—run out of loans, or at least for those with bad credit. These loans, known as subprime loans, are designed to finance buyers whose debt history fails to make initial bank approval. Now those who fall in this category may not be able to buy property.

“The division will not be with the have and have nots,” Coldwell Banker United, Realtors president Helen Edwards, said. “It will be by how well you manage your money or don’t.”

Subprime Market

In the last decade, the subprime market became a growing demand. Financers liked the option because they could increase their charges to offset the risk of working with clients who had bad credit scores. Potential homeowners with less positive debts or past debts liked it because they still had an opportunity to purchase property. Round Rock lender James Copeland of Austin Mortgage Associates said his community, along with Pflugerville, is “highly dependent” on subprime financing, with around 20 percent of local buyers using the loans.

However, too many of the loans foreclosed and lenders became wary. To create subprime loans, a bank purchases a wholesale line of credit from an investors group. Banks quit buying the loans in the last few months because of too many foreclosures and want the investors to buy them back—which means some investors, starting in December and January, have opted to move away from subprime financing, making the loans unavailable.

Impact on the Community

Edwards used to manage Coldwell Banker sales offices in Round Rock from 1998 to 2004, where she watched the local market increase and then correct itself due to job losses. However, she said as a whole, the area sustained itself because it relied on the subprime market. Now that will not be an option.

“Certain areas like Round Rock and Pflugerville, Pflugerville especially, are prime areas for construction, but unless we see ample numbers change in the subprime market, we’re not going to see a growing housing market,” she said.

K.C. Whetstone with Keller Williams Realty in Round Rock has seen similar trends. In 2006, he said he felt a cooling period, but now expects the market to become “quite robust” because of employment availability. At the same time, he also acknowledges subprime loans may be a problem. He is just not sure how much.

“It will always be cyclical,” he said. “There will be tightening of the belt like it has happened in the past. Then it will get better. For the next several months, it will become more difficult for subprime loans.”

His primary lender, Eddie Mitschke of Preferred Mortgage Services, is particularly concerned. Some buyers will get an adjusted rate mortgage version of a subprime loan called a 2-28. In two years, the loan’s interest rates grow.

With the recent developments, if a buyer has bad credit history, then it will be extremely difficult to get it refinanced.

He knows one couple who was 30 days late on a single credit card payment, which made their credit score drop by 85 points. Last month, he could get someone with a 560-600 credit score a 100 percent loan. Now someone in the subprime category with a 620 or more score might qualify for a 90 percent option, but that is not even a guarantee.

Balancing Act

English’s firm handles 80 percent resale real estate and 20 percent new, with a focus in residential for the Round Rock-Pflugerville area. Both cities have a similar market, he said. Land is less expensive so homes tend to be less expensive.

For the last four to five years, he has seen the residential resale real estate market remain flat. English attributes the lack of change to Dell’s decision to lay off thousands of employees in 2001. However, now part of Austin is exploding.

“I would be shocked if we didn’t have a good two years,” English said.

A home English sold in South Austin two years ago has increased in value by 30 percent. English says that is not happening as much north of the Capitol. However, he does anticipate local real estate will inflate with a five to 10 percent increase by the end of the year.

“If our market had a lot of problems with foreclosures, we would have a lot bigger problem with the subprime loans,” he said. “People are still able to sell their homes. So the problem will still exist, but it will not be as big of a problem. It will not be as acute as it has been around the country. The things that are good in Round Rock and Pflugerville will outweigh the bad.”

Calculating Credits

Most lenders and investors in the U.S. rely on Free Isaac Corporation or FICO for credit scores, which range from 350-800. Anything below 620 is usually considered less than favorable. Calculating a credit score includes several variables.

• The Factors
  • Types of credit in use
  • New credit
  • Payment history (Usually carries the most weight)
  • Amounts owed
  • Length of credit history
• Tips to improve your credit score:
  • Pay bills on time
  • Keep balances low on credit cards
  • Pay off debt rather than moving it around
  • Don’t open a number of unneeded new credit cards, just to increase your available credit
  • If managing credit only for a short time, don’t open a lot of new accounts too rapidly
  • Have credit cards, but manage them responsibly
  • Note that closing an account doesn’t make the history go away

Source: Understanding Your FICO Score, Fair Isaac Corporation