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Mortgage mess hurts high-end homes, too
August 22, 2007
By MITCHELL SCHNURMAN / Star-Telegram Staff Writer
schnurman@star-telegram.com
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?
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