Declining Market Designation Stumps Experts
Last updated Friday, April 4, 2008 7:07 PM CDT in Business
By Kim Souza
The Morning News
Recent news that Northwest Arkansas' residential real estate market has been dubbed a "declining market" has agents, economists and mortgage lenders scratching their heads.
It could also cause potential home buyers to scratch deeper for a larger downpayment.
The "declining market" distinction made recently by mortgage giants Fannie Mae and Freddie Mac is a reference to falling home prices, as reported by the Office of Federal Housing Enterprise Oversight.
While no one disputes home sales have declined in Benton and Washington counties, the one market aspect that seemed to defy most economic laws was resilient home prices when comparing 2006 to 2007.
Fannie Mae chose not comment on details of its decision for the local downgrade. Freddie Mac officials did not return calls prior to press time.
Fannie Mae notes on its Web site: "There is no standard industry definition for a declining market. But in general, a declining market refers to one in which home prices are currently declining."
Andrew Leventis, senior economist with the OFHEO, said his office merely reports the numbers in its Housing Price Index and does not make market designations. That, he said, is left up to mortgage insurers and lenders.
However, Fannie Mae notes on its Web site it uses OFHEO data to identify declining markets.
Leventis said his office takes data collected from both Fannie Mae and Freddie Mac and measures the price appreciation each time a particular home sells or is refinanced. That data is published quarterly.
Levenitis reported the Fayetteville-Springdale-Rogers Metropolitan Statistical Area, which includes neighboring Carroll, Madison and McDonald counties, experienced a 0.4 percent increase in its Home Price Index when measuring the fourth quarter of 2006 to the same period in 2007. The decline comes from measuring the third quarter to fourth quarter in 2007, in which the region's home price index dropped 0.8 percent.
Local real estate statistician Paul Bynum said one quarter does not make a trend much less give an accurate depiction a market's viability.
As a market specialist with Coldwell Banker Faucette Real Estate, Bynum collects and tracks data from nine cities in the region. He reports the region's average home price in 2007 was $187,313, up from $186,612 in 2006. Average median home prices also remained strong in the year-over-year period at $155,000 compared to $155,500 in 2006.
"The median prices in each buyer percentile category remains constant. It is hard for me to understand the rationale behind the 'declining market' tag because the data doesn't support what that implies," Bynum said.
Anthony Cione, a housing economist with MoodysEconomy.com, agreed. He said none of the data he collects would lead him to classify this region as one with declining home prices.
Lawrence Yun, chief economist with the National Association of Realtors, suggested that mortgage giants Fannie Mae and Freddie Mac are tapping into the Midwest to gain needed liquidity to offset their losses in California and Florida.
Other government data, not associated with that collected by OFHEO, does not support the notion that home prices are falling in Northwest Arkansas, Yun said.
The facts, apparently, have no relation to policy.
"It doesn't matter if we agree with the assessment or not, the fact is these government agencies (Fannie Mae and Freddie Mac) make the rules," said Richard Smith, senior vice president of the Bank of Arkansas mortgage division.
The market tag, whether justified or not, requires lenders who underwrite loans they hope to sell to Fannie Mae and Freddie Mac to incur a 5 percent loan-to-value downgrade, which means borrowers will have to make up the 5 percent in additional downpayment, Smith said.
Nationwide, Fannie Mae and Freddie Mac buy about 40 percent of the mortgage loans written and they govern the rules for conventional lending.
Conrad Eberhard, vice president of Bank of America mortgage division in Fayetteville, said the new 5-percent rule does not include loans funded by the Federal Housing Administration, Veterans Administration or rural development authorities. He said potential buyers and homeowners should not be overly concerned about the rule because other low-interest mortgage products are still available.
"FHA now has a loan limit of $271,050 and you can still buy a lot of house in Northwest Arkansas within that threshold. This lending avenue also allows for credit blemishes, while only requiring a 3 percent downpayment," said Mike Henry, president of the Metro Board of Realtors.
U.S. Rep. John Boozman, R-Rogers, said Friday that the position of Fannie Mae and Freddie Mac does not support their roles in making home ownership more accessible.
"My concern with the new market designation is that the fallout could negatively impact lenders and force some borrowers out of the market in this region," Boozman said.
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