How The Mortgage/Credit Crunch Affects You As A Home Seller or Buyer
August 15, 2007 by Danilo Bogdanovic
Filed under Interest Rates
If you’ve looked at any news pages online or picked up any newspaper recently, you know all about the subprime mortgage fiasco and how it’s caused investors to flee, money to dry up, the banks to inject money into Wall Street and the government to step in. But how does it really affect you as a home seller or home buyer here in Loudoun County, Virginia? To find out, let’s look at two real life scenarios that I ran across in the past 2 weeks:
1) I am representing sellers who have their town home up for sale. It was originally listed a few weeks ago at $449,900 and during that time, buyers that went through it said that it was just outside of their budget. This was based on the asking price and the interest rates (at that time), which came out to a certain monthly mortgage payment. The buyers asked that we let them know if/when the price was adjusted because they were very interested in the property, but just couldn’t afford that much.
Fast forward two weeks…
Based on market conditions and recent comps, we adjusted the price to $432,000 this past week. I immediately called the buyer’s agent to let her and her clients know of the new price and to see if her clients were still interested in the property. The buyer’s agent told me that due to the interest rates going up a quarter point the week prior, that her clients went from affording $430,000 to only affording up to $410,000.
The buyers lost $20,000 in purchase power and a chance to purchase the home they really liked while the sellers lost a potential buyer and sale and possibly, market value. All in just one week.
2) I am representing buyers who are looking to purchase their first home. We originally started our search almost a year ago, but something came up that made them put off purchasing a home until this month. Prior to searching last year, they spoke with a reputable lender and were approved for up to $360,000 based on their financials and the interest rates at that time. They spoke with the lender again two weeks ago and were told that the rates had gone up, but due to their financial situation improving since last year, they were approved up to $350,000. They weren’t thrilled, but they weren’t as upset as they would be shortly.
Fast forward two weeks…
Due to the interest rates going up almost a quarter point on conforming loans last week, they are now only approved to $340,000. They lost $10,000 in purchase power in one week.
But wait, it gets worst.
Due to the price points of town homes in Ashburn, the difference between a town home that is $350,000 and one that is $340,000 is huge.
- One car garage versus no garage
- Move in condition versus $5,000 to $10,000 in work and/or sweat equity
- New appliances versus original appliances
- 1700 square feet versus 1900 square feet
- Backs to common area versus backs to another town home
- More desireable location versus less desireable location (based on buyer feedback)
The list goes on. And yes. All for $10,000.
The buyers had their eye on a particular property and decided that they wanted to place an offer on it. After speaking with the lender and finding out that they could no longer afford to buy it, they were heartbroken. Every property they’ve seen since then (at the lower price point) is compared to the one they liked and now, they all "don’t work".
Though they will eventually get past it, it’s not fun to go through it for anyone. It hurts the buyers and the sellers whose homes the buyers saw and now "don’t work" because they’re stuck on the one they now can’t afford.
Well, it could be worse. According to some, there are consumers out there that may have been approved for a loan in the past, but may no longer be approved even if their financial situation stayed the same. Are you one of them?
Related Articles
Who Can’t Get A Mortgage Now – CNN Money
Mortgage Mania – Part 10, The Credit Crunch – 3 Oceans Real Estate
You Think The Subprime Mortgage Fall Out Won’t Affect You? Think Again – Loudoun Stats
Washington Mutual, National City and Now IndyMac – real/diaBlog
Cascades on Sat, 18th Aug 2007 9:50 am
How’s this for a “domino effect” story that affected several people (sellers, buyers, agents, etc.):
We had our townhome listed at $425,000 and had received three offers over the course of several weeks. The first we rejected, the second was verbal only and well below asking (and comps) but the third seemed the most promising.
We agreed on a price of $415,000 (+ $8,000 subsidy) and had the home inspection on a Thursday. On Friday evening, the buyer’s agent called our agent with a verbal list of fix ups. Nothing surprising, all very fixable.
During the week, we had been looking at SF homes in the area and were seriously interested in a couple that really needed to sell (we were glad to help them out!).
On Saturday morning, our agent called and said our buyers were backing out of the contract, using the home inspection contingency as their excuse. Their agent said there was nothing seriously wrong with the home, the buyers just got “cold feet”.
We were stunned. On reflection, we realized the buyers never submitted a pre-approval letter for their financing, so it may have been the money got to be too much.
We decided to pull our house off the market. Now look at the people affected: Our agent won’t collect a commission (for selling our house and buying our new one), their agent won’t collect a commission, a lender won’t get to write a mortgage for us, a seller of a SF home we were looking at won’t sell their house as quickly as they could have, etc, etc.
This market is crazy.
Danilo Bogdanovic on Thu, 23rd Aug 2007 6:43 pm
Unfortunately, your story is more common than you may think. The thing is though, it’s not necessarily caused by the credit crunch. “Cold feet” has been around since real estate was first bought and sold.
And if I may comment on a few things I noticed in your comment:
1) Always get a lender letter (not just pre-approval letter) from all potential buyers. If there is not one with the offer, there are ways to ask/counter the buyer/offer to get one within a specified (and short) time frame. But make sure that it’s one from a reputable lender and loan officer.
2) Make sure everything is in writing (including Home Inspection items). If it’s not, it’s worthless.
3) The fact that your agent didn’t bring up the lender letter issue with you prior to you signing off on the offer and that he/she didn’t get the Home Inspection addendum in writing is a bit disturbing. Your agent should have known better – these two issues are real estate 101. The entire situation could possibly have been avoided if they had done their job correctly.