A continuation of tight credit conditions for first-time buyers and a foreclosure pipeline full of homes bought with subprime loans will mean that house prices at the low end of the market will continue to fall at a faster rate than prices at either the middle or high end, according to analysts at the research firm ""Capital Economics"":http://www.capitaleconomics.com.
[IMAGE]
The bulk of these low-end homes consists of distressed properties, which already carry steep discounts as lenders and investors try to capture a piece of the limited demand out there to get these homes off their books and back into the hands of responsible homeowners. But Capital Economics' researchers say even properties at the high end of the price spectrum may not completely escape a further dip in value.
Using price tier data for 16 major cities produced by Case-Shiller, and by weighting each city by the value of its housing stock, Capital Economics has generated a proxy for national trends in the low, middle, and high price tiers.
Paul Dales, senior U.S. economist with the firm explains that up until 2000, prices in all three tiers rose at roughly the same rate, but during the boom, prices at the low end rose much more rapidly.
Capital Economics' analysis shows that from January 2000 to their peak in 2007, prices in the low tier rose by 150 percent, eclipsing the 120 percent and 95 percent gains in the middle and high tiers, respectively.
According to Dales, the more rapid gain in the low tier was largely due to the increased availability of subprime loans, the reduction in down payment requirements, and the introduction of teaser mortgages which attracted first-time buyers that are more active at the low end of the price range.
The middle and high tiers which are dominated by repeat buyers, on the other hand, were more insulated from these
[COLUMN_BREAK]developments as these homeowners could raise a down payment by extracting equity from their home and did not need a teaser mortgage, Dales explained.
He notes that during the crash, the closure of the subprime mortgage market and the tightening in credit conditions hit first-time buyers harder than repeat buyers and caused the sharper fall in prices at the low end of the market.
Capital Economics found that since their 2007 peak, prices in the low tier have so far fallen by 45 percent compared with declines of 35 percent and 25 percent in the middle and high tiers, respectively.
The research firm says prices in the low tier are still falling at a faster rate than elsewhere and there are two reasons why this is likely to continue.
First, there are no signs that credit criteria for first-time buyers are loosening. In fact, Dales says the proposed risk retention rules mandated by the Dodd-Frank Act mean that more lenders will require a down payment of at least 20 percent.
Second, of the 4.5 percent of outstanding mortgages currently in foreclosure, a large share are subprime loans taken out on homes that probably fall in the low price tier, according to Dales.
He points out that the foreclosure inventory rate for subprime loans is 14.7 percent, much higher than the 3.5 percent rate for prime loans. That means the downward pressure on prices from forced foreclosed sales will be greater at the low end of the market, he explained.
According to Dales, this doesn't mean that prices in the middle and high tiers won't fall further. He says indeed, what happens at the low end tends to filter further up.
For example, the price repeat buyers looking to trade up can pay for their next home depends on the price they receive from first-time buyers, Dales explained.
""Nonetheless, the bulk of the 3 percent fall in prices that we expect over the remainder of this year will be felt at the low end,"" Dales said.
The low-end price range varies by market. For example, for the purposes of Capital Economics’ study, the low tier in Cleveland encompasses any home priced under $114,762 and in Phoenix it’s below $99,786. But in the pricier market of Los Angeles the low end of the spectrum refers to homes under $309,177 and in Washington D.C. the low tier cutoff is $298,049.