'Perplexed' by the "Slowdown"

From the Stockton Record:

Cheryl McFall, broker and manager of the Manteca office of Remax Executive, said the Manteca market had a slower than usual summer, with prices dropping between 5 percent and 10 percent this year. "So, I don't see that we're turning a corner this year," she said. "I'm hoping for next spring."

The main competition for the existing-home market is new homes, because builders are not only offering incentives of between $80,000 and $100,000, they're also offering sales commissions to real estate agents, she said. "It hurts the real estate market, because you can't compete with that new-home smell."

McFall said many would-be buyers seem to be hesitating because they're watching prices, but this slowdown boggles her mind. During the last slowdown, interest rates were running at between 13 percent and 14 percent, and there were not nearly the variety of today's loan products designed to get people into homes, she said. Interest rates are in the 6 percent to 7 percent range, and the economy is good, she said. "I'm perplexed in a way as to why we're going through this."

Why are we going through this? Columnist Eric Grunder provides some answers:

Last year, as the real estate market reached the apex of its nuttiness, more than 40 percent of mortgages in San Joaquin County were interest-only, according to Loan-Performance, a San Francisco mortgage-research firm.

When home prices are increasing by double digits every year and the Fed isn't boosting interest rates every other month, you can get away with such things. But home prices have flattened - a word that may be way too charitable about what's going on in the real estate market - and interest rates are climbing, the Fed's temporary hiatus last week notwithstanding. (Mortgage rates last week did dip to their lowest level in six months.)

Homeowners servicing an adjustable-rate mortgage are likely in for a shock as rates on those loans are adjusted. We're probably not where we were in the early '90s when some homeowners got upside down on their mortgage - owed more than the house was worth - but the latest foreclosure figures show a troubling pattern.

In the first quarter, the latest reporting period, foreclosure notices statewide jumped more than 23 percent from the same period in 2005. In San Joaquin County, they jumped by 30 percent. And those figures are from the January-March period. Since then, the county's homes-for-sale inventory has skyrocketed, buyers have become at once more choosy and more nervous, and home prices have softened. Do you want to be servicing a funny-paper mortgage in that situation?