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Commenting on the Housing Mortgage Market as of 09/10/07
by Peter L. Zachary, MAI

The factors that influence value are several. However, the factors that affect value in a big way are few. The events of the past 2 months have shown the importance of the availability of credit and the ability of borrowers to make their mortgage payments.

It is common knowledge that the consumer fuels two thirds of the United States economy. Without jobs, people can't afford the smallest or largest things in life. The smallest being daily necessities and the largest being a mortgage payment due at the first of the month.

In my opinion, the most important fallout of the sub-prime mortgage crisis is the loss of jobs which is occurring in the mortgage business and on Wall Street. The following job losses have been announced in August and September:

According to Associated Press
Country Wall Financial Corp. (Owners of Country Wide Credit) will cut as many as 10,000 to 12,000 jobs to cut costs and cope with soaring foreclosures. This amounts to about 20% of its workforce.

According to the New York Times
American Home Loan Mortgage will fire all of their 7,000 employees after announcing their plans for bankruptcy.

According to Rueters
First NIC Financial Services, LLC has laid off nearly half of the 1,350 employees.

The MSNBC website estimates that 40,000 jobs will be lost in the mortgage industry.

These job losses will result in lower disposable income for these people, which further exacerbates the risk for a recession and housing price declines. Not only will they have less money to spend on their mortgage payment but they will have less to spend on everything related to their houses such as appliances, and home improvements. There will be a ripple effect throughout the economy.

According to the New York Times (09/08/07), the U.S. Labor Department announced that 4,000 jobs were lost from July to August. This shocked the markets since economists predicted the economy would add 100,000 jobs in August and that growth had slowed but would continue. The Times states that the odds of a recession in the next year has increased to 25% to 50%, according to economists interviewed by the Times. This article cites Mr. Negel Gault, Chief United States economist at Global Insight, an economic research firm in Lexington, Massachusetts. "People need to start thinking about the housing market not just as some ring-fence problem which is off on its own. They need to start worrying about the health of the broader economy." In that same newspaper on that same day, the New York Times reports that the new chairman of Chrysler, Robert L. Nardelli, who was the former chairman of Home Depot, is concerned that problems in the housing market and the broader economy are hurting car and truck sales. He said: "There is a direct coupling there and some negative spill from housing into the auto industry."

The decline in housing prices is a forgone conclusion. In fact, prior to the sub-prime mortgage mess, sellers were having a difficult time selling their properties at their expected price. The time it took to sell a house has lengthened and prices were stabile to moderately declining. The Sunday 08/19/07 Real Estate Section of the New York Times cited the National Association of Realtors, which said that sales of existing homes slowed 17% in the 2nd quarter of 2007 compared to the 2nd quarter of 2006, while inventory swelled 16%. New home sales faced worse, they fell by almost 19%. The New York Post reported on 09/08/07 that new homebuilders across the nation are reducing prices of unsold newly constructed homes. Hovnanian Homes, a New York area homebuilder, is reducing prices as much as 17%. With the sub-prime mortgage mess it is clear that there will be fewer buyers to buy houses, since fewer buyers can qualify for a mortgage. Buyers will expect reduced prices and real estate brokers are even advertising favorable conditions (for the buyer).

According to the Real Estate Weekly, a Manhattan based publication even, the loft high end residential Manhattan real estate market is being affected by this crisis since hi-flying hedge funds are closing and firing highly paid employees which typically fuel this market. In addition, according to Crain's New York Business (8/27 9/2/07), the credit crunch is also slowly chilling Manhattan's hot commercial rental market.

The Federal Reserves effort to reduce the discount rate and federal funds rate is illusory in nature for the near term, since these rate cuts can't restore the loss jobs or the number of people who can afford homes. Typically, these rate cuts do not take affect for 12 to 18 months. Market forces will cause some equilibrium to appear at some point. The Federal Reserves efforts will help mitigate the crisis but not avert it.

In conclusion, pricing pressure on homes will continue.

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