The Harvard Report

During the Great Housing Bubble things were wonderful. There was easy access to money - even those with bad credit could access it. It was easy to buy a house - the better the credit the easier to buy. No money for a down payment? No problem there was 100% financing. Wanted a bigger house than you could possibly afford? No problem there were pick-a-payment mortgages that let you pay a fraction of a normal mortgage payment. Had an unreliable income? No problem just use a stated income loan - no reason to show you really had money coming in lenders would just take your word for it.

Times were good. Unrealistic? Yes. Unsustainable? Yes. But things everyone was making money and we felt wealthy. Hopefully those feelings and memories can carry us through the on-going slump. Marketwatch has a summary of the Harvard University annual report on housing. Here are some of the findings -

The housing slump, already shaping up to be the worst in a generation, still hasn't run its full course, according to Harvard University's annual report on housing, released on Monday.

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Other key points in the report:

• Last year marked an acceleration of home-sale declines, propelled by falling home prices and the credit crunch. The pain in the housing market spread to the rest of the economy by the beginning of this year, as the drop in home building, turmoil in the credit and stock markets and the effect of falling home prices on borrowing and consumer spending contributed to the slowdown.

• Real home equity (adjusted for inflation) fell 6.5% to $9.6 trillion in 2007. And home-price declines as well as a slowdown in home-equity withdrawals conspired to trim one-half of a percentage point from real consumer spending and more than one-third of a percentage point from total economic growth.

• During 2003 to 2005, housing prices surged so far ahead of incomes that by 2006, the number of households (both renters and owners) paying more than half their income on housing rose to 17.7 million, or 15.8% of all households. Today, lenders are requiring larger down payments and higher credit scores, squeezing many would-be buyers out of owning a home -- even though prices have fallen.

• More proof of the changing lending landscape: Subprime loans fell to 3.1% of originations in the fourth quarter of 2007, from 20% in 2005 and 2006. Interest-only and payment-option loans fell to 10.7% of originations in 2007, from 19.3% in 2006.

Some unsettling findings in the report is while prices are being lowered the pool of potential pools is shrinking drastically. Another group removed from the housing buying market are former owners who are now in or have just gone through foreclosure. The damage to this group's credit scores will prevent them from buying homes for years.

Another unsettling part is that more than 10% of new loans are option arms. We know that these are unsustainable. They are really only suitable for a small portion of borrowers - much less than 10%. Numbers are 70-80% of option arm borrowers can only afford the minimal payment. So if these current numbers are still applicable we know that 7-8% of all current home purchasers can not really afford the property. That just means more hurt down the road. Borrowers are still adding more debt on top of falling equity - something shown to be a dangerous combination.