No relief in tight housing market EYE OF THE STORM

Twin Cities-area Realtor groups on Friday released statistics showing a housing market that's still in the midst of a correction.

The number of closed sales during July was down 7.2 percent, compared with the same period last year, while the number of pending sales was down 8.1 percent, according to the Minneapolis Area Association of Realtors. At the same time, total listings on the market last month were ahead of last year at this time by 10.7 percent, or 3,355 listings.

With mortgage defaults rising and the industry in disarray, the flow of money to mortgage lenders has been interrupted by company closures, regulatory changes and investor uncertainty. Collectively, these developments add more drag to a housing market struggling to regain traction after one of the longest booms the market has seen.

The situation is becoming particularly bleak for marginal borrowers and those who have adjustable-rate mortgages and are facing big increases in their monthly payments.

"We're in the eye of the storm," said mortgage banker Ronny Loew, who thinks the situation could get worse before it gets better. "Underwriting guidelines are changing fast and furious."

In Minnesota, spillover from Wall Street's difficulties is likely to be compounded by recent changes in state law aimed at protecting consumers against unscrupulous lenders and expensive, exotic mortgages. While those changes, which went into effect Aug. 1, will help weed out fly-by-night brokers, they also eliminate many of the mortgages that helped marginal buyers get into and keep houses they couldn't otherwise have afforded -- the so-called negative-amortizing and "no-doc" mortgages.

"The borderline cases and the higher-risk cases are getting harder all the time," Loew said.

Borrowers who are looking for stated-income loans, low down payments or first-time buyers and those hoping to refinance because their rates are adjusting upward could find it hard to find a lender.

"They'll get caught in the no-man's land where they won't be able to find a mortgage," Loew said.

That's likely to lead to an increase in foreclosures, which are at record highs, adding more listings to an already saturated market.

New listings start to slow

Although total listings in July were running 10.7 percent ahead of last year, the overall number of new listings is beginning to slow. Last month, there were 9,379 new listings, 2.9 percent fewer than in July 2006.

The combination of slower sales and higher inventory is forcing sellers to offer price cuts, concessions and incentives to buyers. Still, the median sale price in the Twin Cities metro area last month remained relatively steady at $233,000 -- $2,459 below the median sale price in July 2006 and $300 less than in July 2005.

Deb Greene, president of the Minneapolis Area Association of Realtors, is optimistic that the mortgage market troubles aren't deep enough to affect the broader housing market, particularly because there are still more borrowers who will qualify for mortgages than those who can't.

"We're in our recovery," Greene said. "It's a U-shaped recovery and I don't think we've totally hit bottom yet, but we are on our way up."

She also said that the Federal Housing Administration is stepping in with new programs aimed at helping disadvantaged borrowers who are being shut out by stricter underwriting guidelines.

"And more short sales and more foreclosures increases the number of homes out there for buyers who are shopping," she said. "With rates where they are right now, these homes are a great buy."

Still, loan officers and sales agents face a more challenging environment. John Murphy, a sales agent with Edina Realty's Wayzata office, said that what's happening on Wall Street has already trickled down to the local markets.

Slow and getting slower

"The market has been slow anyway and it seems to be slowing it down even further," Murphy said. "Properties aren't moving as fast and buyers are taking longer to get their financing together."

Right now, for example, he's representing a buyer who has a signed purchase agreement, but has been trying for two weeks to line up financing.

And he's becoming more cautious now when it comes to working with buyers who are getting financing from companies he's not familiar with.

"If it's a company that I'm not familiar with, I want to talk with the buyer's loan officer to make sure that the loan is going to work," he said. "It's just all a little trickier."

Jim Buchta • 612-673-7376 • jbuchta@startribune.com