Dysfunction in the mortgage markets has made borrowing more expensive and increased the cost of owning a home by 10 to 20 percent — a situation that is putting more downward pressure on home prices.

That’s the conclusion of new research by Columbia Business School real estate professor Chris Mayer, who looked at the relationship between home prices and the "spread" between mortgage rates and 10-year Treasury notes.

In the last 20 years, rates on 30-year fixed-rate mortgages have averaged 1.6 percent above the 10-year Treasury rate. Thanks to the credit crunch, the "spread" has increased to more than 2.4 percent, meaning that borrowers are paying about 6.5 percent for fixed-rate loans instead of the 5.6 percent lenders would charge in a normally functioning market.

That translates into a $145 increase in the monthly payments on a $250,000 mortgage, to $1,580 a month, Mayer said in a research note explaining his findings.

"The problems in the mortgage market have put the nation’s housing in a downward spiral that will be hard to break," Mayer said. Recent losses at Fannie Mae and Freddie Mac "could well lead to even larger increases in mortgage rates," a serious problem that "leads to a vicious cycle," he warned.

Mayer predicts house prices in "bubble" markets like Miami, Tampa and Phoenix will see further declines of 10 to 15 percent.

Coastal markets like San Francisco, Boston and New York have already corrected to where they should based on fundamentals like demand and income, Mayer said. But deteriorating mortgage markets and economic fundamentals "will likely continue to hit these markets hard, leading house prices to keep falling."

Housing in Midwestern markets like Detroit and Cleveland seems inexpensive, but continued economic shocks and "extremely high levels of foreclosures" make a recovery "unlikely" anytime soon, Mayer said.

Mayer sees increasing mortgage costs pushing down house prices even in healthy markets like Texas and the Carolinas, which did not see rampant speculation during the boom, and which have healthier economies than Midwestern markets with manufacturing-based economies.

Mayer’s latest calculations are based on methodology he developed with other researchers in a 2005 paper, "Assessing High House Prices: Bubbles, Fundamentals, and Misperceptions."

He thinks they probably understate the risk of further price declines, because they exclude condominiums, and don’t attempt to account for the fact that lenders and mortgage insurers have raised down-payment requirements and cut off credit altogether to many borrowers with blemished credit.

It’s also impossible to conduct a numerical analysis of factors like the perception of would-be home buyers that the risk of owning a home is greater than in the past, Mayer said.

Mayer sees a few "silver linings," such as new buyers entering the market to take advantage of falling prices, and the potential for those who purchase now to refinance at a lower rate in years to come.


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