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By Nancy Sarnoff

RISMEDIA, Oct. 21, 2008-(MCT)-This was the year Michael and Nina Phillips were going to build their dream house. Over the summer they started working on designs with a custom builder who was going to finance the construction of the house and later sell it to the couple.

But as the credit crisis intensified, the builder’s lender said it wouldn’t approve the construction loan with the original terms, leaving the Phillips with a choice: finance it themselves or back out.

“We felt it was better for us to kind of sit on the sidelines and not move forward with the project without knowing what was going to happen,” said Michael Phillips, a 30-year-old small-business owner.

In the end, the couple’s dream was deferred, the builder missed out on a sale, and the lender lost business.

The constricting credit market is no longer just a problem for entry-level buyers with bad credit.

Through the end of August, area home sales had fallen 13%, a figure expected to grow when September sales are released this week. Sales fell almost across the board in August, with properties of $500,000 or more declining nearly 7%.

The local market has other factors working against it beyond tight credit.

Buying and selling came to a near standstill after last month’s hurricane, which was followed by wild swings in the stock market and falling oil prices, which can hurt the Houston economy.

“We’ve been kind of hit with a triple whammy,” said Clint Simpson, a real estate agent with Greenwood King Properties.

Simpson had a buyer recently back out during the option period because of the financial markets.

“The uncertainty of the market scared them,” he said.

To be sure, not everyone is holding back.

John Daugherty Jr. said his real estate company has three listings for more than $2 million apiece that went under contract about a week ago.

He said recent stock market fluctuations will help his business, as some buyers view real estate as a safer investment, particularly in Houston where home prices have remained stable.

“A lot of people are saying, ‘Hey, real estate values don’t fluctuate by the second, minute, hour like the stock market does,’ ” said Daugherty, president of John Daugherty, Realtors.

Some of the recent slowdown can be attributed to post-summer doldrums and the hurricane’s aftermath.

Relocation and first-time buyers are still active, said Amy Bernstein of Bernstein Realty.

“We’re working with several first-time buyers who had their money liquid with the anticipation of buying a home. They were not invested in the stock market and are excited about the opportunities,” she said.

Still, mortgage lending continues to get even more stringent, with financial institutions tightening their requirements weekly if not daily, said real estate agents, mortgage specialists and home buyers.

“Submitting a loan is like walking into enemy territory today,” said Edward Kampf of Wholesale Mortgage Co. “There’s a cloud of suspicion. They look for every hidden angle and question any area of concern.”

Kay Shafiei, for instance, was recently approved for a $285,000 mortgage from a lender in Houston to buy a house in Austin.

Shafiei, who has bought and sold about a dozen homes over the past 30 years, said the process has never been so difficult, despite her good credit and 20% down.

She said it took about a month to get approved for the loan because the bank kept requiring more documents.

“We have strong assets, less liability at this point of our life, and our income is higher than it was 10 or 15 years ago.

But the mortgage process was horrendous,” said Shafiei, 56.

The credit crunch, whose initial impact was largely felt by lower-end borrowers, is hitting the upper end, too. And not just home buyers.

Lambert Arceneaux, president of Houston-based Allegro Builders, laid off 25% of his staff about a week ago because he scaled back the number of luxury homes he plans to build this year.

“The money available for us to do spec homes is just not there anymore. Even for us, we still have to come up with a larger down payment,” said Arceneaux, whose company was going to build the house for the Phillips couple on a lot the builder owns in the Heights.
Around the time that house fell through, Arceneaux lost another customer who couldn’t get approved for a “super jumbo” mortgage — generally a loan for more than $650,000 — on a house that was almost complete.

As the secondary market dried up for mortgages, lenders began seeking borrowers with higher quality credit — a practice that’s only intensified as the economy weakens.

Jon Mulkin, president of Compass Bank’s mortgage division, said much of the tightening has occurred in condo, second home and investment property financing.

Buyers, he said, can still get a conventional mortgage with 5% down, but the borrowers’ credit must be in the 680 range, which is considered average.

Even as the government attempts to fix the credit crunch, Mulkin doesn’t think lending standards will loosen up anytime soon. The tightening, though, may have bottomed out.
“Hopefully most of the worst news is behind us,” he said.

James Dong, president of Builders Club, a Houston company that provides back-office and purchasing services to high-end builders, has a unique view of the market.

He said two of his clients have gone out of business as lenders are less willing to loan money for spec homes — those built without buyers in tow.

“The banks are holding them back. On one side, they can’t start more homes. On the other side, they can’t sell,” he said. “There’s no money in and no money out.”

Michael Phillips, who owns a 2-year-old specialty printing business serving the oil and gas industry, said he could probably get a mortgage if he were to “kick and scream,” but he doesn’t have certain financial statements banks now require.

“There are a lot of things not in place yet for me to come to the table,” he said.

Copyright © 2008, Houston Chronicle
Distributed by McClatchy-Tribune Information Services.