Housing Market Mired in Foreclosure Fiasco
Posted by Tim Harris in News
After five of the most prosperous years in recent memory, 2006 saw the real estate market go bust. Low interest rates combined with a strong economy fueled the market for the first half decade of the new millennium. Last year, however, saw sales of single family homes fall nearly nine percent across the nation. That was the biggest drop in nearly 20 years. When the numbers come in for 2007, they are going to look even worse. In fact, the downward trend is likely to continue for the next several years. You even hear the experts commenting on it in the news. Jim Crammer, CNBC, is encouraging viewers to just ‘walk away’ from upside down mortgages. This is an example of how dismal the outlook has become.
What factors are conspiring against the current housing market? Prices are completely disproportionate to salaries. People have been biting off far more house than their paychecks can chew. Buyers have borrowed too much money and are unable to pay their interest. As a result, the market is witnessing a huge surge in home foreclosures.
The third-quarter of 2007 saw foreclosure rates double in the United States. Mortgages with introductory teaser rates are now adjusting to regular rates and causing many families to lose their homes. Nearly two million homeowners hold $600 billion of subprime adjustable-rate mortgage loans - ARMs. These loans are due to reset at higher rates during the next eight months. MSNBC estimates that the recent amount of mass foreclosures is going to result in a $223 billion drop in property values across the country. It is predicted that the most severe downward shifts will be felt in minority communities.
Many believe that lower interest rates will somehow save the housing market. It won’t, because that is not the problem. Most homeowners don’t qualify for a refinanced mortgage much less one for a new purchase. The problem is that homeowners are upside down in their mortgages and owe more than the value of the house. Lenders will not approve a mortgage when the seller does not have at least 10% in the property. When looked at that way, lower interest matter little one way or the other. Since the recent hot markets of California, Florida, Nevada and Arizona has cooled down, homes there are depreciating as much as 40%. There simply is no equity.
The Center for Responsible Lending estimates that roughly one in three homes will drop in value by an average of $5,000. This is largely due to the fact that lenders were indiscriminately granting loans that were far too large for people to realistically handle. As long as a bank could sell a loan, they granted it. This passed the economic risk of loans granted to people with questionable credit onto Fannie Mae; as well as the buyers of mortgage-backed securities. Now that the country is facing nearly one trillion dollars in mortgages that will not be repaid, risky loans are not being granted. Investors are steering clear of mortgage-backed securities. When this happens, less money is available for mortgages and housing prices fall. Prices are likely to fall for the next few years while traditional lending standards are re-established.
Other factors contributing to the downfall of the housing market involve economic and age demographics. There has been a notable lack of middle class first-time home buyers in recent years. Young families have simply been priced out of today’s housing market. Home prices have become completely disproportionate to incomes. And as 77 million baby boomers are approaching retirement, nearly one third of them have absolutely nothing saved up for it. So, they are turning to their home equity and putting their houses up for sale.
What does all this mean for the future of the housing market and the economy in general? It’s anybody’s guess, but experts are not optimistic. “We haven’t faced a downturn like this since the Depression,” said Bill Gross, chief investment officer of the world’s largest bond fund, PIMCO. “Its effect on consumption, its effect on future lending attitudes, could bring us close to the zero line in terms of economic growth,” he said. “It does keep me up at night.”
Since 1997, Harris Real Estate University has thousands of Realtor-Students participating in education courses on a daily basis.
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