Sunday, November 16, 2008

A Housing Market In Crisis

I think, by now, everyone understands the problem with subprime, Adjustable Rate Mortgages and how millions have lost their homes because they can't afford the higher and higher adjustments on their mortgage payments. But, that's not the whole story.

Almost every house in this country has lost some value since the end of 2006. Depending on the locale, how inflated the market was, and when you bought your home, it is quite possible that the value of your house can be down by as much as 50 percent from its previous high. For most people, their home values have been set back to the prices that they were selling for in the beginning of 2004. Some might actually have had their home values reset to 2003, or even 2002 levels. And, this is the problem.

There are a lot of people who don't have subprime mortgages and have no problem paying off their mortgages; but they are tied to a mortgage that was based on a home that had a lot greater value. Almost automatically, these people are not frozen out of the housing market because, if they sold their home at these levels, they would have to satisfy the total amount of their loan. That means they would have to pony up, worst case, an amount equal to what they sold their house for; assuming the mortgage was set on a house that is now 50 percent less in value. Even if they paid cash for their homes, if the value of their house is less than what they paid, they are going to sell their house at a loss. Of course, those awash with money probably don't care.

The other problem with the housing industry is credit. Even if you could sell your house for a profit and could satisfy your previous loan amount, you probably won't be able to get another mortgage unless you can put big bucks down on your next home. That's because mortgage lenders are afraid in this market. They are not sure how low housing prices will fall. To give a loan, they have to make sure that they aren't going to get stuck with another distressed or undervalued property. After all, the home is the only collateral they have to cover your loan. Too many people, who left their homes in foreclosure, trashed the place in anger. This resulted in substantial losses in value. As a result, they want only the best qualified borrowers who can ante up at least 20 percent as a down payment. Further, their mortgage, along with utilities, can't exceed 25 percent of their income. Not too many people are in that category.

The other problem facing the housing market is inventory. There are just too many unsold newly-constructed homes and just too many foreclosed-on homes that have to be sold before the demand outstrips the supply. Only then will home prices start to rise again. Any buyer in today's market might be taking the risk that home prices will continue to fall even farther. That scares people away from buying a new home.

The bottom line is that the housing market is literally frozen. People who could buy aren't buying because either they can't get credit or they are afraid of buying. Many others can't buy another home because they have an upside down and inflated mortgage where they owe more than their house is worth. And, as more and more subprimes and Adjustable Rate Mortgages are reset to higher monthly payments, the amount of foreclosures will continue. Also, foreclosures will continue to rise as people lose their jobs in this recession. All this will do is flood the market with additional inventory and cause home values to fall even further. This is truly a spiraling economic downturn.

Any way you look at it, it will take years for the housing market to right itself. Probably, the least attractive job in America, right now, is the real estate agent. I am definitely concerned about the overall loss of wealth that has hit this country. It is being lost in the stock market and, for sure, in the housing market, and the virus is being spread around the world. All this because people who weren't logically qualified for a home loan were able to get them. This is really sad.

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