Analyzing the Housing Market Downturn

As you all know by know the housing market is in big trouble and there does not appear to be an end in sight , at least not until sometime in 2008. The problem as started with the mortgage industry. A lot of mortgage holders had interest rates which were variable or adjustable rate mortgages. When homeowners interest rates increased this caused the payments to increase and a lot of people were not able to afford their new payments which a lot of times jumped by $400, $500 and sometimes more than $1,000. They were not able to refinance their mortgages because the value of the home declined leaving them with no equity and sometimes the value of the home was less than the balance owed.

Homeowners saw abandoning the home as the easiest way to resolve the problem. Of course this lead to foreclosures. To compound the problem some states like Indiana, Ohio and Michigan are facing downturns in the economy which leads to layoffs and more people unable to pay their mortgages.

As far as the sale of existing homes, well they are at the lowest point they been at in five years. It continues to decline. Why is this one might ask? Well it’s due in part to the sub prime lenders, you know the loans that are made to consumers with spotty or less than stellar credit. They don’t qualify for the prime loans so they receive the alternative which in essence puts more money in the lenders pockets. Two types of these loans are the interest only and the ARM loans, (adjustable rate mortgages). There have been situations where customers did not really understand what they were getting. With the interest only loans your entire payment goes to interest and nothing to principle this enables a borrower to receive a lower payment.

There is a trickle down effect. First of all lenders are tightening up the lending requirements making it much harder for a potential borrower to receive money. Foreclosures are now at a record high however the ex-home owners have to live somewhere. So where do they go? They are now renting which is now causing a drought with rental units which in effects causes rent payments to go up? It’s the law of supply and demand in effect.

Hopefully we will see the light of day next year, at least that’s what the forecast is calling for.