The Worst Is Yet to Come for Real Estate
You know the economy is in trouble when the good news is unemployment increased at a slower rate and pending home sales stood basically still all month. Brace yourself because it looks like the “good news” is going to get much worse, too.
Home prices appear to be approaching a valley, though no one can know for sure if they are near a bottom or if they have further to drop. However, credit is still hard to come by, and it is becoming more expensive as interest rates rise on 30-year fixed-rate mortgages.
Unemployment is fueling fears of a new foreclosure crisis. Homeowners who borrowed responsibly are at a high risk of defaulting on loans, similar to those who received subprime or other outlandish loans. The national unemployment rate is expected to rise above 10 percent this year, despite government promises that a stimulus package would prevent it from going that high.
With interest rates on the rise, many homeowners facing a shortfall in income don’t have the option to refinance to a more favorable rate. Home prices are down 32 percent on average from their 2006 high, making it impossible for many to pay off their loans by selling their homes because they are worth less than when they bought them. These factors are combining to create a new foreclosure crisis.
The real-estate market is not out of the woods, yet. Investors should be highly cautious about entering the market because of the possibility of home prices spiraling even farther down, according to some experts.
Amazingly, a recent Mortgage Bankers Association report showed one out of every eight homes in the United States was either in foreclosure or behind on mortgage payments at the start of April. In addition, the amount of homes being foreclosed upon reached a new record of 3.85 percent in the first quarter of 2009. It could even rise to 4.5 percent in 2009.
This surge in foreclosures came as a surprise because many thought most of the damage subprime mortgages had done to the market was over by now. But most of the new foreclosures are not from subprime loans but prime loans. This is a dangerous trend.
Another extremely dangerous trend is the complete lack of credit for home buying. Government-backed mortgages made up 98 percent of all home mortgages issued in the first quarter of 2009. In 2006, the rate was closer to 50 percent. That means banks and other private lenders are not loaning money to homebuyers, even those with strong credit.
This lack of credit is causing serious harm to the real-estate market, and it will most likely prevent any recovery. Without new loans, people can’t buy homes and so sellers will keep lowering prices and entering foreclosure as they run out of home equity or lose their jobs. It’s not a pretty sight.
By: Directinvestornews
