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The Mortgage Crisis:
What You Need to Know
Over the last decade or so, money available for mortgage loans became easier and easier to come by. The result was the advent of many exotic and high-risk mortgage programs.
Many homeowners purchased much more property than they could afford which led to the current real estate market meltdown. Some of the issues that have resulted in falling prices and tightening credit are outlined below:
- Prices in many areas were artificially inflated by the increased buying power of those individuals that previously could not qualify. Artificially because so many of the mortgages that were issued used introductory or temporary rates that increase so borrowers can no longer afford the payments.
- In many areas, new construction was pushed to all-time highs. This again caused an artificial inflation of the market due to speculative investors purchasing new construction properties for resale.
- Many individuals purchased second homes either as investment or as true second homes, which again created a false appreciation in the residential market.
- In 2004, 36 percent of all homes sold were investment or second homes.
- In 2005, vacation and investment home sales accounted for almost four out of every 10 residential sales. Investment homes accounted for 27.7 percent of all purchases and vacation homes were 12.2 percent of all sales.
- In 2006, second home sales dropped, however they still accounted for 36 percent of all residential property sold.
- In the rush to invest, many individuals actually purchased more than one property, building inventories of residential houses for which there was not a second purchaser.
- Since late 2006 when issues in the market started to become apparent, 276 major mortgage lenders have gone out of business.
- Company closures have significantly decreased the options that homeowners have when purchasing a new or investment home.
- Many borrowers are defaulting prior to mortgage resets—often times within the first few months after a mortgage is written.
- In addition to company closures, those lenders that are still in business have reduced their product offering and in many cases eliminated entire categories of loans that were previously driving residential sales.
- In many areas distressed homeowners are either selling short or have already gone through the foreclosure process and these bank or investor-owned listings are on the market, further depressing property values.
Where Do We Go From Here?
The question everyone is asking today is, “What happens now?” While some adjustments may be made to this market collapse through government intervention, the reality is that only time can heal this market.This crisis, like many others in US and world economic history, will simply have to play itself out. When the excess housing inventory is depleted and consumer confidence in the real estate market returns, demand for residential homes will increase and prices will begin to rise again.
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