I don’t really consider myself a pessimist, but I do pride myself on looking at the facts and coming to my own conclusions. To me the outlook of the housing market and the economy as a whole have some troubling times ahead. Somebody finally realized you can’t loan hundreds of thousands of dollars to people who couldn’t afford the payment at normal interest rates.
Don’t have a down payment? Just take out another loan for it.
Need some easy cash? Turn your house into an ATM and cash out your equity.
Prices went up so quickly because there were lots of people in the market with easy access to credit through risky loans. Would you give half a million dollars to someone without any income documentation? Equity is determined by the appraised value of your home, the only problem is that equity isn’t realized until you actually sell your home. That’s all fine and dandy in a world were home prices never go down, but without congruent increases in income those prices can’t be sustained.
Fast forward a little bit: lenders start tightening up loose standards, foreclosures go up, supply goes up, demand goes down and prices start to follow. Cashing out your equity combined with decreasing prices puts you in the predicament that the outstanding loans on your home could be more than the market price. Hello negative equity. Now what happens when you can’t make the monthly payment on a house that is worth less than you owe? You try and sell or end up foreclosing which has the double wammy effect of ruining an individual’s finances and if it starts happening enough, effects the lenders, banks, and economy.
Where do I think we are? I think we’ve just seen the tip of the iceberg, but the iceberg isn’t enough to sink the economy. The people that weren’t suppose to get loans in the first place will default on their loans, there will be a surplus in inventory and then prices will drop and stagnate for a while until wages can catch up. The bigger issue at hand though is our nation’s infatuation with spending money we don’t have. If things keep going the way they are we’ll probably be in a world of hurt in a few decades.
Thank you reading my somewhat organized and logical rant.