By Gaurav Bhola, MSM, Managing Editor
Tuesday, September 4, 2007
The current real estate home buying market is the worst one in 16 years. The housing market has been a victim of an oversupply of homes, rising defaults on mortgage loans, higher foreclosure rates, and residual effects from the subprime mortgage crisis. The overabundance of homes has pushed home prices lower, 12 months in a row.
However, what makes the situation more unpalatable is that the housing market hasn’t bottomed out yet. The housing market S&P/Case-Shiller U.S. National Home Price Index declined 3.2 percent to 183.89 the second quarter. This decline represented the lowest ebb in the index’s 10 year existence. The first quarter of this year, the index had only fell 1.6 percent.
According to the National Association of Realtors, sales of homes have declined while at the same time homes for sale have increased by 5.1 percent in the month of July. At the moment, there is a 9.6 month inventory of homes available, the most amounts of homes on the market since October 1991.
The impending fallout from the subprime mortgages caught the homebuilders, mortgage lenders, investors in risky mortgages, homeowners with risky mortgage loans, the Federal Reserve, Wall Street, global stock markets, and many more off guard. The morass is thickening, further imperiling the national economy.
Many analysts predict that the consequences from the current state of the housing and mortgage market could lead to a recession. A few weeks back, the Fed infused billions into U.S. banking system to avoid illiquidity in the market place, the infusion of cash temporarily forestalled a credit crunch.
As more mortgage lenders go out of business, the surviving lenders have become stricter in their mortgage lending. It has reached a stage where even borrowers with good credit scores are being turned down for new home loans. This is the complete opposite of what occurred during the boom housing market, when mortgage lenders and mortgage brokers were doling out home loans to borrowers with the worst credit.
The new restricted lending practices and the glut of homes for sales is a potent mixture that can explode with a bang in the near future, as of now there is growing whimper. Since late 2005, the housing slump has been slowly building to crescendo proportions, deafening the recent efforts of the Fed to prevent a recession.
The Fed on 17 August cut the discount rate, the interest rate it charges banks for loans by a half percent. However, the discount rate is different than the Fed funds rate which affects the interest rate of consumer loans. It appears the Fed is open to cutting this rate. If homeowners receive a lower interest rate, they can refinance their mortgages to the new low mortgage rates, thus lower their monthly mortgage payments. In the current atmosphere, a new lower monthly mortgage payment can make a difference between keeping a home and foreclosure. A Fed funds rate cut may help reinvigorate the housing market. Nevertheless, the lessening home prices may not help jumpstart the sluggish home buying market because of existing strict mortgage lending guidelines; borrowers may not be able to obtain a home loan mortgage.
