Foreclosure crisis harder to fix than once thought
The record number of foreclosures and the tighter lending guidelines will make it very difficult for the once prosper housing market to rebound, according to a Harvard University study released on Monday June 23, 2008 citing that this is the worst housing market since at least World War II.
A 2 year drop in home prices along with rising gas prices, homeowners insurance, and food cost is curbing consumer spending and is drastically affecting economic growth. Most consumers will unlikely become potential homeowners until they have been convinced that the home values have stabilized. With the home loan rates the highest in nine months it is unlikely anything will change even after a 16 percent national home price decline since 2006.
"Historically, housing markets recover only after the economy has entered a recession and a combination of falling mortgage interest rates and house prices have improved housing affordability," Retsinas said in a statement released with the study. "It will take longer this time to rebound given the unusually high levels of foreclosures and constrained credit markets," he said. "The slump in housing markets has not yet run its full course."
Payment shock after interest rate resets on subprime adjustable mortgages, many made to high-risk borrowers, has propelled owners into foreclosure. For others in trouble, falling prices have left them with mortgages larger than their home's value, and they are often unable to refinance or sell. Then there are the ones who did have good credit and refinanced using an unethical mortgage broker who because the commissions were higher would sucker them into a sub-prime mortgage without them realizing the consequences.
The number of homeowners paying more than half of their income on housing surged by 35 percent to 8.8 million in 2006 from 6.5 million five years earlier, according to the study, After rising for years, the U.S. homeownership rate fell to 67.8 percent at the end of 2007 from an all-time high 69 percent in 2004.
As investors demand a higher return for the assumed risk, they to are limiting the credit worthiness of the consumers who are attempting to purchase or refinance a home. Many homeowners looking to refinance or prospective homeowners are finding it near impossible to obtain funding or once the funding is found realize the requirements of the mortgage make it unlikely they will be able to conform to the conditions.
After a bidding frenzy that swept prices unsustainably high this decade, even if a potential homeowner could get credit, they are not willing to buy due to the instability of the home prices over the past 2 years and the worst part about this mess is that it has yet to reach the bottom.
Economic weakness does not bode well for income growth in the short run, and housing cost pressures are unlikely to lighten in the long term. Much of employment growth will be in part-time and low-wage positions and the somber conclusion is that if the economy slips into recession or job losses keep racking up, household growth and homeownership demand could fall even more.
The only thing that is going to fix the current foreclosure and mortgage loan crisis is time, and some aggressive legislative changes in mortgage lending guidelines. The real story began several years ago when the mortgage lending guidelines were changed by the Clinton Administration to allow more not so credit worthy consumers to enjoy the American dream of homeownership. Unfortunately, this particular American dream has turned into a nightmare for a lot of people and is ending with the government and tax payers footing the bill for something that could have been avoided by simply not allowing consumers that don\'t pay their bills to obtain mortgages on homes with no money down and no idea what they are signing. |
