Housing Mortgage Loan
Last summer, a new uncertainty began to build about housing and home mortgages. Along with it came questions about our economy. It has proven to be a real bafflement at how people really got into the mortgage loan mess. The problem virtually started with the subprime mortgage market. Anyone that asked for a loan received a loan. People with credit problems were borrowing money to buy homes. People, who could not afford the home they were buying, were receiving loans at 100% financing. The real estate market was one of the main contributors to the growing economy. Now it is the downside of our economy.
Bad lending practices have led our real estate market into an economic adventure. In the history books, we have never seen lending at this extreme factor. For the economy to see a turn around lending practices will have to be analyzed and re-written. Lenders need to realize that they can only lend people the amount of money that they can reasonably pay back.
Foreclosures are increasing daily. According to CNN, foreclosures have increased 112% in the last year. There are states that have been harder hit than others have. California, Nevada, and Florida seem to have been hit the hardest. The reason this three states have been hit harder is due to the growth in those states over the last few years.
Inflation is hard on everybody. However, the middle class seems to have been hit the hardest. With increasing gas prices and grocery prices, there is not much left of their paychecks. Before inflation set in, each household had to have two incomes. Now households need two or three incomes. Times were not easy before and now they have become more strained.
Investment Dealers Digest stated, “The rate of foreclosure starts and the percentage of loans in the process of foreclosure are at the highest levels ever.” People do not have money left over from their paychecks to make their house payments. Other problems that have led to an overwhelming number of foreclosures is inflated home prices and loans that home buyers received with adjustable rates. Borrowing up to 100% of the value of the property has not helped either.
Neighboring properties that have been reposed has had an affect on the value of properties. If a homeowner went to refinance his home, the loan company would need an appraisal. The appraiser uses sales of comparable properties to place a value on the home. “It is difficult to get a good assessment of what the valuations would be in this type of market” (Bethune, 2008, p.2). Repossessed homes typically sale at a lower value than homes marketed by true owners. The market will continue to be over saturated due to more foreclosures because people cannot refinance.
Having a home is a necessity. However, home ownership is an alternative. People can still rent. However, rental rates are increasing as well due to inflation. Domash (n.d.) stated that with buyers being able to afford homes in the past that rentals had declined. Now that people cannot afford buying, rentals are up four percent. Rentals are expected to increase over the next year. Rental rates are still more affordable than owning a home.
At this point, demands to purchase a home are weak. As foreclosures continue to increase, the market has more elasticity. It is possible that the elasticity will continue to increase. Eventually, the market will become inelastic due to people buying homes and the market becoming unsaturated. In reality, home prices are decreasing but the cost of living is increasing. In time, things will level out. When they do, supply of homes will drop and the prices of homes will increase. Typically, there is elasticity of supply in the real estate market. At this moment, we have an over production of new homes along with an increasing amount of foreclosures, which is affecting the elasticity.
New home construction has dropped to the lowest level in approximately 14 years. Builders have had to decrease production because of a decrease in demand. The real estate market has helped the economy tremendously. However, due to the decrease in building, there will be many layoffs in the construction field. Only the more skilled construction workers are getting to keep their jobs. During the construction boom wages increased. Now that there is a decline in building, the labor market is showing a decline in workers. Wages have not decreased at this time. However, wages could be forced to decline as demand slows.
How did we get here? From 2003 to 2005, interest rates were low. This spurred building and real estate sales. Financial institutions fueled the problem with adjustable loans. Financial institutions were also funding homes at 100% financing. Homes that were not affordable suddenly become affordable. The buyers who fell for this tactic were financially hurting. They did not realize the problem until their mortgage payment started to increase.
This is just the beginning of the crisis. The homes that have been foreclosed on so far are on borrowers who were offered these loans in the very beginning. Most of these homeowners now have negative equity. With the increase in foreclosures, it is causing home prices to decrease. Part of the problem is lenders are changing the way they are loaning money. This is adding to the problem because people cannot qualify for a loan. Therefore, refinancing is out of the question.
If the government stepped in homeowners could possibly see some relief. We are at a critical time in the progression of weakening real estate sales and construction of new homes. The longer it takes the government to step in the more critical the problem will be. Dunn (2008) stated “Everyday that lawmaker fail to act is a missed opportunity for improvement” (p. 11). If the Federal Home Loan Banks would increase their security holdings with Fannie Mae and Freddie Mac it would help stabilize the mortgage market.
Builders believe that they need a tax credit reform or FHA modernization that would help builder's sale homes that they built as model homes. Builders are wanting to sale to first time homeowners because first time homeowners do not have other properties that they have to sale. If the government would come out with a tax reform for new homeowners, builders believe that they could reduce their inventory.
Interest rates are falling due to a decrease in housing prices. With lower prices comes a decrease in the money demanded which in turns lowers interest rates. With lower interest rates, the quantity of homes on the market and building supplies will increase. These increases will affect the job market in a negative way. Because of the change in quantity of homes and building supplies, the aggregate demand curve shifts to the right.
Macroeconomic variables are important here because of the interest rate, the price levels of new homes, and the output of builders completing new homes. However, short-term fixes affect the short-run aggregate supply curve that is upward sloping. Because of this, the decreasing price of new homes cannot balance the supply and demand. However, the lower interest rate does bring the money market into equilibrium.
Brown (2008) states that one of the largest problems we have to overcome is the fact that the consumer does not have any confidence in our economy. We are coming into the summer season, which is typically the best time to sale a home. People are out looking at homes but there is not an increase in sales at this point. There needs to be sometime of incentive to push lookers into buyers.
Congress is looking at one idea to push the sale of foreclosed homes. They are proposing a $7,000 tax credit to anyone who buys a foreclosed home. Congress is thinking that this will stabilize prices of homes as well as keep existing neighborhoods from deteriorating. However, some people think this would hurt the economy more than help it. The thinking is that this would continue to drive down house prices. The reality is that people want to see some stability without affecting housing prices. This would also not help the people whom have already filed bankruptcy or the ones that are going to have to file for bankruptcy.
In the last 18 to 24 months, people were astounded to see the large prices that were being paid for housing. They are just astounded now to see the decrease in price. Homeowners purchase a house thinking it is an investment; and that they will receive a profit when they sale. If a homeowner wants to sale their house in today's economy, they more than likely are going to take a loss. If people in a neighborhood start selling their homes at a loss, typically everyone in that neighborhood will be affected.
This causes a negative externality because of the neighbor selling his property for less and driving down neighborhood properties. If the homeowner keeps holding out and he is foreclosed on, the neighborhood will suffer. Housing is excludable because homeowners have to pay for it. You do not have a choice not to pay, because it could be taken away.
Financial institutions say that they want to help troubled borrowers. Unfortunately, many foreclosure prevention counselors say they are running into obstacles. Since financing is a private good, it does make it harder to find loan companies that are willing to help the troubled homeowner. A financial institution can only have so many bad loans. Therefore, they cannot help everyone. The government can however, come and offer homeowners some type of relief.
Gas prices are having a negative impact on our economy. Until gas prices stabilize, it is hard to predict what the outcome will be. The gas prices are affecting the way people spend and save their money. At the present time, gas prices have a negative affect on the economy. Economists saying that we are headed for a recession is another downfall on the housing market.
The economy affects the real estate market on a daily basis. Every time a new report comes out about the GDP, interest rates, labor statistics, or even gas prices, it affects homeowners. In the short run, interest rates play an important role. However, in the end, the overall prices of homes will adjust to the level where the demand for money equals the supply. The change in demand will have a different outcome depending on the time period that we look at. At the present time, the demand for purchasing houses is low. It is forcing homeowners as well as financial institutions to record losses.
The President and congress state that they are trying to help the American people. Lenders created problems for borrowers a few years ago. The government has known about it all along. I am not sure that the government can pull the American people out of this situation. The only thing that would make homeowners happy, is the fact that if they decide to sale, they would not have to sale at a loss. The market is trying to bring real estate prices back into perspective. However, the Fed continues to stimulate the economy and their actions could cause inflation to hit other areas of our economy.
References
Christie, L. (2008). The foreclosure bailout that almost blew up. Retrieved March 20, 2008, from
http://money.cnn.com/2008/03/18/real_estate/loan_modification_hurdle/index.htm
Domash, H. (n.d.) Turn a profit on rising rents. Retrieved March 21, 2008, from
http://articles.moneycentral.msn.com/Investing/RealEstate/TurnAProfitOnRisingRents.aspx
Even if homeowner's credit is good, property values are affected. Retrieved March 12, 2008, from
http://www.msnbc.msn.com/id/23599085
Frulla, P. (2007, June 13). Construction wages leveling off: Demand is slacking for general laborers. Knight Rider Tribune News, p.1. Retrieved April, 10, 2008, from Proquest database.
Harmon, J. (2008). New home sales continue to plummet as demand softens. National Mortgage News, 32(28), 11. Retrieved April 21, 2008 from Gale database.
Oppendahl, D. (n.d.) Understanding the (relative) fall and rise of construction wages. Retrieved April 10, 2008, from
http://findarticles.com/p/articles/mi_qa3631/is_200007/ai_n8909934.htm
Tully, S. (2007) Real Estate: Buy, sell, or hold? Retrieved March 19, 2008,
from
http://money.cnn.com/2007/11/06/real estate/home prices.fortune/index.html
US home foreclosures at all-time high. Investment Dealers' Digest, March 10, 2008. Retrieved March 11, 2008 from Gale database.
Williams, M. (2008, February 19).Valley's new-home sales drop 51%: Level hits lowest point since October 1995. The Tribune. Retrieved April 21, 2008, from Gale database.
We provide a professional essay writing service that thousands of our customers use as an effective way of improving their grades, improving their research and saving them lots of time.
