Archive for the ‘Housing Market’ Category

A Silver Lining to the Subprime Mortgage Debacle

The current economic situation leaves much to be desired. Unemployment is up around the country and due to the bank bailout, we are facing a very large deficit, which has questionable returns. This and many other factors lead many to be very wary of what is to come, so it can be hard to find a silver lining. However, for those who are prepared to buy a home, now is a very good time, as home prices are at a historic low and the government is offering a tax credit for first time home buyers.

There are several reasons that house prices are so low, but it has a lot to do with the high rate of foreclosures. Over the last 10 years, the subprime mortgage market exploded.

What are Subprime Mortgages

Subprime mortgages are mortgages that have higher interest rates and less favorable terms than traditional mortgages.

Subprime mortgages have historically been a tool used by people who have less than perfect credit and would not be able to get a standard mortgage. One of the most popular subprime mortgage was the Adjustable Rate mortgage, which had a low initial rate that increases periodically. Not all Adjustable rate mortgages(ARMs) are bad, but subprime ARMs can have an interest rate that increases freuquently and exponentially raises the monthly mortgage payment.

The Role of Subprime Mortgages in the Financial Crisis

Those who receive a subprime mortgage are still usually vetted by the lender, with credit checks and income checks to verify that the individual will be able to pay for the mortgage. However, over the last few years, many lenders stopped vetting loan applicants and instead approving pretty much anyone for a home loan.

Lenders stopped vetting mortgage applicants, because mortgages became a very popular investment tool. Investors would buy up a group of mortgages and then bundle them into a large group. They would then sell the mortgages to investors, many of who were overseas, as a high return investment. Since the bundled mortgages were subprime, they had a much higher than normal return rate.

The first investor, who financed the initial mortgages, would not be keeping the mortgages, so there was no incentive for the investor to vet applicants. Instead, as soon as they had enough mortgages in their bundle, they would sell them and be someone else’s problem. This resulted in many people who should not have had a mortgage ended up with a subprime mortgage.

One of the reasons that real estate became so popular as an investment tool was because of rapidly increasing home prices. Homes would often appreciate more than 25% a year towards the end, which gave the impression that even if the person defaulted on their loan, the home could still be sold for a profit.

This went on for some time, with home prices rapidly increasing, artificially inflated by the large number of subprime mortgages. However, this could not go on for ever and eventually those who received these subprime loans, were no longer able to pay for them, spurring a increase in foreclosures.

The Silver Lining

While the current housing market has brought much sorrow to many homeowners, there is a silver lining for some. With the vast number of foreclosures and empty homes, it is possible to buy a historically low prices. This large number of foreclosures has also driven the prices down on other homes. Further, interest rates are at an all time low.

Of course, lenders are now being much more careful in who they offer mortgages to, but for those with good credit and money for a down payment, it is possible to purchase a new home for much less than even a year ago. The federal government is also offering a tax credit for first time home buyers, which is up to $8,000 and does not need to be repaid, so for many, now is a good time to buy a home.

Many assert that housing prices were artificially inflated in the first place and the prices we see today are simple the real market value of the home, and in many ways this is correct.

Construction Spending Down in July

The recent report from the U.S. Department of Commerce stated that overall construction spending  in the US is down 0.6% month-over-month in July.

Residential construction fell by 2.1%, up slightly from June’s 1.3% decrease, while non-residential construction gained 0.2%, down slightly after rising 1.1% in the previous month. Overall, this is not surprising news. As home purchases continue to decrease in the tightening credit market making it unwise for contractors to take on large residential projects. More worrying is the notable decline in private construction.

There was a 1.4% decline in private construction and a 1.4% increase in public building, which came in at 0.2% and 0.4% in the month of June.

Obama Outlines Housing Plan

This week Senator Barack Obama outlined his plan to save the US housing market while speaking to a group of Union members in New York. His plan centers on the modernization of the financial regulatory system as well as a second stimulus package. According to Senator Obama, the regulatory agencies in Washington have let the special interest set the agenda for reform.

The Obama plan is a three prong approach.

1. Modernize the Financial Regulatory System

This includes giving the Fed supervisory authority over any institution where the Fed is a lender of last resort; i.e. Bear Sterns. Obama also wishes to increase disclosure requirements for investment institutions and streamline the entire process of regulation. Currently, many institutions are regulated by multiple agencies with overlapping areas of authority. This makes it difficult to identify who is responsible for enforcing compliance.

2. Help Homeowners Facing Foreclosure

Obama proposes the start of a new Housing Security Program to give lenders an incentive to refinance existing mortgages into fixed 30 year mortgages backed by the federal government. He also proposes closing the Chapter 13 bankruptcy loophole for mortgage companies and defining mortgage fraud and predatory lending at the federal level.

3. $30 billion Economic Stimulus Package Specific to the Mortgage Crisis

The stimulus package would set aside $10 billion in foreclosure prevention for home owners in danger of losing their home. Another $10 billion would go to state and local governments that are facing revenue shortfalls due to the housing market. The rest of the package would be used to extend the length of unemployment benefits for full time workers and offer compensation to many part time workers not currently included in the system.

Existing home sales and home prices drop

The National Association of Realtors (NAR) announced today that existing home sales decreased 0.4% in January, when compared to the previous month’s sales.

Housing starts dip despite rates at 10-year lows

This morning the U.S. Census Bureau and the Department of Housing and Urban Development announced that builders continue to initiate the construction of new homes in lower numbers. According to the joint report, privately-owned housing starts for the month of January 2008 fell 14.2 percent month-over-month as compared to December 2007.

Housing starts decline, rates still at 2-year lows

The U.S. Census Bureau and the Department of Housing and Urban Development announced today that the number of privately-owned housing starts decreased in November.