You’ve probably already read about it in the news…the sub prime markets are a mess. The problem began after the turn of the century, when stock markets began to tank. As a result of the instability caused within the U.S. economy, the Fed began an aggressive campaign lowering interest rates. And while the rate cuts did salvage the major indices, the fallout was an unintentional real estate boom, as lenders began qualifying sub-par would be homeowners for mortgages they clearly couldn’t afford.
Making matters worse, many of the loans were Adjustable Rate Mortgages (ARMs), where after certain periods of time, payments increase with rising interest rates. By the end of 2007 many of these mortgages are designed to reset their rates, which mean higher payments. One trillion dollars of these ARMs will be raising rates requiring higher payments. Further complicating the situation, many banks also offered Home Equity Lines Of Credit (HELOCs), which in essence, mean the borrower’s payment is tied directly to the prime rate, constantly fluctuating as rates shift.
As a result, foreclosures are at an all time high, with 1.2 million filings in 2006. And that number is expected to double again in 2007.
In the history of the world, borrowers have never been further leveraged, and the toll it’s taking on the U.S. economy is starting to show.
Economics aside, the foremost issue facing you, the homeowner, is the devaluing of your property, as excess inventory continues to weigh down prices.
It’s a simple rule: excess supply means lower demand. And lower demand equals waning prices. In fact, in a recent article by Fortune, the magazine predicts 52 of the United States 97 markets will see 2% (or less) growth in 2007, with 35 of the nation’s real estate markets actually seeing price growth roll into the red.
No market is resistant to a correction. On May 9th, Bloomberg released an article titled: Home Prices Fall in Rich New York Suburbs Once Immune to Slump. In 15 of the 24 New Jersey, New York and Connecticut areas studied, prices dropped as much as 18.8%, this year alone.
And, with the U.S. dollar moving lower, the Fed cannot simply lower rates to help aid those just inches away from foreclosure. You see, this problem is not going to end any time soon.
It’s time to face the facts, U.S. real estate markets could be in big trouble, and the very first stones have only now begun to be thrown. What we are witnessing could be a serious adjustment to the economy. Leverage used to excess contains the seeds of demise.
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