There are signs of improvement in the economy and many economists have declared victory and heralded the end of the recession.
But if the economy is once again growing, why are so many banks failing and how might this impact the economy?
Here’s an AP story that discusses the topic:
Real estate buyers spend a considerable amount of time and energy agonizing over home prices. Will they go up? Will they go down? But those buyers are asking the wrong questions.
The real question is “Will the combination of home prices and interest rates become more or less favorable?”
If prices drop and interest rates rise, the net effect may be no gain for the home buyer. A key component is where interest rates are headed.
Right now, interest rates are low, and perhaps artificially low. The government has been printing money like crazy to try and keep rates low. How long can that go on? I suspect that higher interest rates are in store for the future.
Without getting into the equations involving home price, down payment, loan amount, and interest rate to determine the mortgage payments, on a very high level it is obvious that when rates rise they pull mortgage payments up in the same ratio. For example, rates rising from 6% to 7% would reflect a change of almost 17%. If prices don’t drop, that means payments are going up 17%, obviously bad for buyers. And even if prices drop, will they fall enough to maintain the same payment?
If rates rise faster than home prices drop, the net effect to the buyer is that it will cost more to buy a home.
California mortgage default rate hits 15%
In contrast to recent claims that the recession is over and home prices have stabilized, the California mortgage default rate is still increasing. In the most recent report, the rate was 15.2% which is the highest since 1972 and higher than the national level which is currently 13%.
What’s driving all these homeowners into delinquency?
The real estate market is continuing to unwind. At first it was high risk borrowers, those who took on adjustable mortgages and bought with little or no down payment. Then with unemployment soaring, another wave of defaults came from families dealing with lost jobs and lost income. The problem has progressed to the point that highly credit worthy borrowers with good credit and conventional home loans are getting squeezed into default.
As more and more foreclosures flood the market from adjustable rate mortgages resetting and job loss financial distress, prices will continue to have a limited upside potential.
To read more about the California real estate mortgage default rate situation, refer to this LA Times article:
In a report just issues by the California Association of Realtors, a chart was included that shows the percentage of total home sales that were distressed sales. The percent is staggering, being higher than 80% in some counties. With levels this high, there’s still a glimmer of good news in that the percentages of distressed sales are slightly lower than reported in March.
Distressed Home Sales as Percentage of Total Home Sales
Real Estate Prices Have Hit Bottom as Sales Increase. Is That Right?
There are definite positive signs that real estate prices have hit bottom. But could it be an illusion? There are some positives. Prices are a lot lower than they used to be, and interest rates are still low. The combination means that homes are more affordable than they’ve been in many years.
And my answer to that is…
Just because prices are lower does not mean they can’t go lower still. Real estate prices are driven upward by trend following speculators who want an easy profit, and they are driven down by fundamentals. Families all across America are struggling, cutting back on expense, and have fear of job loss, or income reductions that come from cut hours or underemployment. Until there are more positives, it’s hard for me to imagine a trend of increasing real estate prices.
In the short term, I do see some gains possible. This is due to some real estate bottom fishers, the speculators who think they can pick up houses cheap right now. And we are in the midst of the summer selling season for real estate, and that helps give a positive impression.
I want you to read the article linked below to expand your understanding of this subject.
This blog is dedicated to Southern California real estate. I've been a real estate agent since 2002 and I look forward to helping you. I will be posting a wealth of information here to keep you informed so you can make wise decisions regarding real estate.
