What’s Wrong with Housing? Value Equation, Over Supply, and Consumer Confidence

Mortgage write-downs continue to plague the financial markets today with no end in sight. As the mortgage market continues to roil in turmoil, more and more experts have suggested that the housing depression will go deeper and last longer than previously expected. Low interest rates do not seem to be enough to spark a housing revitalization.

The Housing Market

The housing market began its downward spiral over a year ago. Cracking fundamentals finally gave way about six month ago, leading to the decline the United States and Europe find themselves in today.

Housing is experiencing two fundamental problems. The value equation represents the first problem. Purchasing a home requires a larger portion of income than ever before. While a home might have accounted for 50% of a new homeowner’s income 10 years ago, that number now is more like 70-75%. This significantly increases the probability of default. Homeowners simply cannot save enough for a rainy day. On top of that economic clouds are swirling and some homeowners are already in the eye of the storm.

Market perception and consumer confidence make up the second issue. Consumers have made up their minds that housing is finally too expensive and that recession fears are real. This expectation of a price decline keeps buyers out of the market. Supply and demand takes over after that and all of sudden housing stocks rise to record highs and prices begin dropping at a record pace.

Mortgage terms represent the third dark horse stalking the market. With an increase in consumer defaults and a faltering economy, mortgage lenders and banks have to be more judicious about where to allow customers to borrow. This means tighter lending restrictions, higher downpayment requirements, and a generally tougher loan market despite a record low Federal Funds Rate.

Turning around the Residential Market

Eventually two of the three issues plaguing the housing market have to change. Unfortunately these issues will not change overnight. Honestly, these issues take months and perhaps years to correct themselves. With supply and prices at record levels, buyers could be sitting on the sidelines for well over a year before even considering re-entry into most markets. Now that consumers have been sold on the fact that the United States is in a recession, it will be a very hard sell to get them out of their bunker mentality. As negative data continues to pour in over the near future, they will only develop more resolve to save and hold off major purchases. Without substantial change in these two problems, expect the mortgage market to hold firm on their lending standards and the housing market to remain in a rut.

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