Why the property market crash bad?
Friday, February 26th, 2010 at
5:06 pm
I understand negative equity but im not yet a homeowner so this doesnt effect me as such.
I was just wondering what the other negatives were of the housing slump and also the positive and the key question…When to buy and what I should be cautious of?
Thank you
Sell and Rent Back
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Tagged with: Housing Slump • Market Crash • Negative Equity
Filed under: property crash
Housing prices historically have been between 2.5 and 3x median income for the area. In the last few years we got way above that number, and this is not sustainable. This “crash” we are seeing is just a reversion to the historical trend.
Check the median incomes in your area versus home prices. if they are 3x earnings or less, go ahead. If they are still above that, i’d wait longer. Personally, I’d wait either way since this crash is far from over.
if you have to buy, do your research and find a foreclosure or something you can get for a really good price.
The problem stems from a period of time in which it was easy to get loans without having to document your income or assets in any way. This meant that people could claim higher income than they actually had and thus qualify for a much higher mortgage. Now, imagine millions of people running around with tens or hundreds of thousands in excess mortgage money available to them. What will they do? They will bid up the prices on homes far above what they could if they had to prove their income. So a person could bid $400,000 on a house that he might only be able to bid $150,000 with verified income. What this creates, if you multiply it by millions of home buyers, is a tremendous upward pressure on home prices. After all these homes are purchased at inflated prices, mortages adjust, rates go up, people can no longer make the payments, and lose their homes to forclosure by the millions.
So the market is not really crashing, it is merely returning to a level that it never should have exceeded in the first place had sound lending practicves been in place. The ones who will lose are the ones who took advantage of lax lending guidelines and lied on their mortgage applications, and the banks who accepted them.