The biggest obstacle facing the real estate market is excess inventory
April 11, 2008
The housing crisis is a daily headline on almost every website, newspaper and blog. The fact that American home owners have lost billions of dollars worth of equity is very concerning and one of the largest items on politicians agendas heading into the elections. Our country is growing at a rate of about two million people per year. This is a key statistic that is often overlooked but will be a major factor in eventually helping to fix the housing market.
The largest challenge facing the real estate market today is excess inventory. The fallout from the sub prime mortgage crisis has been an over abundance of foreclosed homes. This has had a significant secondary impact on the market that is contributing to the ongoing problem. As home values have declined, lenders have tightened their guidelines making it more difficult to not only refinance but to qualify for loans to purchase homes. The net result is that we have a marketplace where inventory is continuing to grow and the demand for the inventory is restricted. Like every major economy this causes prices to decrease.
The solution that should be the major focus of congress is to encourage new forms of lending to stimulate the real estate market. Fixing the demand side of the equation will go a long way towards improving home values.
Government Bailout Options
April 9, 2008
The long anticipated government housing bailout should be announced within the next two weeks. The economy has seen a number of indirect initiatives in assisting to help the housing market with both fiscal and monetary policy coordinating efforts to help the troubled market. There have been a wide variety of reports on what form of bailout and to what extent the government would become involved.
Critics have argued that the government does not need to increase the tax burden for individuals who did not make poor financial decisions or get greedy trying to refinance their homes into teaser rate programs. However, even the most staunch critics of the government having a direct role in fixing the problem are now beginning to ease on their opposition as the economy heads into a full blown recession and U.S. home values have dropped almost 10% in value over the past twelve months.
There are a number of items all but guaranteed to be incorporated in the upcoming legislation including:
- A larger role for the Federal Housing Administration (FHA)
- Tax incentives to buy foreclosed homes
- Financial incentives for lenders to reduce the balance on mortgages where home owners owe more than the value
- The role of the Fed continuing to grow in oversight of the mortgage market
- Better funding of education and home counseling programs
The real challenge in correcting the downward spiral of the housing market is a simple lesson in economics, supply versus demand. The supply of homes continues to grow with foreclosures and bank owned homes being a large contributor and the demand from buyers is limited because of lenders restricting underwriting guidelines. Fixing this balance will be critical in bringing back the real estate market.
