What's in the Future? Part 3

One of the factors that lead to the over heated Real Estate Market of 2000 – 2005 was the easy availability of cheap money. While the Fed was driving down interest rates, the banks, with the permission of the government were putting together loan packages that made it extremely easy for the average American to buy a house.

With interest rates down to 4% on some loans, you could arrange to get a loan with no down payment and no documentation. You could get 5 or 7 year adjustable rate mortgages. You could even get a negatively amortized loan if you wanted to. Home ownership in the United States grew from 50% of the population to 70%.

This easy access to money only further fueled an already hot real estate market. Now all of these exotic loans have begun to backfire on the home buyers who used them. With home values at a stand still or even dropping, those who used zero down payment loans have very little room to maneuver. A zero down payment only works in a Market where values are growing. You can depend on the growing value of your home to make a zero investment into something of value, with the growth of the equity in your property.. In a downward trending market, you are going deeper and deeper into a whole, and rising interest rates are making it cost more each month..

By the 3^rd quarter of 2005 fully half the home loans made were either sub-prime or adjustable rate mortgages. Now that the market has changed 21% of sub-prime lenders have gone out of business and that number will likely increase as more and more people default on their loans. Even the big institutions cannot absorb all the defaults.

By September of this year Freddie Mac is going to tighten up its requirements for loans, and they have already signaled that 50% of those sub-prime loans out there will not meet the tougher requirements. In this arena of lending, there is still quite a distance to fall.

The silver lining in this will be a more controlled lending market leading to a more stable Real Estate market. At least, that is the hope.