Ups and Downs in Housing Market and Home Loans

Real estate market in United States experienced easy credit conditions for quite some years owing to low interest rates as well as large influx of foreign funds. However, this was the scenario before the crisis occurred in the real estate market. Such environment helped enhancement in market boom while encouraging debt financed consumptions. In result, getting home loans were easier those days.

Home ownership increased substantially from 64% in 1994 to 69.2% in 2004. One of the reasons that contributed handsomely to the enhancements in ownership rates as well as demands for houses in the market was the subprime lending.

Since the prices of the houses continued to rise till 2006, mortgage was easy to find. Rise in the price was in the range of 124% overall; quite substantial in any real estate market. People were also able to get refinance at lower interest rates by getting second mortgages. Household debt as the proportion of the disposable personal incomes rose to 127% by 2007 as against only 77% in 1990.

Impact of increase in prices of houses was that the consumers were having limited savings. Borrowing and spending were consequentially on the rise. Household debt saw a phenomenal rise to $14.5 trillion by 2008. At the same time the home mortgage debt increased to 73% during the corresponding period and the overall figure was a massive $10.5 trillion.

Natural consequence of the rise in the price of houses as well as credit was building boom that eventually lead to surplus unsold homes. Prices of houses started declining by mid 2006. In result finding home loans became much harder than in the past and the interest rates went up. Subprime borrowers those obtained the adjustable-rate mortgage found themselves in big soup as a consequence.

Borrowers that could not repay their loans after the expiry of the initial period of grace often tried to resolve their problems by resorting to refinance. As refinancing became more difficult with decline in house prices and value of collaterals, borrowers found them unable escaping higher monthly payments by such methods. Such conditions resulted in most of the borrowers becoming defaulters. With growth in number of defaulters, foreclosures increased and number of houses for sale increased as well.

Lowering of homeowner's equity and reduction of value of mortgage backed securities were the consequences.


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