It is impossible to forecast with certainty how long the real estate market will continue to be in the doldrums. One can, however, examine what fueled the housing bubble and its subsequent explosion and surmise some guesses from that analysis.
What fueled the housing bubble and gave false impressions of high home demand were bonds sold by Wall St. banks that were backed by home mortgages. They needed more and more loans to package together, and lenders knew they could sell any loan to Wall St., even ridiculous ones made to people who had no income, for example. This helped to fuel the housing boom, along with the fear by many that they had better get into a home as soon as they could or they would never be able to afford one since prices seemingly were going forever higher.
There was an assumption that because so many mortgages were being packaged together that the risk of the entire bond going bad was very low. The Wall St. banks managed to get the risk rating agencies to rank these instruments as carrying very little risk. When people started defaulting in droves, all these assumptions proved to be false.
A lot of subprime loans were made. In fact the numbers for just the year 2006 were well over a half trillion dollars, and most of those were put into packages to support subprime mortgage bonds. If one assumes that the average mortgage was for about two hundred thousand dollars, then three million homes were bought with subprime mortgages in just one year, 2006.
If these sorts of subprime lending levels lasted four years, and that would seem to be reasonable, that would mean that twelve million homes were bought using these loans. Further assuming that about a quarter of those loans were defaulted on, then three million of those homes would be going into foreclosure. In 2010 we know that there were roughly a million foreclosures, and it has been predicted that 2011 will see slightly more than that. Many banks are not preceding with paperwork on all the foreclosures they have because they don't want to make the market look any worse than it is and make their losses even larger.
So it looks reasonable to assume that to simply expose all the looming sub-prime foreclosures will take a couple more years. Selling these properties and clearing them from the market will take perhaps a year or two beyond that. So this author's best guess is that the real estate market, especially the market for new homes, will not get back to normal for about 3-4 more years. Such is the legacy of the Wall St. subprime mortgage bond fiasco.
What fueled the housing bubble and gave false impressions of high home demand were bonds sold by Wall St. banks that were backed by home mortgages. They needed more and more loans to package together, and lenders knew they could sell any loan to Wall St., even ridiculous ones made to people who had no income, for example. This helped to fuel the housing boom, along with the fear by many that they had better get into a home as soon as they could or they would never be able to afford one since prices seemingly were going forever higher.
There was an assumption that because so many mortgages were being packaged together that the risk of the entire bond going bad was very low. The Wall St. banks managed to get the risk rating agencies to rank these instruments as carrying very little risk. When people started defaulting in droves, all these assumptions proved to be false.
A lot of subprime loans were made. In fact the numbers for just the year 2006 were well over a half trillion dollars, and most of those were put into packages to support subprime mortgage bonds. If one assumes that the average mortgage was for about two hundred thousand dollars, then three million homes were bought with subprime mortgages in just one year, 2006.
If these sorts of subprime lending levels lasted four years, and that would seem to be reasonable, that would mean that twelve million homes were bought using these loans. Further assuming that about a quarter of those loans were defaulted on, then three million of those homes would be going into foreclosure. In 2010 we know that there were roughly a million foreclosures, and it has been predicted that 2011 will see slightly more than that. Many banks are not preceding with paperwork on all the foreclosures they have because they don't want to make the market look any worse than it is and make their losses even larger.
So it looks reasonable to assume that to simply expose all the looming sub-prime foreclosures will take a couple more years. Selling these properties and clearing them from the market will take perhaps a year or two beyond that. So this author's best guess is that the real estate market, especially the market for new homes, will not get back to normal for about 3-4 more years. Such is the legacy of the Wall St. subprime mortgage bond fiasco.
About the Author:
Check out Homes for Sale Monument Colorado to sign up for the free report "How to Save Money on Mortgage Closing Costs". And read about the new phenomenon Deliberate Default of a Mortgage.
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