Wednesday, March 28, 2007

A Glimpse at the Housing Argument

The housing market in the United States has often been a relatively safe investment. Many investors feel the housing market is not too volatile therefore is a less risky investment than stocks. In the late 1990's and early 2000s the housing market was skyrocketing due to low interest rates and a dramatic increase in home purchases. It is relevant to point out that the housing sector of the economy is very much linked to the interest rate and general economic conditions. It has only occurred recently that many economists see the huge price increase and significant supply increase of new homes through 2004, 2005 and early 2006 could bring about a housing bubble that could lead to a recession. When asking most financial institutions or economists many say that there won't be a national housing bubble since the average national home price has never been in a decline for a single year. Yet it is becoming more and more convincing through housing data and record low numbers that it could be quite possible for a national housing bubble to arise. Though the argument to consider is will the bubble lead to a recession or and other economic problems? Many experts have different opinions on the matter and may often times be skewed due to their role in the business world. Many may suggest they think all will be fine, since if they express a negative opinion their own company could suffer from many buyers being wary of the housing market. In large part, many believe everything will be fine since there was such a massive boom in the mid 2000s that it is only normal and almost obvious that a correction in housing prices must occur. Since the recent news in 2007 has not caused any major damage despite the news being negative, we can be assured that the US economy will not see a recession.

In general, the safety of the economy and housing sector lies within the interest rate as mentioned earlier. Recently, the interest rate has been on the rise due to the Fed trying to tighten up inflation worries. Though the rates have been rising, they are still close to historical lows just under 6%. The problem that lies within the housing industry is the ability for home buyers to get a mortgage. During the significant housing boom, most home buyers were able to get mortgages with any credit therefore adding to the number of capable home buyers in the economy. Now many financial institutions are tightening up their lending practices due to the number of defaults occurring on mortgages given out over the past couple of years. So, now many buyers are unable to get mortgages and cannot afford the homes that are at high prices today. A home buyer must now have excellent credit and substantial wealth in order to approve for a loan and this adds to the housing sector demand declining. In addition, the major disappointment within the housing sector right now are new homes sales not existing home sales, since supply has no far exceeded demand. Furthermore, the link between tightening loans standards and the housing sector are all linked together and can be associated with the correction that is currently occurring within the residential real estate market.

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