Monday, March 26, 2007

The Tumbling of the Housing Market

    The article "Housing Still on Down Slope" by Steve Kerch appearing on on Feb 8th 2007 discusses the current situation of the housing market and forecasts housing prices for the future. Three economists mention that the real estate market is still declining and will not stabilize until the middle of the year. David Seiders states that there will be a decline in housing starts, which are the number of privately owned new homes entering the market, from previous years leveling out around 2002 numbers of 1.5 million. The maximum number of starts was seen in 2005 with 2.1 million, which shows a considerably more amount of money in the US economy. Though the starts are suppose to represent wealth in the economy, GDP growth, unemployment and overall inflation and interest rates situations have all been positive. So even though it seems there has been a housing bubble, it is not as severe as many would have portrayed since it really has not harshly affected the economy. Furthermore, David Berson, chief economist for Fannie Mae, believes investors and home owners will not see real home price gains for several years. This could surmount to a problem if many investors were planning on selling their homes and cannot, but still must pay for rising mortgage rates. Many people will then default on their mortgages causing many homes to enter foreclosure. The owners who default will have many problems, but all the foreclosures on homes will allow many new home owners to enter the real estate market at a much cheaper price. If many people enter the market at a low price, then homes will eventual rise and possibly create a similar bubble in the distant future. Currently, we do not need to worry about the future markets just about the current supply and demand and housing-price declines. The housing prices in 2005 were significantly high which caused supply in the housing market to increases while many homebuilders were trying to reap the rewards of the high prices and to keep up with the demand. The demand was partially inflated due to many people investing in real estate due to the rapid increases in prices. So, now investors and homebuilders are all trying to sell homes which no one wants to buy since demand was inflated and prices were sky high. Now prices are dropping to find the market equilibrium where supply equals demand at a reasonable price level.

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