Thursday, October 16, 2008

Housing Prices Still Heading South

The housing market is still in a downward spiral. As values decline equity disappears. No equity means that people are unable to refinance and unable to take out equity. As the prices fall even people who did have a down payment or had equity at one point in time do so no longer. It is like the money disappearing from the DOW - just in slower and more common terms. The future declines are discussed in this article from the New York Times titled Home Prices Seem Far From Bottom. Lets take a look -

Home prices across much of the country are likely to fall through late 2009, economists say, and in some markets the trend could last even longer depending on the severity of the anticipated recession.


Adding to the worries nationwide are rising unemployment, falling wages and escalating mortgage rates — all of which will reduce the already diminished pool of would-be buyers.


On Wednesday, the average rate for 30-year fixed rate mortgages was 6.75 percent, up from 6.06 percent last week. While banks are moving aggressively to sell foreclosed properties, the number of empty homes is hovering near its highest level in more than half a century.


Higher interest rates result in bigger monthly payments, pricing some potential buyers out of the market. For example, monthly payments are $2,700 on a 6 percent 30-year, fixed-rate loan of $450,000. If the interest rate rises to 7 percent, those monthly payments jump to $3,000. All things being equal, when rates rise prices generally fall.


While those declines have been painful to homeowners in those cities, economists said the quick decline might help the markets reach bottom faster than in previous housing cycles, said Edward E. Leamer, an economist at the University of California, Los Angeles. In a previous boom, home prices peaked in the Los Angeles area in 1990 but did not hit bottom until 1996. Prices remained near that low for more than a year before starting to climb again.

The raise in mortgage rates will make the values drop even more. This in turn will put even more people underwater. The downward spiral continues but it appears to be on the fast track. The big question how much more will this quick descent hurt as compared to the long and slower descent of the 90s. And how long and hard the slog will be to get back on the right track.

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