Mother nature unleashes its fury in the form of forest fires, tornados, hurricanes and earthquakes. Certain things can be done to minimize the damage and reduce the risk of destruction. However the extent to which you may suffer a loss is beyond your control. To a lesser degree, an economic disaster is occurring in the real estate market. Again, how you prepared yourself will determine the extent of your financial injury.
In the current economic cycle, California is in the destructive path known as the sub prime or the housing crisis. A false economy built upon escalating home values, mortgages for anyone who completes an application, and a lending industry committed to seeing everyone who wants to own a home, will own a home. At least for a year or two, or until the repo man cometh. Very similar to when my daughter blows up a balloon. It flies like crazy until all the air is expended. It doesn’t just pop and fall to the floor, it goes for a while until the force of gravity begins to be greater than the air escaping and then it falls to the ground albeit rather suddenly.
A Silver Lining in This Dark Cloud
How can anything good come out of something that has negatively affected so many? The positive opposite reaction is that home prices are coming down and becoming more affordable. The California Association of Realtors reports that 44% of the households can now afford to buy a house compared to 26% this time last year. That’s great news if more people can now enter the once exclusive club of home ownership. Except for one thing, people are not buying homes.
You would think that if homes were more affordable, people would be buying, but their not. The reason is that it is so much harder to qualify for a mortgage. Now it appears we have the worst case scenario, falling prices, and wealth evaporating in the form of declining equity. Proving that if money is inexpensive and obtainable, people do not care what they pay for a house.
Surely there is a middle ground somewhere in this case of extremes. The problem is the people who have abused the system, a system designed to increase home ownership. Unfortunately, it has now been ruined for the ones who could truly benefit. The situation resembles offering a sales person a huge bonus, but with a sales quota that is unreachable. Home prices are in sight, but still unobtainable to the many who can afford the monthly payment, but can’t meet the requirements to obtain a loan.
The real estate market needs to find a balance. For the past few years the pendulum swung to far to the left and allowed too many applicants the opportunity to commit to a financial obligation they couldn’t document or afford. Now just the reverse is true, a swing to the right and many people who could buy are eliminated, thanks to increasing restrictions. If the real estate market is to recover it’s time to put some air back in the balloon and just let it float for a while.
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