Main Menu
Home
News
Contact Us
Search
News Feeds
Articles
Financial News
Real Estate News
Directory
Home arrow Real Estate News arrow General News arrow Market for estate shows sign of stress
Market for estate shows sign of stress Print E-mail
Friday, 01 September 2006

Housing headlines dominates the news these days.  Spectacular price and sales of lots had given way to a falling real estate business.  There had been records of unsold homes, a plunge in housing affordability and flattening out of prices on a nationwide basis.
The big debate is whether housing will a) stabilize at a lower level; b) slide for an extended period; or c) sink fast and take the economy down with it. The length and strength of the housing boom, with its rapidly rising house prices, has enabled many owners to refinance their mortgages and take out a bigger loan, providing an additional ``spending accelerator.''

Ever since former Federal Reserve Chairman Alan Greenspan became fixated on the amount of money homeowners were extracting from their homes and instructed his staff to quantify it, private sector economists have been dutifully estimating ``MEW'' or ``HEE,'' for mortgage equity withdrawal or home equity extraction.

Greenspan never believed in the intangible aspect of the wealth effect: the idea that a homeowner could feel richer, and spend more from earned income or borrow to finance spending, because the price of an asset had appreciated on paper. For him, it was the actual dollars in consumers' pockets that mattered.

Homeowners who owe the bank more than the house is currently worth try to convince the lender to accept less than the loan value to avoid the costs of foreclosing on the property. While foreclosures and delinquencies are still low by historical standards, the proliferation of exotic adjustable-rate mortgages may backfire for borrowers, not to mention lenders.

The U.S. economy has weathered a stock market collapse, a terrorist attack and sky-high oil prices without much noticeable effect on aggregate statistics. So it's unlikely the decline in residential real estate will be enough to bring the whole house down.

One area that has received next to no attention is the risk to the banking system, which, like everyone else, got caught up in the housing-market froth, extending credit seemingly without much due diligence.

It was only 15 years ago that many U.S. savings and loans went under and banks' ability to lend was impaired by bad real estate loans. An extended period of easy money wasn't enough to get the economy moving. It was only when the financial system healed itself and started to make loans again that the economy took off.

 

 

-jhd-

 

 

 
< Prev   Next >