We have all seen housing prices drop the past few years, as home owners watch as their net worth falls as the price of their homes plummet in value. As the credit markets slowly begin to thaw, and as banks and other lending institutions implement new policies on home loans, how will the credit crisis continue to impact the real estate market?
Fundamentally, the real estate market is affected by the same supply and demand economics that affect the sale of every commodity in the United States, whether it is cereal or cars. The 1990’s witnessed a great increase in the number of home owners in the United States as credit was relatively easy to get, some say too easy, for prospective homeowners to obtain a mortgage and buy a house. This lead to increased demand for houses, and the median home prices soared. Homebuilders also started building more homes as demand skyrocketed.
However, now there is excess capacity on the housing market as many people defaulted on their mortgages and typically it is taking longer and longer for a home to sell, and when it does sell it is at a much lower price than it would have sold at in prior years.
The reason is that demand for homes has evaporated. This partially due to the fact that banks and financial institutions are very reluctant to give home loans to potential buyers who may have good credit and good jobs. This is mostly because there is a fear that the economy will worsen, and that a person who takes out a mortgage today, may be in foreclosure in a couple years. For this reason lending institutions have become more conservative about whom they give a mortgage too.
Because fewer people can obtain mortgages, even when they can find a relatively cheap house, the number of people actually looking to buy houses has decreased. This decreased demand has lead to house prices that have plummeted as people looking to sell their homes must compete for a smaller market of sellers. Only when the credit crisis improves, probably months after the recession has improved and companies start hiring again, will housing prices start to inch up slowly.