How Does the Stock Market Affect The Real Estate Market?
Bankruptcies and forced takeovers are difficult enough economic happenings, but when they involve one of the biggest brokerage houses and one of the biggest insurers in the country, it is bound to have implications.
Many of us don’t have any money in the stock market, at least not any that we can touch for the next 20 years, so we are more concernedabout how these events will affect the housing and mortgage markets.
Since the housing and mortgage bubbles caused most of these problems, we can see that they are closely related. Both consumers and lenders are at fault, since too much easy lending put borrowers in over extended credit situations and lenders were able to sell off these risks in specialized markets, so they did not have to worry about the risk. Banks were thrilled to lend whatever amounts homebuyers required, since they knew they could sell the loan; buyers of these securitized loans were confident that the default risk would ultimately fall on Fannie Mae. Nearly $7 trillion of new residential real estate and consumer debt was created during the beginning 6 years of this decade, according to Daniel Alpert, managing director of Westwood Capital. This represented a doubling of consumer type lending since the end of the prior century. Now this rapid expansion in debt is returning to haunt us.
Events such as this affect all markets, by creating a credit crunch. The International Monetary Fund predicted in the beginning of2008 that the world credit crisis may cost the world wide economy $1trillion this year.
The real estate market was radically affected. First of all, banks will continue to grant fewer and fewer loans. Homeowners have mortgages they cannot afford, and so are cutting back on other areas, such as auto and credit card purchases, which decreases lenders incomes.
Loans in total, not such home loans, will be much more difficult to acquire. This may signal a return to the more traditional lending standards, with substantial down payments required and sensible income to debt ratios expected by lenders.
One good thing may exist for upcoming buyers, however. Since there are not enough home loans being granted, houses are going begging so prices will continue to go down. This kind of credit situation also removes the speculators from the market, and they have a very inflationary impact on prices. This may be a real boon to first time home buyers who had been shut out of the housing market when housing prices were escalating. If a potential homebuyer used this time to build up an adequate down payment and improve his credit rating, he will be one of the lucky few still able to get a mortgage.
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