Tuesday, December 12, 2006
Mortgage delinquencies, the threat is on.
Mortgage delinquencies, the threat is on.
Investing in 2005-spring 2006 was defined by the real estate market. Middle class America was suddenly worth tens of thousands more in the course of a year and some entrepreneurial spirits raked in hundreds of thousands flipping low priced homes.
An article was released today by the AP saying that delinquencies and late payments are on the rise, primarily by lower income households and families. I have several reasons for this:
A: During the real estate boom throughout the last year and a half, home prices, specifically in the lowest priced homes went up higher when compared to wages. Middle and upper class Americans were the people who were most invested in real estate during the last boom. These investors purchased homes for lower class and lower middle class citizens to lease or possible purchase from the investors after renovation. In some cities, entire neighborhoods of low income areas were purchased to be renovated and then resold to potential inhabitants for $20-30,000 more than originally paid for the home plus the new additions.
B: Home prices in the lower income areas addressed above rose, by percentage, higher than the high income suburbs which experienced the same boom in prices. Homes in $70,000 neighborhoods saw rises of 200-300 percent due to renovations. When an entire neighborhood is flipped, the houses are of better quality and gain as a whole. No one will want to buy a $200k home in a neighborhood of $50k homes but they will have no problem buying a $200k home in a neighborhood of other $200k homes.
C: Lower income families missed out on the housing boom and are forced to pay more money to the people who are renting their homes to them, or to the banks who hold the mortgage on the property. Middle class and higher profited the most from the latest real estate boom, as with any boom. Those who have the money to invest will always fare best in a market, you cant win without investing.
This marks the end of the real estate days at least for another decade. When you have people missing payments, real estate prices as a whole are too high for the current wages. We’ve lived in a society where you buy now and pay later but there is a crucial point where people are maxed out and are unable to make good on the things or money that was borrowed.
What good is a market when no one can afford to front the money? This is what I think real estate has lead to. We’ve got another good 10-15 years before we see another real estate boom, things like this are 10-20 year occurrences.