What if Housing Doesn't Come Back?!
I have been mulling around a simple concept over the past two weeks. Our housing market for many years has been driven primarily by easy access to credit. It allowed many home buyers to overextend, and even more suitable buyers access to extremely (relative to the 80s) inexpensive financing options. Much of this (putting aside much better Fed policies since the 80s) can be attributed to an extremely lucrative market for mortgage backed securities. It leads me to the simple question, what if the mortgage backed securities market doesn't come back...ever?
Many economists, including Henry Paulson, are calling the real estate tumble a "market correction" which is an inherent acknowledgment that there was something wrong with the housing market that now needs correcting. There has been a lot of discussion about the need to make mortgage backed securities more transparent so investments carry the appropriate risk level to stem a future crisis from happening again (I have yet to hear of one viable option). But no one is really admitting that whatever new form these securities will take, it will never be the same. These new securities will have added cost due to new government oversight, and more importantly they will be sold in a market where investors now consider the security extremely risky, instead of extremely safe.
Since most individuals purchase real estate with credit, cost of accessing credit is a strong contributing factor for the demand for real estate. Packaging mortgages and selling them in a bulk security greatly lowered the cost of borrowing. It opened the mortgage market up to a world (literally the entire world) of investors. A bank in
This may be the end of real estate based wealth building as we know it. For years housing prices were driven upward, I would argue primarily by easy credit. Securitizing mortgages brought borrowing costs down so low there was an influx of new demand into the market. Now, with more investors becoming extremely risk adverse to
Looking forward two years from now, after the global recession will begin to (hopefully) ease, and when consumer spending and Fed policy returns to normal; the mortgage market may look very different. With an additional fear factor, investors will be looking for a higher return to account for newly recognized (does not even need to be real, just perceived) risk in the
To end on a bright note. If you rent, this is great news! Wait out this adjustment period, build your credit now, save up for a ridiculously high down payment to secure your loan, and hopefully the post-recession, post-crisis, interest rates won't be too far out of reach! Just don't count on your home being your nest egg unless you anticipate a sudden jump in
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