Newsweek: Dream House or Nightmare?

For those who have a harder time grasping the housing market, Newsweek has an excellent article highlighting a specific family who is affected by the slumping housing market. The article focuses on families who have built custom-built houses, expecting to cash in later on their investment. For example, the Elliott family built a $750,000 house, using part of inheritance money. They expected, based on the rising housing market from 2000 to 2005, to gain high returns on their investment. But instead, the house is rapidly losing its value and as the National Association of Realtors predicts, home sales will fall by 10.8 percent from 2006. The owner, Roger Elliott, predicts that the house is now worth 10 percent less than it cost to build. The article goes to show that not only those who financed homes with a subprime adjustable rate mortgage are at risk. In fact, the Elliotts have lots of equity and are not worried about paying mortgages. The housing market is affecting everyone in different aspects. Personally, I think it's unfortunate that those who were counting on using their houses as an investment are let down by the slumping housing market sales.

What Did Bernanke and Co. Do About This Stumbling Market?

Ben Bernanke, the Federal Reserve Chairman, and his fellow Board of Advisors took action. I think that the Federal Reserve should cut interest rates a bit more, even though they have already cut the Federal Funds Rate (what banks pay to borrow money from each other overnight) from 5.25% to 4.75% -- an aggressive 0.50-point decrease designed to "shock" the market back into life. I like what the Fed did: the cut will allow liquidity to be alive and consumer confidence to be high. If the banks are charged a lower interest rate, then they will perhaps loan out more money.

But, there is one problem that I have with this action. By reducing the interest rate, Bernanke has given inflation a chance to pick up. The US has a relatively low inflation rate compared with many other nations (this is good--believe me), but if the interest rates are decreased, then perhaps inflation might, well, inflate.

I must admit, though, the possibility of inflation picking up is remote, as the US economy is quite strong now.

~Dr. ECON

What Can You Do? Elizabeth Razzi Has "Steps That You Can Take" To Stay on Top

In the recent issue of the Reader's Digest, Elizabeth Razzi wrote an article about the subprime mortgage market entitled, "House Wrecked?" Razzi, after analyzing a few personal cases of people losing their homes to foreclosures, created a list of steps one can take to stay on top of the market. I am posting a few of her steps:
- Get an expert on your side. Razzi says, "You can get advice on avoiding foreclosures from a housing couselor approved by the US Deparment of Housing and Urban Development*."
*In case you wanted to reach that site, click here.
- Make copies of all of your documents.
- Ask the lender to waive prepayment penalties for refinancing.
- Razzi says "Do not work with anyone who asks you to sign a "quitclaim deed^."
^If you are unsure as to what a quitclaim deed is, go to Dr. Wikipedia's website. Or, read on. A quitclaim deed is a legal document which hands over ownership of your home. Obviously, don't sign this. You don't want to lose your home!

Housing Market WILL NOT cause a recession

In response to the previous post, the other side of the debate...

According to economic analysts at CNN, the housing market recession is not global, nor national for that matter. Decline in housing capital can only bee seen in certain parts of the United States; parts in the Southeast are hardly affected and have rapidly growing markets. Both analysts and prospective homebuyers believe that the housing recession has already reached its lowest point and, once sellers relax prices enough, buyers with good credit will return to the market, discoursing unscrupulous lending practices and variable-interest mortgages. Similarly, the Federal Reserve should not interfere with a recovering trend, which is part of natural cycles of growth and recession in the economy. There is not enough capital in the housing market for people to make loans at this stage, but most Americans say they are confident they could sell their home within the next six months for a fitting price.

Stricter regulation should also be placed on subprime mortgages to prevent rapid economic recessions in the future. Measures must be taken prevent borrowers from falsifying information about their financial condition to obtain a subprime mortgage (known as a "Liar Loan") and to curb dishonest subprime lending practices and "predatory" mortgages. However, policy regarding the market regulation must not involve the Federal Reserve, which is blamed for much of the recession after they created a reckless demand by making the cost of borrowing money artificially cheap. Although the housing market is currently in a slump, the overall economy is still healthy and shows little loss of momentum from the recession. Availability of jobs has risen to 28.6 percent from 28 percent and interest rates have not increased, indicating that the status quo is currently maintained.

Housing Market WILL cause a recession

The housing market crisis began with a high rise in housing price (about 80%) and subprime lending which became about 35% of the credit market. Subprime lending is the practice of lending to people who had poor credit history. Furthermore, the interest rates were at around 1%. However, when lending slowed down and interest rates went up, many couldn’t pay mortgages. As a result, the demand for housing was reduced and home prices fell. There was a 30% decline in housing activity that could reduce the GDP growth by 1.5 percentage points, according to the American Enterprise Institute Newsletter. Now, lenders are tightening standards and are making it increasingly difficult for people to obtain loans. In fact, Merrill Lynch rates the chances of a recession at 65%. According to the Washington Post, the Fed has already cut federal funds rate (what banks pay to borrow money from each other overnight) from 5.25% to 4.75% to keep liquidity alive and keep consumer confidence high.

Although the housing market is part of the business cycle, the housing market has a tendency to fall for years. One in five subprime loans issued between 2005 and 2006 are projected to fail and at least four subprime loan lenders filed for bankruptcy. The impact will be likely to spread elsewhere as a result of the adjustable rate mortgages and zero down payments. Countrywide, the biggest mortgage financier, is to cut 12,000 jobs and Lehman Brothers are to cut 2,000 jobs. Also, there are 22,000 less jobs in construction and 46,000 less jobs in manufacturing as a result of the housing market crisis. There should be more government intervention, especially from Fannie Mae and Freddie Mac, the nation’s biggest mortgage companies. There should also be stricter regulation of the subprime mortgage market, which Senate Banking Committee Chairman Chris Dodd calls “unconscionable” and “deceptive.”