It wasn’t too long ago everyone was excited about the housing market. It was on the path to recovery, and there was a long trail of home buyers following. But with the flip of a switch, the housing market has turned down the wrong path once again.
With the government shut down, the IRS – an important part of the lending process for home mortgages – is largely out of operation. The IRS must verify all income before a mortgage can be processed, but these verifications have been put on hold during the shutdown. This means there’s a delay in mortgage approvals and thus home sales.
When there’s a delay in home sales, many buyers and sellers decide to walk away. That’s strike one for the housing market right now.
The second strike comes when mortgage lenders start to process mortgages without income verification. It’s a great risk to give people home loans without knowing exactly how much they earn. If income is less than what individuals and families are reporting, they may not be able to afford the mortgage payments. Defaults may ensue, and foreclosures could pop up everywhere once again.
Now for the third strike. Housing prices have been climbing steadily, but they won’t be for long. Mark Hanson, a real estate analyst, blogger, and founder of Hanson Advisers, told Bloomberg, he expects housing prices to decline in the next year. The areas hardest hit will be Florida, California, Nevada, Arizona, and Georgia.
What Happened to the Housing Market?
But wait, everyone was talking about how great the housing market was for months! All anyone was complaining about was the increasing interest rates because of the Fed’s mention of tapering its stimulus. What happened to all of that talk?
People started to open their eyes to see what was really going on with the housing market. With house prices and interest rates low, investors took advantage. Hanson reports that 50 percent of the price appreciation in cities like Phoenix and Las Vegas was due to purchases by private equity firms, not people buying homes for primary residence. All of the “great” housing activity was more about investors trying to buy property low so they could sell high or rent for a profit.
Now housing prices going up, and interest rates are higher than they were back in May. Investors are going to start walking away from the housing market, likely going back to the Treasury for high yield bonds.
When investors walk away, it creates a huge empty space where home buyers used to be, which causes a slowdown in home sales – and this is the main reason the housing market is going to start heading south.
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Home buyer attitudes aren’t the greatest right now either. The National Housing Survey reports that consumers are not as optimistic about the housing market. Fifty two percent of respondents said they expected home prices to increase in the next 12 months, down from 55 percent in August. Of course, one reason for this decrease was concern about the debt ceiling and the government shutdown.
When fewer people expect home prices to increase, it could mean they’re taking a step back to contemplate whether they should buy or sell. This is just another sign of a slowdown in the housing recovery.
How This Affects Investors
This situation will affect investors in two ways, depending on how they have chosen to invest in the housing market in the past. If you bought a home hoping to flip it, you had better get it ready soon. If home prices decline, you’ll be in trouble.
If you purchased property to rent out, you may be okay, but expect a slowdown in the next year. If home prices decline and the interest rates stay where they are or decline once more, people will want to buy instead of rent. You may end up having to compete with mortgage payments.
If you haven’t invest in the housing market yet, you may want to hold off right now. The housing market seems to be poised to take a dip in the near future, so keep following the news and keep a close eye on the market.
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