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Subprime Mortgage Crisis Means for the Future Real Estate

While the real estate market has never been an easy concept to figure out, it was much more predictable prior to the subprime mortgage crisis that began in 2007.

Even though the country is nearly five years beyond the peak of the crisis, the economic downtown triggered by the lending crisis still has a prevalent hold on the United States. How is the real estate market doing today, and how will the future of real estate be affected by the subprime mortgage crisis?

A Brief History of Subprime Mortgage Lending

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The subprime mortgage lending crisis refers to a period when mortgage lenders lent to people who could not afford a traditional mortgage because of their credit history and financial status. The mortgage lenders offered mortgages to these high-risk borrowers at high interest rates and sometimes offered payment plans that allowed borrowers to pay only on the interest of the mortgage.

This practice became commonplace and many banks participated in subprime lending. Unfortunately, the fact that borrowers were high risk and had limited means to make mortgage payments meant that a high percentage of homeowners began defaulting on their mortgages at the same time. This triggered a banking crisis in 2008 as banks were struggling to recover funds lent to homeowners in the form of subprime loans.

Read also: Should I pay off my mortgage?

People who were still current on their subprime mortgages faced a problem when the real estate market started to collapse following the banking crisis of 2008. The houses they had purchased years earlier were now worth less than they owed on their total mortgage.

This fact fueled both the real estate and banking crisis as homeowners were forced to foreclose and banks were not able to recoup the money that was lost because the houses were now worth much less than they had been when the money had been lent.

The Current Real Estate Market

The suprime mortgage crisis is responsible for shaping the current real estate market. While housing prices have fallen significantly since the subprime mortgage crisis began, potential homeowners are still reluctant to take the leap and make a purchase.

Why is the real estate market still struggling despite significantly reduced home prices and low mortgage rates?

  • Unemployment rates are still high, and many Americans are struggling to pay for their day-to-day expenses. Even those families that have enough to get by may have trouble putting aside any extra for the purchase of a home. While real estate prices may be very low at the moment, this fact does not help families that have no income available to pay for a new home.
  • The fact that the real estate market collapsed in recent history means that even people who can afford to purchase a home may be hesitant to make such a large investment. Even though the economy may recover and make a home investment lucrative in the near future, consumer confidence is currently down due to the recent losses people have suffered as a result of the failing economy.
  • Banks have now implemented strict lending standards because they do not want to suffer another crisis like the one that was caused by their decision to engage in subprime lending. These stricter standards include a much higher minimum credit score requirement and verified documentation of financial information.

Some homeowners who are staying in their current homes have decided to invest in home improvement projects to increase the comfort of their homes without taking on the risk of purchasing a new home in a real estate market that remains volatile. Homeowners who opt to hire contractors for home improvements should make sure that the contractor holds a surety bond. Surety bonds allow homeowners to recover any losses if the contractor fails to finish the project or does not complete the work as agreed upon.

Projected Qualities of the Future Real Estate Market

Financial analysts have predicted that real estate prices will continue to fall in the short term because of a high rate of unemployment and low consumer confidence in the economy. However, there will be a point where the real estate market reaches a bottom and prices begin to rise across the country. Areas with a historically in-demand real estate market have already seen a start to the recovery.

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The key demographic in the recovery of the real estate market is people who are currently in the 17 to 31 age range. Because this demographic is made up of people who are either just beginning college or graduating college and entering the job market for the first time, the instance of home ownership has been delayed.

People in this age range have struggled to find jobs and save money because of the economic crisis, but analysts say that this trend will not continue. People in this age group will likely become able to purchase a home in the next three to five years if they have not already.

Could Another Subprime Crisis Happen?

Some economists are concerned about the possibility of another subprime crisis even though banks have put stricter borrowing standards into place. One concern is that these standards will be significantly relaxed as the country moves forward and confidence in the economy returns.

The simple answer is that another subprime crisis cannot happen if the current rules stay in place. However, the government has allowed banks to retain most of their freedom regarding their lending practices. The current stringent standards are in place primarily because banks are afraid of taking on excessive risk at the current time.

A suggestion to prevent another subprime crisis is to allow banks to be held liable for irresponsible lending practices. In the past, the borrowers have been blamed if they borrowed money and were not able to pay back their loans due to financial hardship or an economic crisis.

If banks were held legally liable for lending to borrowers who cannot afford to pay their loans back, the banks will likely keep stringent lending standards in place over the long term.

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