The Real Estate Bubble has burst. Am I telling you something that you already know?
Nationally, nearly one in four homeowners is underwater on their mortgages, according to First American CoreLogic, the property and information provider subsidiary of The First American Corp. Moody's Economy.com estimates that 17.5 million borrowers will be underwater in early 2010. You are considered underwater on your mortgage when you owe more than your house is worth, rendering it almost impossible to sell.
In Colorado, it is estimated that 1 in 23 borrowers are currently in foreclosure, meaning the Public Trustee in the respective counties has scheduled a sales date for those houses. The house will be auctioned off by the lender and the homeowner (now former homeowner) will be evicted.
What happened? How did the "American Dream" of owning a home suddenly become more the "American Nightmare" of unaffordable mortgage payments and negative equity? It is not a simple answer.
Our problems began back in 2001 with the downturn in the Internet stocks, the stock market in general, and 9/11. Most of those previous gains had been built with borrowed money and false profits and, like a house of cards, finally collapsed.
Inexpensive Chinese goods flooded the American market, sending U.S. dollars to China. China then invested billions of those dollars in U.S. Treasury Bills. Banks and lenders took advantage of the availability of this easy money and loaned the money to home buyers. Real Estate values skyrocketed!
These new mortgages were then bundled and sold to investors on Wall Street, making more money available to the lenders for even more mortgages. Lenders loosened their lending requirements, thus the onset of the so-called subprime loans to people with questionable credit histories. Many home buyers were sold Adjustable Rate Mortgages and were convinced by loan originators that "home values will rise and you can refinance in a few years"...
It has been argued that during this time, 2003-2008, many loans were made based on inflated appraisals--almost immediate negative equity! We all used our homes like ATM's and eventually found ourselves deeply in debt. Borrowers began to default on their loans by the millions and many homeowners "walked away" from their mortgages, giving rise to millions of vacant homes nationwide. Every vacant home in your neighborhood represents at least a 1% drop in your home's market value.
So lending got tight. Fewer buyers could qualify for loans so even though there are 25,000 to 30,000 homes for sale in the Denver market, which would appear to be a buyer's market, few buyers have the cash and those that don't cannot now qualify for loans, even with near-perfect credit.
Throw in the rising unemployment rate, which some predict will pass right through the 10% level this year, and you have the recipe for foreclosure and economic troubles. Now businesses have a reduced market for their goods and services so business failings have increased dramatically, causing more consumers to lose their jobs... And the vicious cycle increases in intensity.
Now that we understand how we got here, what can we do? What options are available to homeowners who cannot afford to make their current mortgage payments? Where can homeowners find answers to their questions? We will answer these questions and more in the next few articles.