A question about the U.S. housing market

[eugenekop]

I'm sorry for opening another thread on this, but I am not from the U.S. so I'd appreciate a synopsis of what is going on there

1.
From what I understand there are a lot of foreclosures in the last few years, which I assume lead to an increase in the supply of houses and and thus an increase in prices. Am I right about this? Also, why do so many foreclosures occur?

2.
The low interest rates are supposed to make it easier to get a mortgage loan from the bank, so this should increase demand and thus increase prices. So which force is stronger, the foreclosures that decrease prices or the low interest rates that increase prices?

3.
What do you think is the short and long term future of the housing market?

4.
What do you think is the effect of the housing market on the economy in general?

Thank you!

 

[Zippyjuan]

Quick answers (markets very quite a bit by where you live in the US):

In general, forclosures happen when somebody is no longer able to make the required payments on their mortgage. That may be due to a couple of reasons. One is losing their job or having their pay reduced due to the economy. Second could be that they took out an adjustable rate mortgage (where the rate is fixed at a low rate for a limited time but can later rise) and the rate increase made their payments higher than they could afford. Fall far enough behind on mortgage payments, and the lender can force you into forclosure so they can try to get back at least some of their money they lent you.

Forclosures do out more houses on the market and depress the prices but as the prices go down, some who thought they wanted to sell their homes may feel that the prices are too low compared to what they want to get for theirs, so they take it off the market and the supply again shrinks. The lending companies also don't want to flood the market too fast and lower the prices they get too much so they also hold back on selling all of the properties they want to get rid of.

2. Interest rates are low and the Fed buying $40 billiion worth of mortgage backed securities will help them go lower (one of their goals for the plan), but the requirements for getting a loan (or refinancing a current one) are much harder than they were so qualifying is much more difficult. During the housing bubble, standards got so low that you didn't have to show any income or assets to qualify. Now they have gone from over- loose to over strict (compared to what they were before the bubble).

3. It varies by region, but in general, we seem to be near the bottom of prices in the US housing market. Like the rest of the economy, I don't expect any significant increase in housing prices or demand for them until the rest of the economy picks up- and that still looks like it will be a long time. I don't expect any more significant drops either. Just my opinion.

4. Housing does not directly have an impact on the economy but instead is a symptom (not a cause) of the economy. If it is doing well, it is not going to make the US economy better but rather it will be doing well because the rest of the economy is doing better and people have money to spend on it (as well as security about their own futures to borrow that much money for a long time to make the purchase- the largest single purchase a person will make in their lifetime). It is important because when people buy a home they also buy things to fill it up with (washers, driers, furniture) and fix it up (spending money on flooring, kitchens, bathrooms, etc). That means demand for other goods and services beyond the housing industry.