Mortgage Woes Contribute to Real Estate Woes

If there was any doubt prior to 2007 as to just how important the housing market is to the U.S. economy, there isn’t any more – not after several years of declining home values, falling existing home sales, and sluggish demand for real estate. GDP is barely keeping above water, and real estate is a big contributing factor to that important metric.

And one of the big drivers of real estate transactions is the ability for consumers to borrow money and use that money to purchase homes.

Since the housing bubble burst spectacularly in 2007, banks – freshly scorched from round after round of toxic assets, foreclosures, and red ink – have clamped down on lending and made taking out a home loan a challenge rather than a mere chore as it was before. Forget about mortgages on new homes; people are finding it too difficult to take out loans even on distressed properties that are well below fair market value.

What adds further to the irony of the situation is that there are plenty of cheap homes and foreclosure properties for sale on the market today, all across the country, of which many are sitting abandoned and vacant – waiting for would-be owners who cannot get access to the credit they need to make the deal.

Of course, it goes without saying that those who have access to the cash and capital to purchase homes are doing quite well. Cash is king in the new real estate boom areas of South Florida, California, and Arizona (in select, high-end areas). A legion of foreign investors has traveled to the U.S. to scoop up cheap properties by the ton, counting on the inevitable market recovery to deliver high returns 12-36 months down the road.

None of this matters to most prospective homebuyers, though, who are, for the most part, wanting only the chance to purchase an affordable home in good neighborhood. Between low interest rates and cheap and plentiful homes, one would imagine the impetus for wide-scale existing home sales would be there. And indeed there may be; for the third quarter, existing home sales actually topped the mark they set a year ago, rising by 17%.

We will know that the housing market is truly on its way up to normalcy and recovery when existing home sales rise and demand is met by the ability of lenders to lend. The imbalance between credit and demand right now is crimping the mortgage industry – and thereby, the real estate industry and economy as a whole – and will not improve seriously without banks opening up their pocketbooks.