A Slumping Real Estate Market Leads to a Slumping Economy

by on Real Estate Investing

It’s no secret that the real estate market in the United States has been headed downhill for quite some time. While the problem can’t be pinned on any specific event or person in the past, it is easy to decipher how the housing bubble expanded and then collapsed again so quickly during the past ten years.

During the last years of Alan Greenspan’s tenure as chairman of the Federal Reserve, he made the decision to cut the federal interest rate several times. With banks and financial institutions owing less to the federal government as a result, the interest rates for homebuyers and real estate investor mortgages came down as well. This encouraged a huge surge in home buying throughout the country. Banks also catered to this growing trend by offering new, low cost adjustable rate mortgages. Later, these became known as sub prime mortgages, as they were marketed to buyers with bad credit and little or no money available to put towards a down payment.

The housing market began to inflate at an alarming rate, as the country went real estate crazy. Homes everywhere were being bought up at extraordinary rates and for higher and higher prices. Inflated home values only encouraged the banks and lending institutions to sell more mortgages. This also caused a huge increase in land and real estate development, especially in up and coming tourist areas such as South Florida, the California Coast, and other areas experiencing significant population and wealth growth.

However, sure enough foreclosures began to take root as people were unable to keep up with their mortgage loans. Then the housing market began to slow down. Home sales slowed, and suddenly the market was flooded with new developments and newly built homes that were simply sitting on the market unsold, depreciating in value. Then home prices began to fall back to earth rapidly, well below the inflated values they had been selling for merely months earlier. Investors and homeowners alike began to lose lots of money, as the properties they bought could no longer be sold off to even break even.

Historically, a fall in the real estate market has always been signifier of a coming downturn in the economy, and it seems that this has begun to come true. The Nasdaq and the NYSE have both fallen into significant slumps as of late. Many are predicting an upcoming recession, and in 2008, once again record foreclosures are expected as home prices continue to fall, the economy slows down and people everywhere cannot afford to keep up with their expensive, overpriced and unmanageable mortgages.

It’s a tough time for real estate investors, but there are some bright spots, and ironically, one of the brightest lies in the foreclosure market itself. Since foreclosure homes are coming on to the market and being sold in record numbers, this market too is completely flooded. Foreclosures, traditionally undersold at auction in the first place, are going for incredibly low prices, simply so that banks and lenders can earn something back on them. And the quality of homes on the foreclosure market is at the highest it’s been in years as well.

Since so many investors bought up high priced real estate during the boom and then could not sell it, it eventually became cheaper for them to let the home go into foreclosure than to keep up with the outrageous monthly payments on their ARM. Therefore, all kinds of great properties in desirable locations have become available foreclosures. Buying up these homes as a family residence is a great idea, since you’ll get incredible values unlike at any other time in recent history. They can even be good for investors, provided you can sit on them and wait for the market to come around again.

Foreclosures are worth keeping an eye on, so watch for deals in your area.