Will the defaults in subprime loans have an effect on the entire housing market ? Will it be regionalized?

Question

The indicators showing the increased default in subprime loans had a significantly negetive effect on the stock market yesterday. Speaking to the housing market, the results will be 2 fold.
1. Those who are not able to make payments will be forced to sell their houses to cash in on any equity theyve accumulated in the recent (5yr) run up in hosuing prices
2. Those who cannot sell will default and the banks will take the home into forclosure and sell the homes.

Either way what you are going to have is more homes for sale which by the simplist supply and demand economics will drive down prices.

The obvious answer is downward price pressure will mean a further fall in housing prices, however these are only subprime loans taht are defaulting. I would assume those with subprime loans would be for homes in lower-mid income areas.
Does this mean that homes in upper mid-high income areas will reletively have more stability in terms of pricing pressure, thus a better time to buy?

Answer 1

I don't think subprime defaults alone can really undermine regional or the national housing markets. Yes there will be a lot of desperate situations but subprime loans are not commonly found in areas of high enough value to force down subordinate housing prices. Public opinion and how it can be manipulated by marketers also has a very profound affect on home prices. Foreclosures are happening in all price ranges,not just the lower end. Investor activity in a local market can also skew its stability. HUD and REO properties wont destroy your area's values. There will be some desperate situations where buyers will see some bargaining room but those deals rarely can be used as comps later on by appraisers. There are a lot of people that may lose a home they never should have been able to purchase to begin with. I feel bad for them but this isnt an all are entitled world. Maybe buying a used car and fewer non essentials would have saved some cash flow. Years ago stricter loan guidlines and higher rates kept deadbeats in rentals instead of McMansions. Loan officers and real estate agents worked more responsibly years ago also. The combination of greed and inept service providers mixed with dangerous loan products has also played a huge role. In many cases however it is merely a lack of proper financial discipline. Regarding investers thinking there will be great deals soon I think theres always great deals available if one has some skill and persistence. In fact, I have always recommended buying in any market, at any time, provided the margin meets the at least the minimum spread, and that the area's demographics show a stable job market for the target resale buyer. If you own a house and the market drops a bit the world isnt endng. All markets rebound and after such a correction as we are currently in they appreciate at a more responsible pace. That is until the marketers sway public opinion again and start another bubble. They did the same thing to create the gas shortage, the recession, and, well you get the idea.

Answer 2

This is of course all speculation; however, it is not just the sub-prime loans that are currently in foreclosure. Most of the people who took out arm (adjustable rate mortgages) are currently being squeezed by the current increase in rates. As the rates go up, and they inevitably will, most of these people will find that they cannot pay for the increase in premium. This forces them to either refinance or go into foreclosure/sell their dwelling. (ARM's account for between 10 and 30% of all loans in the past 5 years) more and more houses will come on the market.
Personally, I think that this current situation is a market correction, and will, over all, be good for the economy. It may take some time, but once the correction is over, this sector of the economy will run more smoothly. Hopefully there will be some legislation come about to make the sub-prime lenders, and predatory lenders curb what they are doing.
Last time these types of lenders blamed the Appraisers for what happened (savings and loan crisis) and USPAP legislation was enacted, which made the appraisers more honest. (You will always have dishonest and greedy people in the market.) Now, the same thing should be done for lending institutions.

Answer 3

It has left a record number of foreclosures in Texas, it isnt subprime lending, it is crooked loan officers lying to get peope into homes mostly, legally clearing credit etc. The lenders will be the ones to tighten up I think.

Answer 4

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Answer 5

that's silly! I live in a rapidly growing area of Alberta Canada, and from the oil boom, there are still plenty of new houses being built! in fact, plenty of condos are being made of apartments, making rental property quite scarce! there's always room for more houses to be built in a growing industry like ours.