The relative issues being felt today in the housing sector is one of the main factors why economic experts are seeing an inevitable recession for the American economy (Beams 1). Because of the direct hit of realty segments to the performance of the economy, it is not very surprising that many institutions and individuals are having a hard time coping up with the difficulties set forth by the losing side of the housing sector. This instability of the realty domains could spell a much deeper problem for the entire US economic performance. The great housing ‘bubble’ phenomenon which started in 2001 is now seen to come into an end.
Just a few months back, experts have been seeing some great deals in the low performance of the housing sector especially in terms of mortgage payments and the very slow sales transactions of realty properties. Add to that some significant outlooks on how prime properties were sold at bargain prices. These scenarios have established some great fears among economic analysts since it is always apparent that when one major economic sector, in this case the housing business, becomes unstable, then recession is not far from happening. So what are the possible reasons why the housing sector is all gloomy these past few months?
Basically, the main attribute which prompts the so called ‘bubble-burst’ in the realty sector is the fact that credit owners are no longer able to pay for their mortgages due to offshoots from the delegated interest rate relative to the owners capability to pay. In layman’s term, mortgage values exceed the limit capacity of a house owner’s generation of income. That is why house properties may seem not affordable at all to the general public. This will then prompt for non-payment of rates which will equate to non-performing investment assets of mortgage companies
Another possible invisible reason of the crisis in the realty sector can be seen in the segment of rising defaults set by the high-risk borrowers which is predicted to put a fold for home prices due to the presence of buyers with much lesser credits according to Chris Isidore of CNN. In order to balance off the instability of property values and the possible stagnation of investments, there comes the procedure of foreclosure. Many banks and credit companies see this procedure as the only possible way to recuperate from the damages of the crisis even if it is not actually the optimal way to bring back lost investment assets.
Technically speaking, foreclosure pertains to that investment process in which a financial institution will sell a property (immovable) to the public when the original owner has failed to pay for his mortgages as agreed upon with the lender. In a larger perspective, foreclosures do not necessarily equate to the higher beneficial rate for banks and other lending institutions. In fact, these types of events make it possible for institution assets to generate less and less profit margins due to the fact that selling pre-owned houses cannot be set in a collinear market value of newly structured realty properties.
This means that banks will tend to achieve only the minimal ceiling profit when selling foreclosed properties in contrast to how much they would have earned using the mortgage procedure of payment. As a good illustration, even banks and financial institutions are reporting some great losses due to their respective transaction accounts which were affected by the housing financial crisis. For example, Bank of America, the US’ second largest bank (Owers 1), will have to accumulate at least $4 billion worth of acquisition of non-performing and problematic realty assets by the end of the year (Owers 1).
This staggering amount could lead to a halt in performance for the bank since they are not readily convertible to prime values until a third party client takes interest in purchasing those properties. The company’s chief Ken Lewis pointed out to a problematic countrywide expansion of the company loans but was still able to keep his optimism that the housing crisis will be resolved by the end of the year. Another big bank which announced its problems publicly is HSBC. The institution announced last year that its bad non-performing debts due to rising defaults had accumulated a total amount of $1.
8 billion. It was actually higher than they have expected as prompted by the problems initiated by the mortgage securities it had purchased. The housing sector is one of the most dynamic domains in influencing the economic performance of the nation. Because of the delegated effect of house properties to be that of a basic commodity in a stabilized lifestyle, people tend to participate easily in marketing strategies while not even knowing that they too have their respective limitations.
As an effect, it would probably be too late for them to realize that they cannot really cope up with the very high demands of mortgage rates which will then result to foreclosures. In this aspect, it is always important to note one’s financial capability in acquiring properties even if the market seems to offer a great deal. This will prevent future personal financial crisis from happening in the lower scale which will also prevent realty crises from happening in a larger scope. As what one financial advisor in the program Oprah said, “Buy only a house that you are capable of paying for”.
Beams, Nick. “US Housing Crisis Could Spark Serious Economic Downturn. ” World Socialist Web Site. 2007. 7 Mar 2008 <http://www. wsws. org/articles/2007/sep2007/econ-s03. shtml> Isidore, Chris. “Rising Mortgage Defaults. ” CNN. 2007. 7 Mar 2008 http://money. cnn. com/2007/02/12/news/economy/subprime_realestate/index. htm Owers, Paul. “Bank of America Chief: Housing Will Bottom Out by End of the Year. ” Sun-Sentinel. com. 2008. 7 Mar 2008 <http://www. sun-sentinel. com/business/sfl-flzbofa0228sbfeb28,0,6383542. story>