Cycle of Housing, Financial Markets and the Economy

Honestly, so much has happened this week since the Fed seized mortgage giants Fannie Mae and Freddie Mac, it is hard not to feel overwhelmed as we try to absorb it all.

Financial Sector in Crisis

In a matter of days, Lehman Brothers Holdings Inc., the fourth largest investment firm in the country, went bankrupt, Bank of America bought financially-ailing Merrill Lynch, and the government stepped in to save American International Group (AIG), one of the world’s largest insurers, with an $85-billion dollar bridge loan. 

What brought some of the Titans of the financial world to the breaking point?

As Martin Crutsinger, AP economics writer put it, “…steep declines in home prices in much of the country…(have) helped trigger record levels of mortgage defaults, dumping more homes on an already glutted market and further depressing prices.  The billions of dollars of losses on mortgage investments have sent shockwaves through the country’s financial sector, triggering the biggest restructuring on Wall Street since the Great Depression.”

True.  But was it not the lax business practices of some of the nation’s mortgage lenders that put many of these American home buyers into subprime loans and homes they could not afford? And investment firms chasing higher profits, sinking way too much into risky MBS that put them on shaky ground?

With the financial sector in crisis, we could see the economy weaken further. Home buyers and businesses alike will face stricter underwriting guidelines for mortgages and business loans, as banks curb lending.

The housing decline has pulled down the economy in more ways than one.  With new home construction at its slowest pace since 1991, thousands of people lost their jobs in construction and other related industries.  As home values dropped, many American homeowners lost all equity in their homes and found themselves “upside-down,” owing more on their homes than they were worth.

When homeowners began walking away from their homes, the wave of foreclosures grew and the financial sector faced huge losses in mortgage write-downs.

And so here we are.  Watching and waiting to see what will happen next.

As it stands, the housing market, financial sector and economy are caught in a perpetual cycle of sorts.  We know for every action, there is a reaction.  At this point, we need to hope for some good news and positive events to turn this ship around.

Good News? Mortgage Rates Fall

The glint of hope in all this…many financial experts predicted that the Fed takeover of Fannie and Freddie would result in lower mortgage rates.   The 30-year fixed rate did drop almost overnight from about 6.5 percent to almost 5.7 percent. Next month, the Treasury will buy back $5 billion of MBS, infusing more money into the mortgage market.  With the government essentially guaranteeing Fannie and Freddie MBS, investors will buy up mortgage bonds, pushing treasuries higher and mortgage rates lower.  By year end, we just might see historically-low interest rates.

Who could be the heroes in this mess?  More than likely, it will be the home buyers, who slowly but surely buy up excess housing inventory and stabilize home values in real estate markets across the country.  But to pull it off, we need qualified home buyers.  To get a mortgage in this climate, home buyers will need SUPER BUYING POWER.  Remember…times are tough, but banks are still in the business of loaning money!

Stay tuned for some posts on how you can get lenders to loosen their purse strings and loan you the money to buy a new home.

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