Sunday, June 05, 2005

What If Prices Drop?

Wow... lots of articles in the last week about a real estate downturn. Anna Bernasek from the New York Times wrote an interesting article about how the downturn in real estate prices could create a downturn in the economy as a whole. Her theory states that a 10% drop in real estate prices would drop a half-percent off the gross domestic product. She contends that many sectors of the economy would be affected; banking, construction and insurance. She points out that the according to the Bureau of Economic Analysis construction accounts for 4-5% of the economy.
Hmmm... using those figures a decline in real estate would affect businesses related to housing as home improvement stores, furniture stores, appliance companies... right down to the guys making plastic switch plate covers.
She states that when the International Monetary Fund(IMF) did a study in 2003 on decline in home prices showing a 14% decline would be comparable to a 37% decline in stock prices which is about the same as the stock market bust in 2000. They also found that these types of declines happen every 20 years or so....
Is there any good news? YES... Hopefully the Fed's policy of increasing rates is putting pressure on lenders to tighten their credit standards. You can probably expect new regulations on the guidelines for home-equity lending and tougher rules on first mortgage loans. However there is some concern about the high number of ARM loans and what would happen if rates rose quickly to a point where borrowers had a tough time making payments. Rates are still at historic lows making long term mortgage rates very favorable. A small tightening of rules now may forestall a possibility of foreclosures in the future should rates move up and prices decline.
If you have an adjustable rate loan that is nearing the roll-over date now is a good time to check out your options for a more stable loan.

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