The real estate slump here and elsewhere is likely to worsen, given that most of the adjustable rate mortgages written in the last three years will be reset with higher interest rates, said Christopher F. Thornberg, an economist with Beacon Economics in Los Angeles. As a result, borrowers of an estimated $800 billion in loans will be forced in the next 12 months to 18 months to make bigger monthly payments, refinance or sell their homes.The questions people need to be asking is why were lenders allowed to loan money to people who could not afford the payments? The ease of credit has been a contributing factor to the steep rise in home prices. People were willing to borrow more than they could afford with the thought that the price of the home would rise so quickly that if they could no longer afford it a quick sale would result in a large profit. Those days appear to be over with home prices falling and foreclosures now at all time records.
The problems include not just people losing their homes, but also sharp declines in property values, particularly in lower-income and working-class neighborhoods.Once again it is the lower and working classes who will bear the brunt of this downturn but it will eventually work its way into all areas of the economy. Unscrupulous lenders will frequently target the poor and working class giving them the hope that they too can own a home. The subprime mortgage disaster is the result of these lending practices.
For example, a three-bedroom house near Turner Field, where the Atlanta Braves baseball team plays, fetched a high bid late last month of $134,000 at an auction by the bank that took possession of it. Almost three years ago, the new home was bought for $330,000.
So far, the pain has been limited to those on the financial margins, but as more loans are reset to higher rates and home prices continue to slide, more homeowners will be unable to meet rising payments or to refinance. “This is a process that is starting low and will go high,” said Mr. Thornberg, the economist in Los Angeles.The housing market will continue to decline for at least the next year as these subprime loans reset. In the end a correction in the housing market will be good for the middle class as homes go back to prices that are affordable but those caught in the foreclosure crunch could see their credit ratings destroyed for life.