Why Failing Banks Hurts Real Estate
Posted by: Aazdak Alisimo in Business, tags: BusinessEveryone knew the real estate market would pull back from the astronomical highs earlier this decade, but nobody suspected this. Given the scorched earth that is the real estate market, can we finally expect things to turn around?
This scenario is something everyone knows. Even if you do not own a home, the fear of bank failures has certainly come to your attention. The past is done and nothing can be done about it. Ah, but what about the future. Is the bottom of the market near?
At first glance, one would think we have to be near the bottom of this bear market. Inventor is up and the values have dropped so long that there really is not much more room to fall. At second glance, however, things are more convoluted.
The fundamentals of the real estate market suggest buyers should be lining up to get some good deals. Home values have dropped tremendously and those buying now can expect to see sizeable appreciation gains eventually. Ah, but there is another factor.
Although the market appears ready to flip around and get hot again, it is missing one important ingredient. There simply is no cash to be had. Banks are in bad shape and simply are not lending money to buyers.
The entire situation would be humorous if it was not causing so much pain. The banks are in trouble because they gave out bad loans. Now they are under such stress that they either do not have money to lend or are scared to do so.
This catch 22 situation is really only just beginning to play out. While the Federal Reserve has taken aggressive action to prop up some banks and flip others, it is clear that the really bad stuff has only started to occur.
Subprime loans often get the blame for the current mess. They were part of the problem, but now things are worse. The infamous liar loan, also known as a stated income loan, is starting to rear its ugly head. Yes, the loans are defaulting in mass.
Another wave of defaulting loans are going to sink a lot of banks. Throw in a slowing economy and inflation and we have a huge mess coming. There is no light at the end of the tunnel until late 2009 at the earliest.
Rumors have been circulating in the lending industry that one of the very large banks is in serious trouble and will fail in the next six months or so. Nobody has indicated which bank it is, but banks such as Washington Mutual are known to be severely stressed.
Ultimately, the real estate market will not hit bottom until the lending industry does. The real estate needs mortgages for transactions to occur. As long as banks are hesitant and money is tight, the bottom of the real estate market is no where to be seen.
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