 You've probably been hearing a lot lately about problems in the sub prime market. I've asked Sean Biggins of Wells Fargo to be our guest blogger this week to help explain what it means to real estate.
Sean, please give my readers the story behind the sub prime lending problem. Here is the condensed version: Over the past few years there has been lots of liquidity in the market. This surplus of liquidity had investors pouring money into sub prime lending with higher risk, and not as high returns. They did this because there was such a large supply of money. The results were good mostly because homes were appreciating. Any time a homeowner got in trouble, they simply refinanced. In addition, lenders and investors moved to more and more risk to attract volume like 100% Loan to Value, Stated Income, Lower FICO (credit) scores, etc... So, what went wrong? Many consumers are finding out that their loan iis adjusting to a payment that they cannot afford. In addition, they have incurred other debt. The normal option to refinance is payment defaults. That has caused investors to flee the sub prime markets and many lenders who depend on those investors for liquidity are now stuck without money to lend. How will this impact the real estate market? Year to date, over 35 medium to large non prime lenders have closed their doors. There are concerns that fewer consumers can now qualify for a loan as credit tightens. What are your predictions? The Federal Reserve Board held a two-day meeting last Tuesday. They left the fed funds rate unchanged which was in line with economists and investors expectations. There is a growing hope on Wall Street that problems in housing and the sub prime mortgage sector, in addition to slower economic data, could lead the Fed open to a rate cut in the future. With the economy slowing, interest rates should ease. As the economy continues to slow, corporate earnings will most likely wane. This should cause the wave in the stock market to crest, leaving investors looking for other places to put their money. The most likely beneficiaries of this are the bond markets, and eventually the housing market. When the investors pull money from the stock market and invest in bonds, it drives the bond yields down. When bond yields go down, so do interest rates. Once the rates come down, it makes Real State a more attractive investment. This will give the Real Estate economy a much needed shot in the arm. Sean has served the Groton, CT area as a mortgage officer for the past 20 years. | 
Email to a Friend
