Now, That's Depressing!

Prices have declined, interest rates are low and there is a LOT of inventory to choose from.  So why aren't more Buyers jumping on the band wagon?

With all the negative press these days, who can blame them. I actually heard a news story that compared today's real estate market to the Great Depression!  The Great Depression was a result of the Stock Market Crash of 1929 when speculators who were buying stocks on margin saw their overinflated profits turn into nightmarish losses.  When buying on margin, you can invest $1 to buy $10 worth of stock.  If the stock goes up, you can increase your investment ten fold.  Unfortunately, if the stock goes down, your loss is also magnified by the margin.  Since all good things must come to an end, a market correction devastated the economy. 

The current market has a few similarities to that period of financial crisis. Low interest rates prompted investors to speculate on the real estate market.  Lenders were quick to loan high interest money to risky borrowers, and the investors who supply the capital for these loans, looking at high profit potential, were quick to oblige.  Things were great as long as the price of a home kept rising and rising.  If you got in trouble with your loan, you could sell quickly and get out from under it. But housing cannot appreciate at high rates forever and as things returned to normal, some homeowners found themselves in trouble.

The biggest difference between the Great Depression and the current housing market is simple.  In the Great Depression, those margins, the amount that speculators borrowed to purchase stocks, had to be paid back on demand. In the current housing market, your mortgage is only due and payable in full if you sell your home. Owner-occupants who bought a home they can afford are not affected by a change in the value of their home unless they have to sell. And the majority of homeowners aren't going anywhere.  Losses are limited to those homeowners who must sell their homes.

For those who are going to lose out, investors who just weren't savvy to the risks and homeowners who got caught by an Adjustable Rate Mortgage, the losses are a fraction of what they were in the Great Depression. Speculators could never sustain the magnitude of losses experienced in the Great Depression. There are too many safeguards in place to prevent that kind of financial devastation.  And the percentage of homeowners facing the loss of their home is a very small fraction of homeowners. Although the situation is depressing to those homeowners, we are a fair cry from a sequel  to the Great Depression.

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