I hate to say "I told you so," but I did...
The economy is now taking a beating as the situation with the housing market worsens. It all started about a month ago with record defaults in the sub-prime lending market. Simply put, people purchased homes they could not afford. I should say it all started with the mortgage boom back in 2003. Rates were at an all time low and housing prices were also low.
Everyone started buying homes and refinancing. This caused home prices to gradually climb and a demand for houses, which caused builders to build like crazy, seeing very high profits as housing prices climbed. Just as any market, one primary force is supply and demand.
People got greedy and purchased multiple homes, or started "flipping" houses (a term relatively obscure until this mess started). Seeing "no end in site," greedy people purchased homes from greedy lenders. The low interest rates and ease of getting a loan was too good to be true and people were told "if you don't buy now, you'll be sorry later...you can always refinance into a better loan later."
There was a problem with that. Interest rates were never that low, so how could someone expect them to stay that low while they "build equity." And, with the housing prices about 30% inflated, how could they even expect to build equity. Greed has a way of blinding sometimes. But now it's plainly obvious to everyone watching, the boom of the housing market is over.
Because of the inflated prices, many buyers cannot afford a home. The smart buyers are refusing to buy a home, while many, many people maxed their income by getting into home loans they could not afford. These people, one or two years later, are defaulting in very high numbers...record numbers in fact.
These "sub-prime" loans (interest only, ARM) issued to high-risk people have now taken it's toll. Combined with a surplus of homes on the market and the still inflated home prices, the housing market crisis is now officially over, but a new one has begun, one that will affect many, many aspects of the economy.
MarketWatch.com has been following this situation very closely, and so have I. Countrywide mortgage, one of the largest mortgage companies in the world has been one of the hardest hit, but is no different than what is happening with all the mortgage companies. The stock has fallen over 21% and the dow jones industrial average has sunk 234.60 points to 12,626.87. Country wide is scrambling to get money to fund it's loans and says that now 90% of it's loans will now be prime credit.
What does this mean? This means good luck getting a home loan. This also means that housing prices will drop drastically. Economists are estimating the market will not begin recovering until 2009. Until then, no loans, no purchases, more inventory, lower home values and prices. I truly do feel sorry for anyone who has purchased a home in an overinflated market in the last two years, but a house is not a fool-proof investment. It is just like any other investment, it could lose value.
But it just goes to show that nothing is immune from the forces of supply and demand. I'm personally happy. I can't wait until prices get back to normal and purchasing a house is done to own the home and live happily, not for investment purposes. I would much rather save money now, pay extra points on the mortgage, buy an affordable home and pay extra every month using a conventional loan than get into something I couldn't afford and could never pay off.