Buying a home can be an exciting experience, but is more overwhelming than anything – especially in a market that has been struggling for the past few years. The most challenging aspect of purchasing new property is definitely finding a home that fits your budget. As the housing bubble burst in the late 2000s, the market was left in shambles and foreclosures and short sales were the main form of transactions since homeowners couldn't pay off their mortgages, prices were plummeting and people were losing their homes.
While the depreciation of home values means cheaper prices for the consumer, many people are feeling the other affects of the recession which makes home buying a more difficult task. But as the U.S. economy rebounds, the housing market has seen some glimpse of life – but it’s uncertain if an entire revival is occurring anytime soon.
But if you plan on buying a home in the current market (or at anytime), there’s things you must be wary of.
At the peak of the housing bubble in 2005, the number of new home sales was at 1.4 million, but that number dropped drastically by 71 per cent to 374,000 units in 2009 . The average inflation- adjusted home prices were down 5 per cent in the first quarter of 2011.
Even a couple years after the burst, the market still hasn't quite come back to force – not just in selling and buying a home, but also maintaining a home. In the fourth quarter of 2010, over 11 million or 23% of borrowers were in a state of negative equity . The first half of 2011 showed some promise, as there was a slight increase in sales. However, most of the sales were foreclosed homes . With this, home sales are still occurring, but it is estimated that another million foreclosed homes will be added to the market later this year .
Why the slowdown in the market?
There are various reasons to why the real estate market is in a sluggish and arduous situation, but a lot of it has to do with the reluctance of home buyers. This doesn't mean that everyone should go out and immediately buy a home – there are still risks involved. But the only way for the market to rebound some bit, is for purchases to be made. High unemployment and inflexible credit availability is hindering the hopes of prospective buyers, therefore decreasing the demand. As a result, the prices of homes have dropped.
Furthermore, the implementation of Dodd-Frank Act and qualified residential mortgages has further deterred buyers, including ones who are credit-worthy, from purchasing a risk-free home. Essentially what the Dodd-Frank Act has done is include the “risk-retention rule” that requires banks or lenders to maintain 5 per cent of any loan they sell, therefore to decrease the chance of defaults and credit risk.
While more costly to the borrower and the bank, the Dodd-Frank Act does include an exception to this rule: QRMs. QRMs are mortgages that requires a minimum 20 per cent down payment, no matter what the home buyers credit background is. Most home buyers – especially first-time buyers – will have much more difficulty in buying a home because they cannot make that down payment. If they do make the payment, a more affordable loan is available to them, but if not, then the home buyer may be bombarded with hefty interest fees or not be able to qualify for a mortgage loan at all.
Tips for buyers in today’s market:
Caution should be taken for buying a home at any point in the real estate market, but extra caution should be taken now because of the fragile nature of the industry. And don’t be fooled by extra cheap prices, those homes may be accompanied with years of risk.
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