For the past six years, the housing market has been an anchor that has weighed down the entire American economy. After reaching the height of the bubble in 2006, housing prices have fallen by 34 percent nationwide, and the decline has been even more severe in certain areas where the real estate market was particularly frenetic before the credit crisis. Some areas of the metro Atlanta real estate market have seen prices drop even more that the 34 percent national average.
Declining Housing Values
With the dramatic decline in housing prices, millions of homeowners who bought at the top of the market found themselves "underwater" on their mortgages – the value of their home was less than the debt owed on the house. Given the negative equity in their homes, some of these people made the logical decision to walk away from their mortgages rather than continue to sink money into a collapsing asset.
A Glutten of Foreclosures
This led to a glut of foreclosed homes that overwhelmed any post-bubble demand for housing, which only further depressed housing prices. Even today, nearly one-third of all homeowners are still underwater on their mortgages. Although the vast majority of these homeowners will ultimately keep their homes – approximately 90 percent will continue to make their mortgage payments – the remaining 10 percent are still at risk of foreclosure, which could threaten to flood the market with more houses at distressed prices.
Signs of a Housing Recovery?
Despite this depressing picture, however, there are signs that the housing market is beginning to slowly rebound. In June, construction of new homes grew by nearly 7 percent, which was the largest increase since 2008. In addition, sales of previously occupied homes are up by almost 10 percent over the past year. Even housing prices may begin to recover: A recent poll of economists by Reuters suggests that prices should increase modestly next year – a welcome change after years of dramatic declines.
Record Low Interest Rates
These promising developments have been aided by record-low interest rates, which have made borrowing for a new home as cheap as possible. The current interest rate on a 30-year fixed-rate mortgage is just above 3.5 percent; meanwhile, homeowners can now obtain a 15-year fixed-rate mortgage for well under 3 percent. Given the current rate of inflation, it would seem as if banks are practically giving away money for home purchases.
But, Can You Qualify for a Mortgage?
Of course, low interest rates are valuable only if potential homeowners can actually qualify for a mortgage, but banks – hoping to avoid a repeat of the recent foreclosure crisis – have significantly tightened lending standards. A report by the mortgage software company Ellie Mae noted that current borrowers are required to have very high credit scores and save a lot of money toward a down payment. Needless to say, the days of ubiquitous subprime mortgages that do not require a down payment are long gone.
However, those people who do qualify for a new mortgage are entering the market at an opportune time. Not only is debt cheap, but housing prices are also near a bottom. For several years, buyers have remained wary of buying into a falling market, but it appears that they are beginning to test the waters again. Housing prices and interest rates may have a little more room to decline, but potential buyers will find it difficult to pick a better time to enter the market. The housing market may not get much better as long as the broader economy continues to remain weak, but it is doubtful that things could get much worse at this point.