Will the fast spreading sub prime mortgage lending problem cause the very first real crash in Real Estate market? : Bad Credit Advisor

Will the fast spreading sub prime mortgage lending problem cause the very first real crash in Real Estate market?

New Century Financial is getting closer to the bankruptcy - by issuing too many loans to the bankrupt homeowners - both, past and future ones. That is not funny, actually. This is the second largest sub prime home mortgage lender, with Countrywide Financial being the first. While the New Century stock story below is clear, the ramifications of the fall of this lender and many others, are very gloomy indeed.

The never ending influx of the money taken from the homes in forms of cash-outs and lines of credit has finally gotten to the end. With that, the entire economy built on consumer spending will suffer greatly, as precious little money will be available to spend. Some predict a very "doomy" scenario that evolves into something like that:

1. The vast number of foreclosures coming, combined with the massive overbuilding that went on for many years will depress the prices further down.

2. In many places the prices will get to the point, where the house values will be much lower that the mortgage or mortgages people owe, so with a little sign of money trouble, these homeowners will simply walk away. Really, why would you spend hard earned money on something worth lower than you owe on it?

3. That will in turn drop the prices even lower, leading to a deflation. So the cash becomes the real king. But how many Americans have enough cash? And that can lead to the first ever Real Estate crash. Not a pretty picture.

4. The winners will be some land lords, simply because will be many more renters. How many more, who knows? Should you rush in and buy an investment property? I would wait. The only more or less sure thing is to buy a recent condo conversion with existing tenant. Try to sign him or her for a longer than usual period of rent, say two years instead of one. Just a thought.

Lastly, one of my clients just lost $60,000 in earnest money. Those were for three condominiums he build in Central Florida. Unlike so many stories recently where builders simply don't finish their much touted projects, his were all done. But after taking a good look at the situation down in Florida, and talking to many, this fellow decided simply not to close on any of three condos, forfeiting $20,000 a piece. As he explained to me, that was the cheapest way out, by far.

Tue Mar 13, 2007 12:03AM by Tony | More in Economy | Comments (1)

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