So how did we get here? What happened to the dizzying heights of the housing market, and why do things look so dismal now? Well the answer to that is a bit complicated, because it includes a combination of factors that all came together like a perfect storm and shook more than just the real estate and appraisal industry. Since all roads seem to lead back to mortgage lenders, that’s the best place to start. How did these shady lenders affect the value of your home?
Our sad story begins in the early 2000s, when the economy was booming. With this boom came lower interest rates, which raised the value of real estate across the country. Real estate appraisers were appraising homes for upwards of $500,000 here in Los Angeles alone. Because the housing market was floating high in its bubble, mortgage lenders felt a bit more comfortable giving loans to people who didn’t have the best credit history, which put an influx of buyers, that otherwise wouldn’t have been able to purchase a home, into the housing market. Are you with me so far? More demand meant less supply, and we all learned in economics 101 that supply and demand is what drives prices up. But that was just the tip of the iceberg.
Now we get into the creative financing that took place in the housing market during the bubble. In order to get these higher-risk buyers into a piece real estate, loans that included things like the adjustable-rate mortgage (ARM) were offered. Again, prices were going up and up, and real estate appraisers were appraising homes for one price, only to see them go up even more a month later, so an ARM loan was the only way many of these people could get into the housing market. Here’s how an ARM loan works.
ARMs are loans whose interest rates adjust up or down periodically. The initial rate is typically fixed for a period of two or three years. The benefit is that the starter rates are lower for ARMs than for traditional, fixed-rate mortgages. That means lower monthly payments, making homeownership more affordable and allowing borrowers to qualify for a bigger loan. Sounds pretty good, except in cases were people weren’t able to sell their real estate fast enough. Than there was the issue of very risky ARMS that put people in very precarious positions.
Some of the creative ARM products that flourished of late included interest-only and payment-option loans. With the former, a borrower only pays the interest on the loan — not the principal balance — during the introductory period. With payment-option ARMs, borrowers get to choose how much they pay each month: enough to cover the interest plus the principal, the interest only… or less than the interest. In that last scenario, the unpaid interest is tacked on to the principal, leaving borrowers owing more than the amount of the original loan. I think most people felt they would be able to sell their real estate before their rate went up, but as we all know what goes up must come down. If people were stuck in their homes longer than they initially thought they would be they sought out refinancing options, which included getting their homes re-appraised by a real estate appraiser. I think you can see where this is going. If somebody bought real estate at the end of the housing bubble thinking they could easily sell, they ended up getting stuck with a home they either couldn’t afford or had to stay in much longer than they anticipated in order to save their shirts. But there’s more, because subprime lending seriously affected the housing market as well.
Subprime loans carry higher interest rates in order to compensate for the risk lenders took to give loans to people who really didn’t have the credit to support one. Many of these subprime loans carried risky terms such as interest-only payments, penalties for paying the loan off early and very little paperwork to verify the buyers could actually afford the loans that were needed. In essence, subprime loans were getting people into the housing market that had no business being there. Sounds harsh, I know, but my mother always told me not to buy anything I couldn’t afford. It’s really a basic rule of finance. And if these people thought they’d be able to get out of the homes before the housing bubble burst, recent real estate appraisals shattered those dreams.
Now add to the whole mess a bunch of unethical mortgage lenders, and you have a recipe for disaster. Not only that, many of these lenders coerced appraisers to bring in real estate values even higher than they actually were. This is why a reputable real estate appraiser and lending company are so vital to any real estate transaction. So, there you have it. There is actually more that went into the crash of the housing market, but you get the general idea. So what do you do now?
The first thing you can do is get your home re-appraised, in order to understand its current value. This can help you decide whether it is best to refinance, sell or settle in and make the best of a bad situation. If you decide to stay in the home you purchased, why not turn it into your dream home until the housing market turns around and it is safe to sell? Or consider renting the house you can’t rid of out. This option can help ease the burden of your mortgage payment. Whatever you decide to do keep this in mind, the housing market goes in cycles. Right now we are starting to see the beginning of a buyer’s market. Normally these cycles last approx five years. That being said, the last cycle, which was a seller’s market, went about eight years, so it’s hard to say for sure how long this situation will last.
I hope this clears up at least some of what’s been going on. If you are looking to appraise your home, please visit us at www.iappraiseforyou.com, and we can help appraise it for the fair market value.