Ameublement Resources and Information

Posts Tagged ‘economy’

How Low Can We Go?

It was recently reported that San Diego County has more renters than homeowners. That’s right, more people choose to rent than choose to own their own home. What can be inferred from this one statistic? Let me take a closer look.

While there has never been a situation in our recent history where 100% of the county owned their own home, I am writing strictly about the percentage that can afford to own a home but chooses not to plus the percentage who could have owned a home but no longer can for various reasons.

The cost of owning a home in San Diego is still too high for the majority of San Diegans and I predict that values will continue to decline in the region. While a strong economy and attractive financing options ultimately drive values there are many economical-reasons that make up the cost of owning a home that are not entirely related to the purchase price. The purchase price gets all the glory but many other factors come into play

1. The tax advantage is does not offset the continued decline in values. Hopefully, the talk within the administration to remove this tax advantage does not materialize driving home prices down further.

2. Cost of paying for your own utilities.

3. Cost of paying for your own repairs.

4. Cost of insurance.

5. Cost of less space for more money.

6. Cost of living in the area you can afford versus the area you desire.

If anyone thinks these variables are not a factor, you’ve never owned a home.

There is a new threat to the mortgage market, which is the federal debt debacle playing out in Congress.

It all boils down to this. If the Congress cannot authorize the rise in the country’s debt ceiling then the United States of America will have to default on some of its payments. The whole economy would be adversely affected and that includes the housing market. That’s because a default will push up interest rates on every form of credit including mortgages. Some analysts are predicting that the interest rate increase could be as much as 1 percent.

It is said that 95 of every 100 home loans being written today are put into mortgage-backed securities that are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. When they guarantee securities, that guarantee is coming from the U.S. federal government. The inability to raise the debt ceiling would mean that the value of these guarantees would plummet because the U.S. government would have to default on some payments.

The way the system works is that when the value of the securities drop, then the securities market would immediately demand a much larger rate premium on new mortgage backed securities to compensate for the greater risk. The results will be sharply higher interest rates charged to new borrowers.

The adverse effect on borrowing will not just be one immediate reaction by the markets. Instead, it will be spread out for years. If there is a serious and extended problem, U.S. bond holders like China will demand higher interest rates. This will ripple through all the markets and cause the further increase of interest rates in the mortgage market. Of course, this, as well as problems in other markets resulting from such a move by bond holders will slow economic growth more and the results would be higher mortgage rates, a double dip recession or — the worst result of all — a full scale depression.