Post Housing Market Crash Research Paper

Decent Essays
The sounds of elation by all sides of the business are what everyone involved in the post housing market crash is saying these days. The age of the foreclosure and short sale (“when a house on the market is worth less than the seller still owes for it”) is slowly coming to an end as buyers and lenders are more aware of the changing factors in today’s real estate market (Momberger). The previous method that lenders used helped cause the housing crash and a higher level of home loan defaults. Before the housing crash many buyers entered their housing purchase having some debt and often would refinance to pay off debts and use the increasing value of the house they purchased to pay them off. The new ways of qualifying buyers and assessing a homes…show more content…
Pre crash debt/income ratios were used incorrectly as lenders tried to qualify as many buyers as possible and these under qualified buyers negatively affected the market. These lenders used the following two ratios to decide if someone was eligible for a loan. An example of this is a buyer makes $60,000 a year, ($5000/month). The PITI (principal, interest, property taxes, insurance) rate of 32% was used giving, $1600 as an amount available for a mortgage. Then the bank also used a backend (total estimated amount of debt after purchasing a home) (Powel) ratio of 38% giving a total debt load of $1900 a month for a potential buyer (Hymer). This put buyers into a mode where they would try and make it look like they had very little debt at the moment they closed on the house. This was not always true or in the best interest of the buyer. Buyers were convinced that putting twenty percent down to avoid PMI (private mortgage insurance) meant taking big losses if the house they now owned decreased in value. My personal housing example is as follows. I sold my first house in 2001 making a $35,000 profit from the sale and improving market. I then purchase a $206,000 home putting all of the $35,000 and some savings to make a $41,000 down payment and avoid paying PMI. 5 years later I was in a home that was too big for me that I wanted to sell. My home eventually sold for $165,000 and I lost the $35,000 in cash that I had put in to the home along with all accrued equity. Foreclosure wasn’t the answer, before the market crashed, for many homeowners and still isn’t today. Even though banks and lenders are looking at foreclosure and bankruptcy less negatively the amount of time it takes a family to rebound from any financial shortfall can have catastrophic affects on their long-term financial
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