Gulf Shores Real Estate: 3 Reasons Home Prices May Be Heading Lower
After four months of gains, home prices flattened in October. Worse yet, industry insiders think that they’ll soon start to fall.
There are three main reasons for the reversal: a coming flood of foreclosures, rising interest rates and the eventual end of the tax credits.
More Foreclosures:
Moody’s upped its estimate of defaults recently because of shortcomings of the government-led mortgage modification programs. Trial workouts are not being made permanent and completed modifications are redefaulting at high rates.
Resetting option ARMs (adjustable rate mortgages) will also aggravate the foreclosure problem. These mortgages allow borrowers to pick their own payments, which can be so low they don’t even cover the interest. Balances swell.
For many of the more than 350,000 option-ARM borrowers, it’s time to pay the piper. Their loans will change into fully amortizing mortgages that will carry much higher monthly payments. A very large percentage of these homeowners will likely default on their loans.
Rising Interest Rates:
Also affecting prices will be higher interest rates. Some analysts think rates for a 30-year mortgage will pass 6% next year as the government curtails housing market support.
The Federal Reserve has helped keep rates low through purchases of mortgage-backed securities. But that program is winding down and will end in March.
End of the Tax Credit:
The tax credit for homebuyers is a two-edged sword. It reduces taxes dollar-for-dollar by up to $8,000 for new homebuyers and $6,500 for buyers who already own a home and should support home prices. But it ends at the end of April.
Many buyers will push their deals forward to get in before the deadline and then demand for homes could sink afterward.
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