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The Future of the Subprime Crisis and its Effect on the Real Estate Market

published on January 29, 2008

Testifying before Congress about a year ago, the President of the Center for Responsible Lending predicted that 2.4 million homes will eventually face foreclosure from the subprime crisis. At the time, this estimate was considered by some economists to be an excessively large figure created by a consumer rights organization with an agenda.  Today, Congress’ Joint Economic Committee estimates that, through August of this year, 1.7 million homes were lost.  Looking only as far as August of 2009, it estimates that up to another 2 million homes will be lost.  So, if anything, the Center for Responsible Lending was overly conservative.

Other analysts predict similar activity, at least insofar as 2008:  The consensus is that roughly a quarter of a million homes will foreclose due to the subprime crisis in each fiscal quarter of the year. 

So, by an overly simple barometer, the real estate industry has already felt the effect of about half of the subprime woes. Of course, this is an overly simple measure of the impact of the crisis. Once recognition of the problem occurred, markets began pricing in the future impact of the housing crisis.

However, markets rarely are capable of accurately pricing in the macroeconomic effects of their industry. And in the case of the subprime crisis, real estate and housing are only part of the picture.

The financial industry – which is to blame for the whole scandal in the first place – holds the vast majority of the debt.  The financial firms believed that they could always sell the debt for a relatively small loss.  Or, in the worst of scenarios, the home itself was sufficient collateral.  However, as the markets recognized the depth of the subprime crisis – Citibank admitted another $11 billion dollars of losses just several weeks ago –  few players became willing to purchase the debt. The value of the actual houses, of course, also quickly plummeted. Thus the owners of the debt were saddled with billions and billions of debt that they could not get rid of.

In summation, foreclosures will continue to rattle the housing market for at least another two years. The financial industry is far from done feeling the fall out from the subprime crisis, and the current government stimulus package is far too meager to have a critical impact.

The subprime crisis, sadly, will be around for at least the next year.  In places where foreclosures have already occurred, such as in the Dallas market, however, the bottom of the market will come sooner rather than later.  When prices are at their lowest, of course, it is the best time buy a home, and purchasing a home takes time.  If potential buyers begin looking into purchasing a home during the second quarter of of 2008, and they take their time to explore all options thoroughly, they may be well situated to find a home when the market is at its bottom. 

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