Quote from noob_trad3r:
Everyday another article about how foreclosures and slumping house prices are bad for the economy.
Why? Cheaper house prices means people who buy a home will be less house poor and have more discretionary spending money. This is good for the economy it seems.
People walking away from 3000 a month mcmansions and giving the bank the keys means that person now is no longer house poor and has more money to spend on goods and services. Thats good for the economy.
All this money going to service a mortgage is just a money sink it seems. So why the doom and gloom?
Because most people are already LONG the housing market and bought too high
The real problem was the false demand that occurred from the ridiculous loans being handed out and very low down payments, interest-only, balloon payment ARMs etc that enabled people to "justify" buying a house that was WAY OVERPRICED because they could get a bank to give them the money to do it.
Because people were buying, the too high prices became entrenched and perceived as NORMAL. I mean basic common sense should tell you that paying $650K for a nondescript 3-bedroom ranch house in crappy neighborhoods in California is overpaying. It was the greater fool theory carried to extremes.
"Fair" house pricing should be where people can buy a house with 20% down at a non-skewed normal range interest rate ( 7% or so ) and spend no more than 28% of their income on the PITI. Try doing that with a $650K house and see how many people really are qualified to buy something at that price level.
Now the bank rules changed, the music stopped and nobody can really make a justifiable reason for overpaying anymore. Personally, I think this market still has a LONG ways to go down. Consider the following:
1. Interest rates are still abnormally low and likely to rise over time.
2. Many people can't afford the down payments required now.
3. A large number of people have impaired credit
4. The demographic trends are turning negative.
5. The overhang of foreclosed and distressed homes out there.
6. There is no longer any secure long term employment.
7. Real estate taxes are increasing in many locations due to budget issues.
There is really no reason to buy any more house than what you NEED, and if you are anticipating moving within 5-7 years, you are probably better off renting a house anyways since there will basically be zero appreciation and then you won't have to deal with the hassle of selling it later.
Now, back to the question about why would this be bad? Many reasons:
1. Declines in construction employment.
2. Reverse wealth effect impairs consumer demand.
3. People going underwater and adding to the foreclosure issue.
4. Neighborhoods declining from too many bank owned properties.
5. Declines in demand for appliances and house furnishings.
6. Impairs mobility because harder to sell homes at an acceptable price.
7. Increased cost to consumers from bad credit
