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Analyzing the Crash

What caused this real estate market crash?  We've all heard about the subprime mortgages that were doled out like Halloween candy.  People desperate or eager to own a home.  We've heard about investors, greedy and hungry to own more property as appreciation soared.  We've heard about the HELOCs that were given out as people refinanced their homes when they're values increased.  We've heard about the interest rate cuts that spurred the real estate run up after the doc com crash.  But what else is there?  A few things to start...

The Crash - A Few Contributing Factors

  • Subprime mortgages
  • HELOC burned up money
  • Poor credit to start
  • ARMs that doubled mortgage payments
  • Investors greed
  • Low interest rates for too long
  • Dreamers that got over their heads
  • Greedy investors flooding the market with new properties
  • No emergency back up plan for many homeowners
  • Won't bail out now and sell their homes at a loss

What else pushed this market over the edge?  The belief in the home as a solid means of forced investment, right or wrong, as the market went up, people withdrew money via HELOC. 

No money down purchases with ARMs and baloon payments.  There was the belief that the home could be refinanced, but when the crash came, there was no more money in the home.  The $10K to $20K increase on paper was just that, paper now floating away as more and more homes came on the market.  

Then comes along the fear of the crash.  Then comes along higher oil prices and gas prices go up.  People start to pinch pennies.   Then comes along the fact that people don't want to go down with the ship.  Home owners don't want sell their homes unless they can make a profit.  Home owners don't want to speak to the banks until the last minute.  Banks won't offer grace periods.  Home owners won't work with their lenders.  Home owners have poor credit already and how are lenders supposed to take their word for granted.  Sure, the lender got into this situation themselves, if anything, they should give the owner a grace period of not payments for six months.

You know when you see a stock you've owned for a long time start to take a hit, and then another drop in price, it's hard to let this stock go.  You haven't lost money yet, it's just a paper loss.  It's a company you like.  It's a company you have faith it.  But really, maybe you should just sell it and put that money else where.  That's the situation some property owners are in, do they ride out the real estate cycle or take the loss now.

I guess it's an old concept, the naive or the uninformed getting hit hard while the rich walk away unscathed.  The investors, they've bailed out or can afford to take a loss here and there, they'll just write it off.  But the new home owner, the American dreamer, they've gotten ahead of themselves and now they're stuck.  They own property they can pay for anymore.

The best solution.  Explore ways to keep your credit intact, push for a grace period, find a reasonable buyer who'll give you a fair deal.  The good times are around the corner, have faith, the real estate cycle will turn around again, just be more prepared this time and don't get over your head.

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