Lending on Steroids Triggers Bigger Bust

By Mike Colpitts

Market BottomAs the nation’s real estate crisis worsens beyond what once seemed unimaginable, a new Housing Predictor analysis shows that the crisis will deflate the value of U.S. homes in the majority of the country between 55 and 70% on average from the markets highest peaks.

The amount of deflation depends on what area of the country, and in large part whether the housing market experienced double-digit appreciation during the real estate boom.

The staggering deflationary figures represent record high housing deflation on a national level for real estate markets on the heels of the biggest inflationary cycle in real estate values in history. Record numbers of foreclosures are being eclipsed in many states every month severely damaging the values of homes in neighborhoods throughout the country.

Many markets in especially hard hit areas of California, Ohio, Florida, Michigan, Nevada and Arizona have already seen home values fall as much as 50%. But some of the hardest hit areas, which will lose the most in housing values, are already beginning to see a leveling off of fast paced deflation. Housing markets don’t tend to deflate as fast as they appreciate.

The real estate crisis has established itself as the largest economic problem facing the U.S., pulling down the economy in many other sectors, including Wall Street, which has been on a roller coaster ride.

The analysis, conducted over the last six months, determined that the over-whelming majority of housing markets in the U.S. are now deflating or teetering on the edge of deflation. Real estate mortgages that seemed to be on steroids made to just about anyone who could sign their names are long over. These days’ mortgages are harder and harder to get as the credit crisis transforms the lending industry.

Industry analysts are bracing for tougher lending regulations, which they fear will “over-regulate” the industry, eventually delivering higher interest rates for many homeowners. However, their fears may be short lived if they develop at all since about three-quarters of all home mortgages made in the last seven to ten years have been largely unregulated. Newly developed creative conventional adjustable rate mortgages and subprime loans triggered the nation’s mortgage crisis.

Fewer markets are left without falling real estate values. In areas where double-digit housing inflation did not develop some markets are still relatively unscathed scattered throughout the country in places like the Dakotas and Oklahoma. More conservative conventional mortgage standards applied in these areas, and as a consequence the national mortgage crisis is having little impact. Only 29 markets of the 253 Housing Predictor tracks are without deflationary markets. Many of those, however, are also expected to be impacted by analysts as the fallout from the credit crisis spreads with a recessionary trend.

Historically, only the U.S. Savings and Loan Fraud Scandal in the late 1980’s and the Alaskan pipeline market implosion come close to the current crisis in terms of deflation in the modern era. Those crises had less mortgages involved, however, making the credit crisis comparatively worse in the sheer volume of loans. Home values in many areas of Texas, California, Alaska, Washington, New York, Arizona, Florida and other states fell as much as 60% as a result of the S&L scandal.

The Alaskan pipeline meltdown drove home prices down as much as 80%, but it was isolated to just part of Alaska. It took more than 15 years for prices to begin appreciating afterward.

Areas that will be impacted the most severely in the current crisis include California, where 1,000 foreclosures are going to auction daily and Florida, which also had double-digit appreciation. However, many parts of Florida are already seeing more home sales as a result of an earlier deflationary cycle, and California is witnessing a micro market boom of sorts in foreclosure sales in some areas. Michigan and Ohio markets are experiencing similar sales activity.

The north-east and north-west sectors of the nation have experienced less severity in falling home prices thus far. But as homeowners increasingly become aware that it’s more difficult to get a buyer for their homes with the financial market turmoil, real estate values will deflate further.

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