House prices in the US are falling by over 4%. In some areas the rate is much higher.
Many of these factors remain relevant for the UK housing market except: rise in defaults and over supply.
Why US house prices are falling
1. Correction to large Increases in House prices
US house prices increased by 135% in the past 10 years. This meant that house prices grew faster than incomes and rent. Therefore, it reduces the long term affordability of houses and their attractiveness.
2. Rise in Mortgage Defaults.
The problem is that many mortgages were lent with a very cursory look at whether the homeowners could actually afford them. Mortgage salesman were encouraged to sell mortgages and not worry about long term affordability. A popular form of mortgage was a ‘balloon’ mortgage. Basically, this is a mortgage with a good introductory rate for the first 2 years. This encourages people to buy them. However, after 2 years, the interest rate increases dramatically. At these rates people often can’t afford to keep up with their mortgage defaults. This led to the significant increase in mortgage defaults that we see today.
3. Rise in Base Rates.
In response to 9/11 and uncertainties in the stock market, the US federal reserve cut interest rates to historical lows. This encouraged people to take out a mortgage. However, since 2003 interest rates increased making mortgages appear much less attractive.
4. Shift in Expectations and Forecasts
Many homeowners share an overly optimistic view of the prospects of the housing market. This encouraged buy to let investors, hoping to make capital gains. Now that market sentiments have changed, this group has been looking to sell.
5. Over Supply of Housing.
The housing boom also affected the supply of housing. House builders saw incentives to make profits so increased supply. Now prices are falling, the increase in supply is still coming onto the market.
6. Falling dollar limits cut in Interest Rates
If American goes into recession, the Fed will not be able to cut interest rates too much because this would further weaken an already sliding dollar
1 comment so far ↓
It looks like the UK market is following suit. The recent squeeze and increase in the cost of borrowing will really start to kick in 2008. At least we don’t have the same housing oversupply problem as the US.
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