In many Western countries at one time home ownership was balanced by a rental market. The opportunity to own property was not available to all, yet many aspired to own their own homes: easy credit and lax lending made it a possibility. Everyone wants to get onto the property ladder, believing what they borrow to buy can only go up in value. Demand for home ownership fuels property price inflation and people become afraid of missing the boat, so jump on with little understanding of the financial commitment they undertake.
When prices soar to ridiculously high levels it is inevitable that the bubble will burst, as the market becomes very tenuous. Some expect house prices to fall, but when an economy goes into recession prices don’t just decline, they drop dramatically. The housing bubble bursts. Those with long term investments in their homes only see a decline in their equity on paper. However those who have bought unwisely at already inflated prices, with too easy credit, experience the shock of negative equity as a reality which leaves them paying a mortgage on a home for far more than its actual worth.
Access to 100% mortgages and interest only home loans make buying easy when the buyers don’t understand the consequences. A study released by the Federal Reserve clearly shows that the majority of those with mortgages do not even understand the implication of a simple one point rise in interest rates, and don’t realize it will cause their monthly payment to increase. Those who bought with no or low down payments pay a hefty insurance premium to the lender for having low loan to value in their properties, not realizing that this insurance they pay protects the lender but not them.
When housing bubbles burst prices fall, lenders foreclose on properties, which forces prices down further. As things begin to bottom out a period of stagnation can occur and people wait for what they perceive to be the inevitable rise in prices again. As the first green shoots of recovery are seen people assume the worst is over, until the double dip begins, and house prices begin to fall even more, taking them down to more realistic levels.
Those who have clung on find that they can cling on no longer in a bad economy which shows little chance of recovering soon. Differentials between the size of mortgages and actual home values have led to a new trend of many home owners simply walking away from their mortgages. Many simply stop paying the mortgage and effectively live rent free waiting for the inevitable foreclosure. They act as tenants waiting for eviction. This could never happen in other Nations where the defaulting homeowner would be pursued through the courts for the outstanding debt, but in America different states have different regulations regarding this and not many lenders pursue the debt.
Currently prices are still over inflated and the signs of a double dip housing market are there. Many aspiring home owners now choose to sit it out and rent until prices level down, rather than jumping in regardless. Property prices will level out at some point and long term property will prove to be the wise investment it has always been when people buy at an affordable level rather than jumping onto an inflationary rollercoaster.