How Long Will It Take For Real Estate to Recover?

It is impossible to forecast with certainty how long the real estate market will continue to be in the doldrums. One can, however, examine what fueled the housing bubble and its subsequent explosion and surmise some guesses from that analysis.

What fueled the housing bubble and gave false impressions of high home demand were bonds sold by Wall St. banks that were backed by home mortgages. They needed more and more loans to package together, and lenders knew they could sell any loan to Wall St., even ridiculous ones made to people who had no income, for example. This helped to fuel the housing boom, along with the fear by many that they had better get into a home as soon as they could or they would never be able to afford one since prices seemingly were going forever higher.

It was felt on Wall St. that by putting together so many mortgages to create the bonds, five or six thousand were typical, the risk of the entire bond going bad was very low. Many more people defaulted than was expected, however, and most of these bonds and associated financial derivatives went bad.

There were a lot of subprime mortgages written in the mid-2000′s. For example, in the year 2006 there were roughly $600 billion worth of these loans processed, and the vast majority of those went into creating subprime mortgage bonds. If we assume that the average mortgage was for about $200k, then that would mean that three million homes were purchased using subprime mortgage loans in that year.

Let’s assume that this type of lending went on for about four years, roughly from 2004 to 2007. That would mean that 12 million homes were purchased with sub-prime mortgages. Let’s further assume that about one-fourth of those loans defaulted. That would mean that three million sub-prime loans went bad. In 2010 alone there were about a million foreclosures in the U.S., and the number predicted for 2011 is a bit higher than that. Many banks are not actually foreclosing on all the bad loans they have because they don’t want to flood the market with even more foreclosures.

So it looks reasonable to assume that to simply expose all the looming sub-prime foreclosures will take a couple more years. Selling these properties and clearing them from the market will take perhaps a year or two beyond that. So this author’s best guess is that the real estate market, especially the market for new homes, will not get back to normal for about 3-4 more years. Such is the legacy of the Wall St. subprime mortgage bond fiasco.

Go to Homes for Sale Monument Colorado and download the free report “How to Save Money on Mortgage Closing Costs”. And find out about Deliberate Default of a Mortgage.