Loans may Turn Bad as Interest Rates rise
As interest rates have continued to rise recently, a recent report showed that recent price increases in homes were lowest in 4years.
Since the stock market bubble in 2000, the money that went out of stock market has found its way into homes and other things such as SUV’s and mortgage payments.
Some markets have seen housing prices go up 20% a year. Mature cities such as Los Angeles and New York City are such examples.
Many people hold the belief that real estate prices cannot fall. Well, this is clearly not the case. In the 80′s California real estate had its boom and later bust period. The same thing may have been said about the stock market during late 90′s. Well, the party doesn’t last forever. Money supply is limited. When housing prices continue to outpace inflation, year after year, it can’t continue forever.
During the current period, lenders & home builders have been letting many people with bad credit get loans for homes. Car manufacturers have been pretty loose on credit recently too. Ad slogans such as “no credit no problem, bad credit no problem are common.” Expensive gas guzzling SUV’s have reached new popularity heights.
People with flexible rate mortgages on their cars and homes may get hit especially hard if rates continue upward. Beside increasing interest rates, we have inflation in the economy to deal with. With record deficits, war in Iraq, and Bush’s tax and spend policy, inflation looks to be higher than usual. This could mean that dollars won’t be going as far as they used to.
As a result of this, more and more people in the economy will not be able to meet critical payment deadlines for things like mortgage payments, car insurance, home insurance and other bills. Some may even loose their homes and have to file for bankruptcy.
And bankruptcy ruins people’s credit which slows up loans and puts damper on economic growth. The banking sector may get hit by this too with lots of bad loans. Some companies effected by this will be banking companies, lending companies such as Countrywide. Also title loan companies and car manufacturers may feel the crunch as well.
This isn’t a pessimistic Kissinger, communist domino effect theory, but is a more realistic view. For every loss is someone else’s gain. And within next few years I think a lot of wealth will be transferring to others.
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