Mortgage Defaults Affect Prices: The California Real Estate Market Appears to be the First Casualty

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California mortgage defaults have hit a 10 year high. Despite lender attempts to stem the tide of the subprime market spillover, it appears California will be the first state to feel the affects. Unfortunately for consumers and current homeowners, this could be foreshadowing an even greater decline in housing prices and an even tighter mortgage market.

Increase in Mortgage Defaults Negatively Affect Current Home Prices

This happens for multiple reasons. First, many of the homes that go into default have nothing inherently wrong with them. The fact that future homeowners can get them cheaper because banks are eager to get them off their books pushes housing prices down in their area. Second, more homeowners will be forced to sell to avoid default. These sellers will be pressed to sell quickly, often taking less than they could get, were they not under duress. Third, fewer consumers will be able to qualify for loans. Essentially, defaults increase the overall supply of housing on the market and tightening credit requirements reduces demand. This will causes prices to fall.

The question many consumers need to think about is how long this situation will persist and how bad it will get. On the positive side many banks have made it their mission to lower the default level. In contrast, the hype over the subprime market fallout has made many banks reassess their exposure to this market. Areas like California depend on subprime lending because of their high real estate prices. How severely they tighten their belts will directly affect how much prices decrease in the market.

What should Consumers and Homeowners do?

The best advice right now is to wait. Unless your property is ready to market right now, waiting out the storm is the best thing you can do. The challenge of selling in a down market is that buyers have tremendous power. Additionally, sellers have to really focus on pricing their property correctly. Sellers get in trouble when their initial price is too high and they chase the market downward. This causes properties to be on the market longer, and forces the seller to eventually sell well below what they could have originally received if they had lowered their initial asking price.

Consumers, who are looking for credit, might also want to wait, but not as long. Right now it will be very hard for consumers to qualify for subprime loans. It is important that consumers plan on getting back into the market as soon as the subprime mortgage issue dies down. Housing will be cheaper and sellers will be more open to concessions than they have been in a very long time. Capitalizing on this situation can help future buyers get a very good deal on their next house.

With all of the turmoil going on in the market, homeowners and consumers need to understand how this situation is affecting them. Furthermore, understanding this affect can help you maximize your future gains and minimize you current losses.