Before the end of 2008 roughly US $700 billion of U.S. sub-prime mortgages will face re-financing at higher interest rates. The Fed has been steadily raising interest rates until it's latest policy change in an effort to control inflation. Tightening credit means that homeowners will face higher interest rates when they renew their mortgages. An average household could see it's monthly mortgage payment increase by $300 to $500.
It is likely that if interest rates in the U.S. are not lowered then many households next year may not be able to afford their mortgage payments if they have to renew their mortgage at current rates. This could have a two-fold effect on the housing market. Firstly, homeowners who could no longer afford their monthly mortgage payments may have to sell their homes which would drive prices down. Secondly, these homeowners who sell their homes would look for rental housing driving up the rental market and making real estate a more attractive investment.
It appears that foreclosures rates are already rising. In August there were 250,000 property foreclosures. This is up 115 percent from last year August. In mid-2007 up to 21 percent of all mortgages in the United States were classified as 'sub-prime'. This means that up to a fifth of all mortgages in the U.S. may be questionable.
The implications are that the United States may see soft housing market if sub-prime mortgages lead to foreclosed properties. Whether this actually happens depends on the economic conditions of the US, the global economy, U.S. interest rates and any actions taken by the U.S. government to aid homeowners or sub-prime mortgage holders. Should the American housing market experience a correction then it would present opportunities for American and foreign investors.
By Kyle Ware
|Virtual Vancouver||Vancouver News||Vancouver Classifieds|