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The Mortgage Pendulum-what it Means For You

Posted by  on Apr 01, 2010
 
A pendulum swings back and forth between two extremes, accelerating always toward the equilibrium point. In terms of the real estate market, the mortgage pendulum shows how the housing market swings between extremes, with a booming market and an ease in attaining mortgages balancing a much slower market and a tighter hold on mortgages. In the middle is the balance, where mortgages are not too hard to get, and not too simple, either, and housing prices are middling, but like a pendulum, the market does not idle long in this place.

A market in a swing toward the bust extreme can be a difficult time to buy a home, with mortgages being rather hard to come by at this point. It can be hard to sell your home as well, and selling can possibly mean selling lower than the purchase price. If you can qualify for a mortgage, however, this is the best time to buy, with home prices being very low. The trick is to judge when the market has hit a low point to get the best deal possible on your home before the prices swing upward again.

The other end of the spectrum is the booming market, in which houses sell quickly, facilitated by loans which are increasingly risky for the banks in order to let more and more people apply for new mortgages. This kind of boom can lead directly into the opposite swing because of the nature of the loans that are being offered.

In order to allow more people to qualify for loans, and to help them pay for those loans, lenders may take a more risky stance, offering interest only loans or loans with a temporary fixed rate that rolls over into an adjustable after a period of time. This can be great for people who need a little boost to get into their first homes, but we have seen the results when these same people have not prepared for the adjusting of their mortgage later on, and many people who do not prepare ahead of time can lose their homes to foreclosure.

This is especially true if the adjustment commences when the mortgage pendulum is already on a downswing back toward a bust market, because many people will be dealing with their rates adjusting at once and it will be harder and harder to sell homes as the market is flooded and the prices drop dramatically. The choice becomes selling at a loss or foreclosure, and many families can be trapped in the middle.

So what does this mean to you? It really depends on your interest in real estate and your financial situation. A first time home buyer will not be considering the same things as someone looking to flip a house or someone who has enough money to allow them to hold onto a house until the market turns around again.

Home Buyer
Someone looking to buy a home must consider the market, and what it is doing. If it is taking a downward swing, it could be in your interest to wait until it seems to have hit bottom. It will he harder to qualify for a loan, however if you can qualify you will have more houses to choose from, less competition, more desperate sellers, and the benefits of knowing that the market will rise again soon.

Investors
If you are investing, it might be a good idea to look for this same downswing. However, you can buy at just about any time if you are trying to flip a house. No matter what the market is doing, a quick flip with significant improvements can make money either way. If, however, you can get a house to flip as the market hits a low point or begins to rise, you will be earning equity on the house in the short time that you have it as well.

No matter what reason you are looking for a home to buy, the low point of the market is often the best time to buy if you can get the loans. Judging just when the market drops far enough down can be difficult, and it can be frustrating to know that you bought a home and then the prices continued to fall, but it is always better to take what you get and move forward than to dwell on what might have been if you could foresee the future.

The mortgage pendulum is an apt description for the movements of the housing market, but it does leave out one important factor, which is the fact that the prices of houses will always continue to rise over time.

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