Saturday, August 18, 2007

The Story Of Uncle Sam - Part 7

As and when interest rates spiralled up, the house market was impacted - the house prices, as expected, started to dwindle. The rising benchmark rates also made mortgage loan repayments much weightier, thereby adding financial burden to the borrowers.

In the absence of additional income supplements, it naturally followed that default and foreclosure rates shot up - almost hand-in-hand with the Fed rates.

The falling house prices , coupled with the rising default rates, landed the mortgage loan lenders in a financial strait-jacket - and eventually with some major players going into bankruptcy.

The rout of the subprime mortgage market was certainly going to affect the domestic consumption. The market confidence was instantly killed off, leading investors to believe that the share market would crash as a result of an increasingly bleak prospect of the United States' growth.

2 comments:

traveller said...

I am curious here. When the mortgage rate is low, the price of the house is high. If the rate increases, the price will drop. So I think the buyers still pay more or less the same amount every month. Is it the reason why the two are adjusting themselves to keep something constant?

Tony Hii said...

When the Fed rate was at decades' low, it provided strong incentive for investors to go in the house market. But when the rate went up to the present level of 6.25%, it has become a financial burden for the mortgagors.

As demand lessened, the market forces pushed the house price down.
This created valuation problem for the lenders.

When mortgagors found it increasingly difficult to service their loan repayments, they defaulted and this led to an increase in foreclosure rate.

The whole cycle eventually led to the present meltdown.

In short, the invisible hand is adjusting our market to move it to an equilibrium.

You are right in this sense.