Reasons why home prices are declining

December 9th, 2009 |

After continuous increase in prices of real estate for years, final quarter of 2007 recorded steepest decline of 8.9 percent in history of housing index. Since then home prices continue to decline. There could be many reasons for this continuing decline in home prices.

First, decrease in earning capacity is what I think main reason for decline in home prices. Due to financial crisis across the world many people are losing there jobs or decrease in income and thus people are finding hard to earn money to pay their expenses. With uncertain income and threat of foreclosure hitting the housing market, home prices are decreasing gradually.

Second, recession is the reason behind the declining home prices. With recession hitting the world economy, every industry witnessing the downfall, housing industry is one of them. People across the world are losing their jobs, there by unable to pay mortgage payments. Hence facing foreclosures.

Third, over supply of properties. With increase in unemployment rates and decrease in earning capacity of individuals, unable to meet monthly payments ultimately increased number of foreclosures into market. With increased supply of foreclosed properties more than demand, home prices are declining. Due to increased competition to sell the properties, the lender has no other option other than to reduce the home prices. Hence this is one of the reasons for declining home prices.

Fourth, lending institutions tightening their lending terms and standards. With increased number of defaults in mortgage payments, banks or lending institutions have tightened their lending terms and standards. With tightening the lending terms many people are finding hard to become eligible to grant the loan to buy house. Therefore less number of people coming forward to buy real estate properties and increased number of houses coming for sale due to increased foreclosure rate could be the main reason for decline in home prices.

Some states of US are experiencing high percentage of decline than others and the reason for this could be local market condition. This is because the economic market conditions are cyclic in nature and many things that rule this market cycles.

During this downfall in home prices, gone are the days when the real estate agents use previously sold houses for appraising. The reason for this could be foreclosures sale that happened in the neighbourhood. Foreclosure sale price was not given serious consideration during appraisal because they were sold at low prices.

With decline in home prices, many banks are not coming forward to loan 100 percent value but now becoming 95% loan to value is becoming more popular in high risk areas. In this scenario, banks are coming forward to lend after judging the risk associate with the area of the property for which they are lending.

Therefore if you are thinking to buy a home then you must analyse the risk associated with the neighbourhood like where prices have held up despite the weakness? Before you proceed to close the deal.

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