Debt Consolidation & California Credit Counseling

Economic crisis put a halt to housing industry boom in California

The economic crisis struck the economy with sub prime mortgage collapse. The sub prime mortgage collapsed on the fact that a relatively taking exposure of risky mortgages during the boom of housing industry. It means having exposure to bad investments can hammer the economy of the nation.

The housing boom actually has two components. First, the demand that comes from the home buyers who already own a home and second the demand coming form the one who is buying a home for the first time.

The problem actually began when the government and banks increased the pool of resources for the first time buyers who could qualify for the mortgage. Government and banks made this by keeping the interest rates low, liberal terms and conditions by banks, made borrowing money cheap and easy.

The other aspect of the problem is made by government of not properly monitoring the lending practices of the banks or lending institutions that was issued for mortgage backed loans and allowing the borrower to make less mortgage payments in short term and larger payments later in the term.

But the first time buyers who is eager to buy a home ignored the fact that adjustable rate mortgage would result in higher monthly payments which would cost higher for staying in home.

The housing boom came to an end in 2006-07 when due to rise in inflation, fed started to raise interest rates which in turn increased the average mortgage monthly payments for many home owners who had ARM mortgage loans. As the lending rates continue to rise over the past years so did the cost of mortgage monthly payments which resulted for more number of Americans to default their mortgages.

At the same time rise in interest rate that also reduced demand for new time home buyers as mortgages have become expensive which resulted in putting an end to price hike of home that were surging over half a decade.

With less demand and higher supply, the prices of the homes that were soaring started to drop and are continuing till date. With declining prices the home owners are left with no option to pay the increased mortgage payments as they could not refinance the mortgage loan nor could take out the home equity because the worth of the home is less than what the borrowers actually owe to lender.

Under these circumstances, California faces budget crisis, the governor of California, Arnold Schwarzenegger has declared a fiscal emergency in a fear that state would run out of money by early this year and delayed the tax refunds for those individual and business who had paid extra for the fiscal 2008-09 so that can to diverted to priority payments required by the law.

To overcome this economic crisis, consumers have to cut their spending and manage their finance effectively, banks to tighten their lending standards. But, these actions may fall short to boost the housing market with kind of stability that is required to rebuild and to withstand the next downturn.