The Big Bailout. The Effect On Property Values?

As a homeowner in CT you may wonder what the proposed bail out really means regarding your property's value. Well, the details are still being worked out but here are some thoughts specifically related to real estate.

In real estate, a free market means that value is based on a true supply and demand theory - your home is only worth as much as someone would be willing to pay for it. Values go up and down according to many things. One thing that recently contributed to the spike in housing prices over the past few years was the availability of credit or the ability for people to borrow money from a bank to make a purchase. Many people were even able to get "sub prime" loans (at a higher interest rate or at an adjustable rate) meaning they didn't qualify for the standard loans since they were considered a greater risk (lower income or bad credit as the main reasons). However, once these loans were written they were then packaged and sold to such entities as Fannie Mae and Freddie Mac and some were held privately. Well, not surprisingly, many people have had a hard time paying their loans and have defaulted. Any entity holding these mortgages found themselves in trouble since they weren't receiving the payments they expected.

Any entity holding mortgages, especially the sub prime ones, knew there was a risk in doing so. The people applying for the mortgages knew they were stretching themselves (there has been little evidence that people "didn't know" what they were getting themselves into or were "scammed"). However, these institutions were willing to chance it since they were charging these people higher interest and it was a gamble they thought worth taking.

Well, the gamble didn't pay off. Those that received sub prime mortgages are defaulting in high numbers. The banks aren't receiving the payments they expected, are foreclosing on homes, and receiving much less than the value they lent out money for. The other effect is they don't have much money to lend out now so fewer people, even those well qualified, aren't able to borrow money.

Essentially, Wall Street wants American taxpayers to pay off their gambling debts. They took a risk, it didn't work out, and now they are claiming there will be wide spread effects if they don't get any financial relief. They may be right. However, the market always corrects itself. If the government didn't get involved some companies that took big risks would fail and some people who borrowed too much would lose their homes. However, Wall Street would learn to take more responsible risks and some people would learn the hard way how to live within their means. It may sound harsh, but this wouldn't be a bad thing.

So, what does the government bail out of 700 Billion dollars mean? Well, in the short term it may stop your property from losing value since there will be more credit available and more people can borrow money (therefore increasing demand). However, what will be the financial impact on taxpayers? It will be staggering. Also, there are no guarantees it will do anything for the long term except teach Wall Street they can take massive risks and if things don't work out the government will step in and pay off their bad debt. As for your home's value, the bail out isn't guaranteed to do anything except make people pay higher taxes and have less money to use to purchase property (therefore decreasing demand). Therefore, as you know, if the demand is gone, the values will drop. The bail out is a great victory for Wall Street but this may actually be a huge detriment to the average home owning American.

P.S. There is already talk about bailing out credit card companies and people having trouble pay their car loans...