Home Sales Decline 27.2% Putting Home Equity Loans In Danger

[Aug 27, 2010.]

 

The current lack of demand for existing homes likely means that home values are going to drop again. By how much, no one knows. The 27.2% drop in existing home sales in July was reported by the National Association of Realtors (NAR). The large drop brings existing home sales to their lowest levels in over 10 years, since the NAR has been keeping track. This news has many executives at the largest banks concerned that more defaults on home equity loans may be coming.

A further de-stabilizing of the housing market could mean huge losses, again, for the major banks. The top 4 banks (Bank of America, J.P. Morgan Chase, Wells Fargo, and Citigroup) hold the majority of mortgages on their books. The home equity loans that are already in default have already been counted. New loans becoming delinquent as as home values drop, could mean a new wave of losses for these four big banks.

An increase in delinquencies on home equity loans would be a shame, especially because the American Bankers' Association (ABA) recently reported that, for the first time in two years, delinquencies on these home loans have improved. The Chief Economist at the ABA was hopeful, yet cautious, about the beginnings of stabilization. However, any hope of stabilization would be dashed should home values drop again.

The decline in existing home sales is not surprising. Many economists and real estate industry experts expected to see demand drop off with the end of the government's tax credit incentives. The government had been offering up to $8,000 to qualified buyers willing to purchase a home. Without that great incentive, the housing sector has to stand on its own. So far, it does not appear to be strong enough. More stimulus may be required. But, at this point, the government has not announced any plans to step in again. It remains to be seen what the new normal housing market looks like in the current, changed economy. The government can't afford to continually stimulate the economy to unsustainable levels. The road ahead may be bumpy.

Apply for a new home equity loan now.

 

About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.