Harvard University has just released its annual report on the status of the housing market. You can read the summary at MarketWatch.com/news.

The key highlights are:

1) The current fall in house values and rise in mortgage defaults was last seen 30 years. In 2007 1.3 million homes were in foreclosure.

2) Builders over-built, lenders over-lent and borrowers over-borrowed

3)However, over the next 10 years, there will be demand for 14.5 million new homes

4)The housing market will eventually recover but it will take longer than other recessionary periods

To cut the long story short, in my opinion, the banks lent out too much money, too easily. Then the law of supply and demand took over. The huge supply of money created a big demand for houses. The big demabd pushed the prices through the sky. But the economy could not sustain the large credit supply and high interest rates from over-inflated house values. So the bubble burst. What we are seeing today is the market trying to recover as it seeks a new equilibrium of supply and demand. 

The lenders now have very strict lending policies. This has lowered the demand for houses and is the cause for falling house prices.  

The larger than normal level of foreclosures is because the average home buyer thought house values will continue to rise for the long term. And based on this notion, most people bought their house as a get-rich-quick investment scheme, which has since back fired.

So for the next 10 years, the average home buyer will see a home as a place to live in and not an investment to buy today and sell tomorrow.

This blog answers one of the questions posed by a reader about what is happening to the housing industry. If you need further explanation, please click here and you will be directed to the TALK2US page and you can then complete the Comments form.

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