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Sacramento California Homes - Will Sacramento, California home prices recover?

housing market option rates

The mortgage meltdown impacted housing markets from New York, New York to Sacramento, California. Homes plunged in value as many families, unable to afford higher interest rates, lost their homes.

Are Sacramento, California homes finally beginning to rebound from the housing crisis? The question is difficult to answer due to the continued softness of the housing market. Sacramento was one of the hardest-hit regions in the country. The metro region prospered during the height of the housing boom. Areas like Elk Grove, Folsom and Roseville saw rapid expansion of new housing developments. Many Sacramento real estate agents became wealthy during these years.

Boom areas went bust
However, just like Las Vegas and other areas that prospered during the boom, Sacramento was especially hard hit when the market collapsed. Many of the mortgage loans were sub-prime or other similar types of mortgages with interest rates that reset in the future. During the height of the housing frenzy, many people purchased secondary homes purely for investment purposes as prices were skyrocketing. Many failed to consider what would happen if they were unable to refinance their homes. In some cases, people were victims of predatory lending.

As increasing numbers of homes went into foreclosure, the Sacramento housing market became saturated with homes for sale. The law of supply and demand dictates that as supply exceeds demand, prices drop. Indeed, home prices have plunged since the meltdown and in many areas they still have not recovered.

At the height of the bust, one could see many homes around the region boarded up with lawns in disrepair. Some whole neighborhoods were hit hard with multiple abandoned or foreclosed homes.

Will the recovery help the housing market?
Technically, the economy has started to recover but there are still many signs of weakness. The unemployment picture, for example, is still grim and not expected to improve quickly. However, most importantly, there are still major problems in the housing market specifically.

While the housing crisis was due largely to homeowners unable to handle higher interest rates on their subprime loans, there is a whole new batch of problems mortgages still causing problems. The option adjustable rate mortgages (option ARMs) and alt-A mortgages continue to reset and they could continue to depress the housing market. Unfortunately, Sacramento was a prime market for option ARMs. In 2005, for example, one in five Sacramento home loans was option ARM and that increased to one in four in 2006. According to the experts, about 60 percent of the nation’s option ARMs are in California.

In some cases, monthly payments on option ARMs can triple when interest rates are reset. Obviously, many people will not be able to afford such a hike in payments and will be forced to give up their homes. When that happens, the already flooded market will again experience downward pressure on home prices. The number of homes on the market will likely exceed demand, so many homes will go unsold for long periods.

The alt-A mortgages are equally problematic and in 2007 about 30 percent of home loans were of this type. Like the subprime and option ARM loans, these mortgages cause monthly payments to jump when interest rates are reset.

On the positive side, the low prices and the low mortgage rates may appear attractive to buyers and investors. Many feel that some neighborhoods in Sacramento have already hit rock-bottom and there is nowhere to go but upward. Also, more government and private programs are in place to help homeowners having problems with their mortgage payments.

So, the problem as to whether Sacramento, California homes will begin recovering in value is a difficult one. Much depends on just how fast the economy grows, and whether local initiatives can help speed up local growth. The Greenwise Sacramento project for example aims at quickly making the region a national leader in clean technology. Of course, we cannot ignore the large number of homes that are still in danger. The ability of the region to help homeowners remain in their homes will have a great impact on housing prices. The problems in Sacramento are symptomatic of what is happening across most of California and also throughout much of the nation.

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