By Dustin R Burke, Adonai Financial

Since the real estate boom went bust a new term has reared its head into the real estate professional's vernacular.  It's the term soft market.  Soft markets are often the result of having too many sellers and not enough buyers in real estate market which often drives home prices lower.  When prices drop from one calendar quarter over another the market is defined by banks as a depreciating market or a soft market.

When a specific MSA or even ZIP code is labeled with the stigma of being soft banks and mortgage typically implement lending policies that are more restrictive such as requiring a higher down payment on a house, etc.

From my observation soft market policies typically impact the less affluent first.  A potential buyer in an economically distressed area typically has less liquidity proportional to their income than a potential buyer purchasing a home in a more affluent area.   Therefore the buyers with lesser means are often pushed out of the market whereas a buyer with greater means isn't so drastically affected by the soft market policies.  The end result is the markets with less means are often hurt more.

We already know that soft markets are a direct result of too many sellers and not enough buyers.  When banks and mortgage lenders implement soft market policies that restrict the number of potential buyers it further accelerates the problem with declining values.

These soft market policies act as a double edged sword.  They are put in place to curb the banks and mortgage lenders exposures to potential risks but they also hasten the problem of declining values.  So, what to do?  Well, we've all heard of these huge write downs that major banks have taken as losses on mortgages.  Since the banks have already written down the "bad debt" and I think they should take action that would work to stabilize the market rather than destabilize it. 

Mortgage companies and banks made billions during the boom and have suffered severe losses because of the bust.  I'm not sure exactly what to do about the declining values in certain areas, but don't think that restricting liquidity further is the answer.  If anything, easier money would start to curb the problem.

What do you think should be done to help curb the problem in declining markets?  Do you think soft market policies are the answer?  Feel free to let me know by sending me an email to dustin.burke@adonaifinancial.com.

"Adonai Financial, your friends in the mortgage business!"

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Copyright © 2008 Dustin R Burke | All Rights Reserved

Portions Copyright © 2008 Adonai Financial Corporation | All Rights Reserved

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---The content of this blog is my opinion---