But Joe was approved.  He moved into his lovely little home but slowly fell behind on monthly payments.  Missed mortgage payments and late fees overwhelmed him until he couldn’t withstand the pressure.  Taking a huge hit on his credit, Joe walked away without looking back. 

Joe was a subprime lender and, over the last few years, there have many like him.  Just look at the headlines in the news and you’ll see countless articles dedicated to subprime lending woes.  You see, subprime lending is the process of lending money to a borrower with low credit scores, no documentation or low income, and no money for a considerable down payment.  This triple combo smells incredibly risky to a lender.  And increased risk equals stricter underwriting guidelines and, of course, higher interest rates for the risky borrower.

During the recent real estate boom, subprime loans were dispersed on a regular basis--causing intricate implications for the market.  While the full affects of such unconventional lending have yet to be seen, one visible trend arising is the overwhelming number of borrowers, like Joe, who are defaulting on their monthly payments. 

In direct response to this trend, the market is now seeing more homes with a foreclosure or pre-foreclosure status.  This “for sale” influx has impacted life for buyers, sellers, investors, and any other type of real estate professional greatly.  Explained simply, the laws of economics show us, the more homes available, the lower the market price.

This spreading depreciation (there are still places appreciating, markets are better analyzed at the local level) means many real estate investors who bought when market prices were high are having trouble turning a profit. 

But now I close on a positive point.  I strongly disagree with those who say that real estate investing is no longer a worthwhile financial endeavor.  Smart, cautious, and confident investors are still cashing in during this buyer’s market.  They purchase homes in foreclosure or near foreclosure at a fraction of their true market value and then fix and flip for a profit.  And don’t forget the old-fashioned way to make money in real estate, long-term holds.  These yield residual income and do appreciate over time despite short-term shifts in the market.