A posting by Vancouver Home Mortgage:

As reported by The Washingtion Times Business - 8/30/2007: The credit and housing crisis deepened yesterday amid reports of a record 3.5 percent drop in home prices during the spring and a resurgence of subprime defaults this summer after millions of mortgages reset at dramatically higher payment rates.

While consumers are increasingly focused on the deteriorating housing and credit situation, the Fed remained focused on its fight against inflation at a meeting Aug. 7, just days before the credit crunch escalated into a market rout on Wall Street, according to minutes from the meeting released yesterday.

In another interview by Bloomberg and originally aired on: 8/29/2007 on CNBC, Robert Shiller discussed the results of the latest quarterly release of the S&P/Case-Shiller home price indices and to provide his assessment of the performance of the Fed including their recent rate and liquidity actions. Shiller concludes that, even today, the Fed is still underestimating the severity of the housing crisis and furthermore, that a recession may be looming.

The US housing market is now going through:

1) A contraction in liquidity eliminating new buyers from getting any new subprime mortgages.

2) Deflating house prices as a result of over supply of inventory of new and resale homes.

3) Billions of 2/28 type mortgages are facing interest rate resets in 2007 and 2008. Both prime and subprime borrowers are not able to afford the higher mortgage payments after the rate resets.

4) Financing for jumbo loans are costly due to lack of liquidity to fund such loans. This will curtail home buying activities and limit demand for houses.

5) The past 5 years excess liquidity and loose lending control have resulted in huge increase in property prices. In most places house prices are still unrealistically high.

The above factors are likely to contribute to a decline in the US housing market. In a declining market, demand will be weak as buyers will stay on the sideline and wait for lower prices. The fact that house prices are presently still highly over-priced and unaffordable, and it will take many years for prices to unwind. Eventually, the market will be stabilized when the supply and demand once again reach an equilabrium.

You are welcome to post your comments and offer your opinion as how the housing market in Canada may be affected by the deteriorating housing market situation in the US.