Lower Credit Scores Could Bring Down Future Home Values

Last week I heard a stat on the radio that 29% of U.S. citizens have a credit score of 580 or less, meaning 3 out of every 10 Americans has really bad credit. FICO scores are one of the most important factors required for getting home loans. A low credit score indicates high risk to banks. Mortgage lenders don't lend money to people wilth low credit scores, unless the interest rates are incredibly high. What this means is that 29% of US citizens have credit scores so low, they will be unable to get mortgage financing to buy real estate.

Many of the low credit scores were caused by by people over extending themselves. These people with the now bad credit, missed payments, had short sales, or were foreclosed on. Many foreclosure victims actually voluntarily stopped making their monthly payments even though they could afford it. These people who foreclosed by strategic default, allowed their credit score to be destroyed because they owed thousands more than their homes were worth.

A long term negative effect of more people with bad credit, is that there will be less eligible home buyers in the future. Foreclosed borrowers will likely be unable to get a new home loan until seven years after their foreclosure date. This represents a future decline in the demographics of home ownership. Less people will own homes, and more people will be renters or live with family. Home builders have been building more homes with "mother in law" apartments. Since the recession, there have been much greater numbers of multi generational households, where extended family all lives under the same roof.

With less people being able to qualify for mortgages, it will be harder for home owners to sell their homes. We will not only see downward pressure for Utah Real Estate but of you're trying to sell Kennesaw Georgia Homes or Real Estate in California you will probably see the same things. The absense of real estate appreciation will also slow down the overall economic recovery. The low credit scores we are seeing will probably keep real estate from appreciating for a very long time.

This and other factors should really play into your decisions when investing in real estate. If your real estate investment strategy is buy and hold, even though you don't cash flow because you believe real estate values will be up in five years, you might want to think your real estate investment strategy again.