The combination of “cheap” money, lower lending standards, Wall Street banks’ now defunct subprime lending industry, and Americans’ eagerness to own their own or a larger home led to escalating demand for houses in the middle of this decade. As demand for homes expanded, so did the profits of mortgage lenders who stoked demand even further with new and innovative financings such as “option adjustable-rate mortgages” or “option ARMS”. Under these loans, the borrower can decide the monthly payment for a limited period before the mortgage is renewed at a higher interest rate and fixed payments.

Millions of people, some of which had never had the financial ability to own their own accommodation, were courted by mortgage lenders who used “boiler room” tactics to entice prospective clients. Under these circumstances, the home building industry could hardly keep up with the demand thus new home construction and prices soared.

However by mid 2006, the upward spiral of prices began to plateau. Home buyers with poorer and poorer credit ratings were purchasing houses that they could ill afford and fewer and fewer prospective clients remained to canvass. By the summer of 2007, the debacle of the subprime mortgage fiasco was headline news, mortgage companies faced financial ruin, and the housing bubble burst with a load bang.

House prices began to plummet and are continuing to decline. This is due to both the demand and the supply side of the equation.

The demand for homes has decreased dramatically for several reasons. Lenders are demanding more stringent credit scores and larger down payments. Mortgage applications have fallen steeply and hit a 7 year low. The current recession is deteriorating the job market and consumer confidence making the demand for homes weak. The U.S. economy has shed jobs every month since late 2008 and the number of unemployed Americans is rising monthly creating the worst unemployment situation in 26 years.

On the supply side, foreclosures are at an all time high particularly in California, Florida, and Nevada. About 75.5 million Americans own their own home and 20% owe more than their homes are worth. Four million homeowners, representing 14.4% of mortgage holders, are behind in their mortgage payments or are in foreclosure. For those who purchased their home in the last 5 years, 29% are under water. According to Fitch Ratings, many option ARMS will reset over the next two years and monthly payments will increase by 63% on average.

With an estimated 15 million households expected to have zero or negative equity in their homes, the situation is bleak for lenders and the holders of foreclosed houses. It is during troubled times, when circumstances appear blackest, that opportunities exist to pick up bargains that will result in long term profits.

However, investors and potential home owners must be astute, do their homework, and analyse the housing market in their area of interest to find these bargains. Take advantage of the “Perfect Storm”, but chart the waters carefully in doing so.

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