Mortgages more affordable as a result of Hurricane Katrina

The real estate industry has been more or less turned upside down as a result of the devastation caused along the Gulf Coast by Hurricane Katrina. Thousands of people are homeless, thousands of homes have been destroyed, and many of these homes were uninsured against flood. The result of this will be a lot of people simply walking away from their mortgages, as there is nothing left to save. The lenders will be unable to foreclose in any traditional sense, as there will be nothing salvageable from the property. In short, the lenders are going to take it on the chin.

There is a plus side to this, however. The effects of Hurricane Katrina are widespread and affect many industries. Many companies have lost their offices and factories and tens of thousands of people will be out of work. Because New Orleans is a major port, the economy of the city affects the economy of the nation as a whole. And the damage done to the national economy as a result of the hurricane may help those buying homes.

The Federal Reserve has raised interest rates some eleven times this year. Any time mortgage interest rates go up, borrowing goes down. That makes sense, money is a commodity like any other and when the price of anything goes up, demand for it goes down. As interest rates have risen, the sales of homes nationwide have decreased. Prior to the storm, interest rates were predicted to continue rising, causing a further slowdown in the home lending industry. Katrina may have changed all of that.

Katrina has generated a ripple effect throughout the United States economy. With thousands of people out of work, a stagnation in the economy as a whole is predicted. This will result in fewer interest rate increases and may even yield reductions in the interest rates. That should spur on home sales throughout the country.

Adding to the home sales is the fact that some 40% of the residents of New Orleans did have flood insurance, but many of them may have lost their homes completely. Some of these people have evacuated and will probably not return. For them, buying a home in their new location will be a necessity. There have already been indications that housing markets in not-too-distant cities, such as Memphis, are picking up as a result of buying activity from former residents of Katrina-stricken areas.

It remains to be seen what the long-term effects of the storm will be on the American economy. The housing market is already in a rather precarious position, as home prices have reached astronomical levels in some parts of the country, and mortgage options such as interest-only loans and 100% financing loans have only made the situation worse. The real factor in what happens to the housing market is the effect of Katrina on national employment. Most of the people who have lost their jobs as a result of the storm were locally employed. If that surge in unemployment should affect the national jobless rate, the entire real estate industry could be in trouble.