The news about the collapse of Lehman Brothers, the sale of Merrill Lynch to Bank of America and the big slump in the shares of American International Group was tragic enough by itself, and immediately led to a 500 point drop in the Dow Jones Averages.

But if you don’t have a lot of money in the stock market, and your real worry is about obtaining a mortgage to purchase a home, you probably want to better understand what the impact of all this negative financial news has on the housing market.

Actually, the real estate market had a lot to do with the debacle in the finance and stock markets. Both consumers and lenders are to blame, since too much easy lending resulted in borrowers in over extended credit situations and lenders were able to sell off these risks in specialized markets, so they did not have to be concerned about the risk. Banks were happy to lend whatever sums homebuyers required, since they knew they could sell the loan; buyers of these securitized loans were confident that the default risk would ultimately fall on Fannie Mae. This policy led to more than $7 TRILLION in new debt being created in the first 6 years of the 21st century. Because of this, debt due by homeowners and consumers in general doubled over 1999 levels. Now it is time to pay up.

This type of economic shift is bound to have an effect on all markets. The International Monetary Fund predicted in the beginning of2008 that the global credit crisis could cost the total world economy $1trillion this year.

So needless to say the home market is going to be affected. Credit is almost dried up. In addition, lenders will see an added burden of falling revenue as consumers, faced with greater mortgage costs and possible foreclosures, cut back on general purchases, reducing fees from banks’ credit card, auto and personal loan operations.

This makes loans to consumers even more difficult to get. In a, this will be good news, since banks will be forced to be more sensible in their lending practices.

But there may be a bonus for potential buyers in this mess. With lower levels of mortgages being granted, home prices continue to fall. Tight credit also eliminates speculative buyers, who created a strong higher pressure on housing prices during the real estate upswing. So those who delayed buying may still have plenty of time to locate a bargain. If a potential homebuyer used this time to build up a sufficient down payment and improve his credit rating, he will be one of the lucky few still able to get a loan.

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