Saturday, September 26, 2009

Residential versus nonresidential mortgage loans

The mortgage market can be dividend into two major segments: (1) residential, which encompasses all loans secured by single-family homes and other dwelling units; (2) nonresidential, which includes loans against business and farm properties. Which of these two sectors is the most important? Loans to finance the building and purchase of homes, apartments, and other residential units dominate the American mortgage market. In 1980 residential mortgage loans on one-to-four-family properties and multifamily structures represented three fourths of all mortgage loans outstanding. Mortgages on commercial and farm properties accounted for the remaining one fourth of all mortgages issued.
In recent years the residential portion of the market has grown faster than nonresidential mortgages. The most-dramatic growth occurred in loans on one-to-four family properties, which rose from 61 percent of total mortgage debt outstanding in 1975 to 66 percent in 1980.this category of mortgages is dominated by singe-family home loans, which increased significantly due to the rapid growth of new family formations and the effects of inflation.
The 1970a also ushered in a speculative investment boom in the building of condominiums, duplexes, triplexes, and smaller residential structures by wealthy investors. Much of this speculative construction activity has been aimed at the rental housing market, designed especially to appeal to college students and low-to middle-income families. Unlike owner-occupied residences, rental properties can be depreciated so that both mortgage-loan costs and annual depreciation expenses are legitimate income tax deductions for investors in such properties. While one-to-four-family residential mortgages were capturing a larger share of the total market, both multifamily (apartment) and commercial mortgage loans were declining in relative importance.
Because residential mortgages dominate the market, it should not be surprising that households are the leading mortgage borrower. The next-largest group of borrowers-nonfinancial corporations- is a distant second. Moreover, the share of the market represented by household has risen in recent years due to an upward surge in the demand for housing, while other mortgage borrowers have declined in relative importance.

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