Wednesday, January 4, 2012

Real Estate Insight From BNN's Linda Nazareth

Just a quick update on the US real estate market , Linda is one of the Economists that have been consistently on the ball.This article shows some the reasoning behind the USA's problems.As with the Real Estate market melt down in Canada in the 1990's the main cause has been speculators.
Have a look and tell us your point of view. All the Best , Louis and Ian
Real Estate Insight From BNN's Linda Nazareth
I guess you could take the view that the economic crisis of 2008/09 is behind us and we are on to new crises so looking back doesn't help anyone. I would disagree with that. To me, the global crisis was such a catastrophe and such a comedy of errors that it will affect the world economy for years to come. So I'm all for looking back and trying to understand what happened.
That's why I was so interested to see a report from the New York Fed this week looking at the role of speculators in the U.S. housing market bubble (there are a lot of tellings of the tale of the global economic collapse, but in all of them, the bursting of the U.S. housing bubble figures prominently).
The New York Fed points the finger at speculators as having played a much bigger role in the housing collapse than had previously been thought. Some of the statistics they have come up with are fascinating.
Apparently, at the peak of the boom in 2006, over one-third of all U.S. home purchase lending was to people who already owned at least one house. In the four states that eventually crashed the hardest - Arizona, California, Florida and Nevada - the share was about 45 percent. In that year, investors owning three or more homes were responsible for 30 percent of mortgage originations, about triple their share compared to 2000.
Thing is, investors behave differently than owner-occupiers at the best of times. For owner-occupiers - the basic, plain-vanilla-American-dream types - the focus is on what the monthly payments are going to be, which is why many scramble to maximize their down payments. Investors, however, don't plan to hold for long, so they care less about the payments, and much more about now having to pay out too much as a down payment.
The Fed study shows that investors were much more likely than owner-occupiers to use nonprime credit to put as little as possible down, and to buy as many properties as possible. They kept doing it, even as prices spiraled.
And then, of course, prices stopped spiraling and investors defaulted, actually at much higher rates than owner-occupiers. There was no American Dream at stake for the investors, after all, just money. Abandoning their investments was the most rational choice.
I must admit, in the past I have tended to blame over-reaching homeowners for the crisis as much as any other player, but if you look at the evidence they may really only deserve a small part of the blame. You can see the entire study here.
So what are the implications of this?
The takeaway seems to be that there is some role for regulation to curb crazy property booms, especially when speculators seem to be getting involved. Canada did that a couple of years ago, and right now China is putting in rules to curb their own insane property markets.
It might all seem kind of anti-business, but it would seem that when the crashes come, they take more than individual investors along for the ride.

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