Observers and analysts have linked the reasons for the 2001-2006 housing boom and the 2007-10 collapse in the United States to "everyone from home buyers to Wall Street, the mortgage broker to Alan Greenspan". Other factors named include "Underwriters, investment banks, rating agencies, and investors", "low mortgage rates, low short-term interest rates, casual standards for mortgage lending, and irrational exuberance." Politicians in Democrats and Republican parties politics has been cited for "encouraging unregulated derivatives" and "with the rare exception" to give Fannie Mae and Freddie Mac "unshakable support".
Video Causes of the United States housing bubble
Government policy
Household tax policy
In July 1978, Section 121 allowed a one-time $ 100,000 exception in capital gains for sellers 55 years or more at the time of sale. In 1981, the exception of Article 121 increased from $ 100,000 to $ 125,000. The 1986 Tax Reform Act abolished tax deductions for interest paid on credit cards. Since loan interest is still deductible, it encourages home equity use through refinancing, second mortgage, and home equity loans (HELOC) by consumers.
The Tax Relief Act of 1997 revoked Article 121 Exceptions and Section 1034 of the Rollover Rule, and replaced it with $ 500,000 married/$ 250,000 sole exclusion from capital gains on home sales, available every two years. This makes housing the only investment that escapes capital gains. This tax law encourages people to buy expensive homes, mortgage, and invest in second homes and investment properties, rather than investing in stocks, bonds, or other assets.
Deregulation
Historically, the financial sector is heavily regulated by the Glass-Steagall Act that separates commercial and investment banks. It also sets strict limits on interest rates and Bank loans.
Beginning in the 1980s, considerable deregulation took place in banking. Banks are deregulated through:
- Deregulation of the Depository and Monetary Control Act of 1980 (allowing the same banks to combine and fix any interest rate).
- Garn-St. Germain Depository Institutions Act of 1982 (allows Adjustable rate mortgages).
- The Gramm-Leach-Bliley Act of 1999 (allowing commercial banks and investment to join).
Federal Home Loan Bank Board allows S & amp; Ls federal to obtain an Adjustable rate mortgage in 1979 and in 1981 the Currency Financial Supervisor extended the privileges to the national bank. This regulation, enacted at times when a fixed rate loan of 17% is beyond the reach of many prospective homeowners, leads to a series of innovations in financing with an adjustment rate that contributes to easy credit that helps encourage housing bubbles.
Some authors opted out banking deregulation by the Gramm-Leach-Bliley Act as significant. Nobel Prize winning economist Paul Krugman has called Senator Phil Gramm "the father of the financial crisis" for his sponsorship of the action but later revised his point of view by saying that repeating Glass-Steagall is "not what caused the financial crisis, which emerged from the shadow banks. ' Nobel Prize winning economist Joseph Stiglitz also argues that GLB helps create a crisis, an article in The Nation has made the same argument.
Economists Robert Ekelund and Mark Thornton also criticized the Act as the cause of the crisis. They state that while "in the world governed by gold standards, 100% banking reserves, and no FDIC deposit insurance" the Financial Services Modernization Act will be "reasonable" as a legitimate deregulation act, but under the current monetary fiction. the system "amounts to the company's welfare for financial institutions and the moral dangers that will make taxpayers pay dearly." Critics also noted the defacto deregulation through a shift in the market share of mortgage securitization from more highly government-sponsored corporations to less regulated investment banks.
However, many economists, analysts and politicians reject criticism of GLB laws. Brad DeLong, former adviser to President Clinton and economists at the University of California, Berkeley and Tyler Cowen of George Mason University, both argue that the Gramm-Leach-Bliley Act softens the impact of the crisis by allowing mergers and acquisitions to collapse. banks when the crisis occurred in late 2008. "Alice M. Rivlin, who served as deputy director of the Office of Management and Budget under Bill Clinton, said that GLB is an important part of the legislation because the separation of investment and commercial banking 'does not work well. 'Even Bill Clinton stated (in 2008):' I do not see that signing the bill has anything to do with the current crisis' "
Loan required
Republican Senator Marco Rubio has stated that the housing crisis "was created by a reckless government policy." Republican appointed to Financial Crisis Investigation Commission Peter J. Wallison and coauthor Edward Pinto believe that housing bubbles and accidents are due to federal mandates to promote affordable housing. This is implemented through the Community Reinvestment Act and the "government-sponsored entity" (GSE) "Fannie Mae" (Federal National Mortgage Association) and "Freddie Mac" (Federal Home Loan Mortgage Corporation). Journalist Daniel Indiviglio argues that the two GSEs play a major role, while not denying the importance of Wall Street and others in the private sector in creating the collapse.
The Housing and Community Development Act of 1992 mandated the purchase of affordable housing loans for Fannie Mae and Freddie Mac, and the mandate must be governed by the HUD. Initially, the 1992 law required that 30 percent or more of Fannie and Freddie loan purchases be tied to affordable housing. However, HUD is given the power to set future requirements. In 1995, HUD mandated that 40 percent of Fannie and Freddie loan purchases should support affordable housing. In 1996, HUD directed Freddie and Fannie to provide at least 42% of their mortgage financing to borrowers with incomes below the median in their area. This target increased to 50% in 2000 and 52% in 2005. Under the Bush administration HUD continued to press Fannie and Freddie to increase the purchase of affordable housing - to as high as 56 percent in 2008. To fulfill this mandate, Fannie and Freddie eventually announces a low-income and minority loan commitment of $ 5 trillion. Critics argue that, in order to meet this commitment, Fannie and Freddie promote the relaxation of loan standards - across the industry.
Regarding the Community Reinvestment Act (CRA), Economist Stan Liebowitz wrote in New York Post that CRA's strengthening in the 1990s encouraged the relaxation of loan standards across the banking industry. He also accused the Federal Reserve of ignoring the negative impact of CRA. American Enterprise Institute Scholar Edward Pinto notes that, in 2008, Bank of America reported that its CRA portfolio, which is only 7 percent of mortgage-owned housing, accounts for 29 percent of its losses. Investigations at the Cleveland Plain Dealer found that "The city of Cleveland has exacerbated the annoying foreclosure problem and has lost millions of tax dollars by helping people buy homes they can not afford." The newspaper added that the mortgage problem "usually comes from local banks that meet federal requirements to lend money in a poorer neighborhood."
Others argue that "almost all evidence of the housing crisis shows" that Fannie Mae, Freddie Mac, (CRA) and their affordability targets are not the main reasons for bubbles and accidents.
Professor of law David Min argues that the views (blaming GSE and CRA) "are clearly contrary to the facts", namely that
- The cycle of parallel bubbles takes place outside the housing market (for example, in commercial real estate and consumer credit).
- The parallel financial crisis hit other countries, which do not have an affordable analogue housing policy
- The US government's market share of home mortgages actually dropped dramatically during the 2000s housing bubble.
However, according to Peter J. Wallison, other developed countries with "big bubbles during the period 1997-2007" have "much lower... losses associated with mortgage and default delays" because (according to Wallison), the bubbles of these countries is unsupported by the large amount of loans mandated by governments below the standard - generally with low or no down payment "as in the US.
Another analysis questioned the validity of comparing the housing loan crisis with the commercial credit crunch. After examining commercial credit failures during the financial crisis, Xudong An and Anthony B. Sanders reported (in December 2010): "We found limited evidence that substantial damage in mortgage-based mortgage-backed credit for CMBS occurred prior to the crisis." Other analysts support the notion that the crisis in commercial real estate and related loans occurred after crisis in residential real estate. Business journalist Kimberly Amadeo reports: "The first signs of a decline in residential real estate occurred in 2006. Three years later, commercial real estate began to feel its effects.D Denice A. Gierach, a real estate lawyer and CPA, wrote:
... most commercial real estate loans are good loans that are being destroyed by a very bad economy. In other words, borrowers do not cause bad loans, it's economics.
In their book on financial crises, business journalists Bethany McLean and Joe Nocera argue that the charges against Fannie and Freddie "are completely reversed, Fannie and Freddie racing into subprime mortgages because they are afraid of being abandoned by their non-governmental rivals."
Most initial estimates suggest that subprime mortgage booms and subsequent accidents are heavily concentrated in the private market, not the public markets of Fannie Mae and Freddie Mac. According to estimates made by the Federal Reserve in 2008, more than 84 percent of subprime mortgages came from private lending institutions in 2006. Part of the subprime loans insured by Fannie Mae and Freddie Mac also declined as the bubbles grew larger (from high insuring 48 percent to insure 24 percent of all subprime loans in 2006).
To make an estimate, the Federal Reserve does not directly analyze the characteristics of the loan (such as the size of the down payment); on the contrary, it is assumed that loans that carry interest rates of 3% or higher than normal rates are subprime and loans with low interest rates are the main ones. Criticism of a Federal Reserve interest rate dispute to distinguish prime from subprime loans. They say that subprime lending estimates based on high interest rate proxies are distorted because government programs generally promote loans with low interest rates - even when the loans are directed to borrowers who are clearly subprime.
According to Min, while Fannie and Freddie did buy high-risk asset-backed securities,
they do not buy enough of them to blame for the mortgage crisis. Highly respected analysts who have viewed this data in more detail than Wallison, Pinto, or myself, including a non-partisan Government Accountability Office, Harvard Joint Study Center for Housing Studies, Financial Crisis Investigation Commission, Federal Housing Funding Agency, and almost all academics, including the University of North Carolina, Glaeser et al. at Harvard and St. Louis Federal Reserve, all reject Wallison/Pinto's argument that the federal affordable housing policy is responsible for the true proliferation of high-risk mortgages over the past decade.
Min argued that Fannie and Freddie did not buy a large number of risk-backed mortgage securities should be evaluated in connection with allegations of subsequent SEC security fraud filed against executives Fannie Mae and Freddie Mac in December 2011. Significantly, the SEC alleged (and still retains) that Fannie Mae and Freddie Mac are reported as subprime and substandard less than 10 percent of their sub-prime and substantial loans. In other words, a sub-standard loan owned in the GSE portfolio may be 10 times greater than what is reported. According to Peter Wallison of the American Enterprise Institute, it will make the SEC's estimate of a GSE's current loan of about $ 2 trillion - much higher than Edward Pinto estimates.
The Federal Reserve also estimates that only six per cent of higher-priced loans are extended by lenders protected by the Reinvestment Act to low-income borrowers or CRA environments. (As with respect to GSE loans, the Federal Reserve assumes that all CRA loans are prime unless they carry an interest rate of 3% or more above the normal level, a disputed assumption by others.) In a 2008 speech, Federal Reserve Governor Randall Kroszner, argues that CRA can not be held responsible for the subprime mortgage crisis, stating that
"First, only a fraction of the subprime mortgages associated with CRA Secondly, CRA-related loans seem to work in proportion to other types of subprime loans... together we believe that available evidence contradicts the notion that CRA contributes in a way substantive against the current mortgage crisis "
Others, such as the Federal Deposit Insurance Corporation Chairman Sheila Bair, and Ellen Seidman of the New America Foundation also argue that CRA is not responsible for the crisis. CRA also affects only one of the top 25 subprime lenders. According to some economists, the Community Reinvestment Act loans outperform other "subprime" mortgages, and GSE mortgages perform better than private label securitizations.
Nevertheless, economists at the National Bureau of Economic Research concluded that banks that are undergoing CRA-related regulatory exams risk additional mortgage lending. The authors of the study entitled "Does the Community Reinvestment Act Lead to Risk-Lending?" comparing "the behavior of bank loans undergoing CRA examinations in a particular census channel in a given month (treatment group) on the behavior of banks operating on the same census month that did not face this test (control group).The comparison clearly indicates that CRA adherence leads to risky loans by banks. "They conclude:" The evidence suggests that around the CRA checks, when incentives to meet CRA standards are very high, banks not only increase borrowing rates but also seem to come from highly risky loans. " The average debt loss was 15% higher in the treatment group than the control group one year after the origination mortgage.
Low interest rates historically
According to some, like John B. Taylor and Thomas M. Hoenig, "excessive risk taking and housing boom" brought about by the Federal Reserve holding "too low interest rates too long".
After the dot-com crash and recession of 2001-2002, the Federal Reserve dramatically lowered interest rates to historically low levels, from about 6.5% to just 1%. This spurred easy credit for banks to lend. In 2006, tariffs have risen up to 5.25% which reduced demand and increased monthly payments for adjustable rate mortgages. The resulting foreclosures increase supply, lowering housing prices further. Former Federal Reserve Board Chairman Alan Greenspan acknowledged that housing bubbles were "fundamentally aroused by real long-term interest rate cuts."
Mortgages have been bundled together and sold on Wall Street to investors and other countries seeking a profit higher than the 1% offered by the Federal Reserve. The percentage of mortgages is at risk of rising while ratings companies claim they are all top ranked. Instead of a restricted area that suffers from a drop in housing, it feels around the world. Congressmen who have pushed for creating subprime loans are now quoting Wall Street and their rating agencies to mislead these investors.
In the United States, mortgage rates are usually set in relation to 10-year bond yields, which, in turn, are affected by Federal Fund rate. The Federal Reserve recognizes the relationship between lower interest rates, higher home values, and increased liquidity in higher home values ​​brings to the economy as a whole. The Federal Reserve report reads:
Like other asset prices, house prices are affected by interest rates, and in some countries, the housing market is the main channel of monetary policy transmission.
For this reason, some people criticized then Fed Chairman Alan Greenspan for "engineering" the housing bubble, saying, for example, "It was a decline in the rate that the Federal Reserve engineered that increased the housing bubble." Between 2000 and 2003, interest rates for fixed-rate mortgages for 30 years fell 2.5 percentage points (from 8% to historical lows of about 5.5%). The interest rate at the one-year adjusted mortgage rate (1/1 ARM) fell by 3 percentage points (from about 7% to about 4%). Richard Fisher, president of the Dallas Fed, said in 2006 that the Fed's low interest rate policy unintentionally boosted speculation in the housing market, and that "subsequent subsequent corrections [are] generating real costs for millions of homeowners."
A decrease in loan interest rates reduces borrowing costs and logically should result in an increase in prices in a market where most people borrow money to buy a home (for example, in the United States), so the average payment remains constant. If one assumes that the housing market is efficient, the expected change in housing prices (relative to interest rates) can be calculated mathematically. Calculations on the sidebox show that a 1 percentage point change in the interest rate will theoretically affect the house price by about 10% (given the 2005 interest rate on a fixed rate mortgage). This is a 10-to-1 multiplier between percentage points change in interest rates and percentage changes in house prices. For interest-only mortgages (at 2005 levels), this generates about 16% change in principal for 1% change in interest rates at current rates. Therefore, a 2% reduction in long-term interest rates can lead to a 10% increase in the price of a house, 2% Ã, Â ± 20% if each buyer uses a fixed-rate mortgage (FRM) or about 16 ÃÆ' â € "Ã, 3% Ã,? Ã, 50% if each buyer uses a mortgage rate adjustment (ARM) whose interest rate is down 3%.
Robert Shiller points out that inflation adjusted for a rise in US home prices is about 45% during this period, an increase in valuations that is almost consistent with most buyers financing their purchases using ARM. In areas of the United States believed to have a housing bubble, price increases far exceed 50% which may be explained by borrowing costs using ARM. For example, in the San Diego area, the average mortgage payments grew 50% between 2001 and 2004. As interest rates rise, the sensible question is how much house prices will fall, and what effect they have on negative equity, as well as on the US economy in general. The prominent question is whether interest rates are a determinant factor in a particular market where there is a high sensitivity to housing affordability. (Thomas Sowell points out that these markets where there is a high sensitivity to the affordability of housing are created by laws that limit land use and thus their inventories.In areas like Houston that do not have zoning laws, Fed levels have no effect.)
Return to a higher value
Between 2004 and 2006, the Fed raised interest rates by 17 times, increasing it from 1% to 5.25%, before quitting. The Fed stopped raising interest rates on concern that an accelerated decline in the housing market could damage the economy as a whole, as well as the destruction of the dot-com bubble in 2000 contributed to the ensuing recession. However, New York University economist Nouriel Roubini asserted that "the Fed should tighten up earlier to avoid festering housing bubbles early on."
There was a great debate over whether the Fed would lower interest rates by the end of 2007. The majority of economists expect the Fed to keep the Fed rate at 5.25 percent through 2008; However, on September 18, it lowered the rate to 4.75 percent.
Affected region
The appreciation of house prices has been uniform in such a way that some economists, including former Fed Chairman Alan Greenspan, argue that the United States does not experience a national housing bubble per se but a number of local bubbles. However, in 2007 Greenspan admitted that there were actually bubbles in the US housing market, and that "all foamy bubbles add to the aggregate bubble."
Although loan standards are very loose and interest rates are low, many regions in the country see very little growth during the "bubble period". Of the 20 largest metropolitan areas tracked by the S & amp; P/Case-Shiller, six (Dallas, Cleveland, Detroit, Denver, Atlanta, and Charlotte) saw less than 10% of price growth in terms adjusted for inflation in 2001-2006. Over the same period, seven metropolitan areas , Miami, San Diego, Los Angeles, Las Vegas, Phoenix, and Washington DC) are valued at more than 80%.
Somewhat paradoxically, since housing bubbles deflate some metropolitan areas (such as Denver and Atlanta) have experienced high levels of foreclosures, though they do not see much appreciation of the house in the first place and therefore seem to not contribute to the national bubble. This also applies to several cities in the Rust Belt such as Detroit and Cleveland, where weak local economies have generated little appreciation of house prices early in the decade but still see declining values ​​and increased foreclosures in 2007. In January 2009 California, Michigan , Ohio and Florida are the states with the highest foreclosure rates.
Maps Causes of the United States housing bubble
' Mania 'for home ownership
American love of their homes is well known and widely acknowledged; However, many believe that the enthusiasm for homeownership today is high even by American standards, calling the real estate market "foaming", "speculative madness", and "mania". Many commentators have commented on this phenomenon - as evidenced by the June 13, 2005 edition of Time Magazine (taken as a bubble mark) - but as the 2007 article on Forbes warns, "for realizing that the American mania for home purchases is out of proportion to conscious reality, one needs to look no further than the current subprime lending disorder... Because interest rates - and mortgage payments - have started to rise, many of these new owners have a hard time fulfilling needs... The borrowers were much worse than before they bought. "The explosion in housing has also created an explosion in the real estate profession; for example, California has a record half a million real estate - one for every 52 adults living in the state, up 57% in the last five years.
The overall US home ownership rate rose from 64% in 1994 (circa 1980) to a peak in 2004 with an all-time high of 69.2 per cent. Bush's 2004 campaign slogan "owner community" shows a strong preference and influence of American society to have their homes live, as opposed to hiring. However, in many parts of the United States, rent does not cover the cost of a mortgage; the average national mortgage payment is $ 1,687 per month, almost twice the average rent payment of $ 868 per month, although this ratio can vary significantly from market to market.
Suspicious Activity Reports related to mortgage frauds increased by 1,411 percent between 1997 and 2005. Both borrowers are looking for a house they can not afford, and insiders in the monetary-seeking industry are involved.
Confidence that housing is a good investment
Among Americans, homeownership is widely accepted because it is preferred to rent in many cases, especially when the tenure period is expected to be at least five years. This is in part due to the fixed rate mortgage fraction used to pay the principal of building equity for the homeowner over time, while the interest portion of the loan payment qualifies for tax relief, whereas, except for private tax deductions often available to tenants but not to homeowners, the money spent on renting is also not. However, when considered as an investment, that is, assets that are expected to grow in value over time, compared to residential utilities provided by home ownership, housing is not a risk-free investment. The popular notion that, unlike stocks, homes do not fall in value is believed to have contributed to the mania to buy a home. Stock prices are reported in real time, which means investors are witnessing volatility. However, homes are usually assessed annually or less frequently, thereby smoothing perceptions of volatility. The statement that rising property prices has been correct for the United States as a whole since the Great Depression, and seems to be driven by the real estate industry.
However, housing prices may move up and down in local markets, as evidenced by the relatively recent historical prices at locations such as New York, Los Angeles, Boston, Japan, Seoul, Sydney and Hong Kong; big trends of fluctuating fluctuation prices can be seen in many US cities (see graph). Since 2005, the year-to-year (inflation-adjusted) year-on-year sale price of single-family homes in Massachusetts fell by more than 10% in 2006. The previous David Lereah economist from the National Association of Realtors (NAR) said in August 2006 that "he expects house prices to fall 5% nationally, more in some markets, less in other countries." Commenting in August 2005 about the perceived low risk of housing as an investment vehicle, Alan Greenspan said, "history has not been handled well after a protracted period of low risk premiums. "
By combining popular expectations that house prices do not fall, it is also widely believed that home values ​​will result in average returns or better than average as investments. The investment motive for buying a house should not be combined with housing needs provided by housing; economic comparison of the relative cost of having versus hiring the equivalent utility of the shelter can be done separately (see box text). During the decade-holding period, inflation-adjusted house prices have increased by less than 1% per year.
Robert Shiller points out that over the long period, inflation adjusted US home prices increased by 0.4% annually from 1890 to 2004, and 0.7% annually from 1940 to 2004. Piet Eichholtz also pointed out in what has been known as the home index Herengracht, a comparable outcome for housing prices on one street in Amsterdam (where tulip mania fairy tales, and where the supply of limited housing) over a 350 year period. The slight return is dwarfed by investments in the stock and bond markets; though, these investments are not widely utilized by fair interest loans. If historical trends continue to persist, it makes sense to expect home prices to just beat inflation a bit in the long run. In addition, one way to assess the quality of any investment is to calculate the price-to-earnings (P/E) ratio, which for a home can be defined as the house price divided by the potential rent annual income, minus the cost including property taxes, insurance, and condo costs. For many locations, this calculation yields a P/E ratio of about 30-40, considered by economists to be high both for housing and the stock market; the historical ratio of price-for-rent is 11-12. For comparison, just before dot-com hit the P/E ratio of S & amp; P 500 is 45, while in 2005-2007 about 17. In a 2007 article that compares the costs and risks of hiring to buy using buy vs. rent calculator, New York Times concluded,
Home ownership, [selling agents] argues, is a way to achieve American dreams, save on taxes and earn solid returns on investment at the same time.... [I] t now clear that people who choose to rent more than buy in the past two years are making the right move. In most countries... recent home buyers face higher monthly fees than renters and lose money on their investment for a while. As if they had thrown away the money, once insult provided to the tenants.
The 2007 article Forbes entitled "Do not Buy That House" will invite similar arguments and conclude that for now, "resist pressure [to buy].) There may not be a place like at home but there is no reason you can not rent it. "
Promotion in media
At the end of 2005 and into 2006, there are many television programs that promote real estate investment and flipping. In addition to many television shows, bookstores in cities across the United States can be seen by displaying big book exhibits that touting real estate investing, such as the book of chief economist NAR David Lereah. Are You Losing Boom Real Estate? , subtitles Why House Value and Other Real Estate Investment Will Rise Through The End of The Decade - And How To Profit From Them, published in February 2005. One year later, Lereah interpreted his book However, after Federal Reserve Chairman Ben Bernanke's comments on the "housing market downturn" in August 2006, Lereah said in an NBC interview that "we have a booming market: you have to improve because the boom can not last forever [ sic ] "Commenting on the phenomenon of the NAR account shift from the national housing market (see David Lereah's comment), Motley Fool reported," Nothing is more funny or more fulfilling... than watching the National Association of Realtors (NAR) change its tone lately... NAR is full of it and will dial numbers in any way to keep the fiction fun that it's all right. " After leaving the NAR in May 2007, Lereah explained to Robert Siegel of National Public Radio that using the word "boom" in the title is actually the publisher's idea, and the "bad title choice". Fever speculative
The graph above shows the total notional derivative value relative to the size of US Wealth. It is important to note for the casual observer that, in many cases, the notional values ​​of derivatives carry little meaning. Often parties can not easily agree to the terms to close derivative contracts. A common solution is to create an equivalent and opposite contract, often with different parties, in the framework of a net payout (Derivatives market # Netting), thereby eliminating all counterparty risks of the contract, but doubling the nominal value of the unfinished contract..
When average house prices began to increase dramatically in 2000-2001 after falling interest rates, speculative home purchases also increased. Fortune magazine article about housing speculation in 2005 says, "America is flooded with stinging and gripping madness that looks a bit as crazy as dot-com stock." In a 2006 interview in BusinessWeek magazine, Yale economist Robert Shiller said about the impact of speculators on long-term valuations, "I'm concerned about the big downturn because the current price is supported by speculative fever", and former chief economist NAR David Lereah said in 2005 that "[t] here's a speculative element in the purchase of a home now." [broken footnotes] Speculation in some local markets has been greater than others, and any correction in valuations is expected to be strongly correlated with the percentage of speculative purchases. In the same BusinessWeek interview, Angelo Mozilo, CEO of the Countrywide Financial mortgage lender, said in March 2006:
In areas where you have heavy speculation, you can have 30% [decrease in house prices]... A year or a year and a half from now, you will see a slow slump in home values ​​and major damage in the areas where there is a speculative advantage.
The main economist for the National Association of Home Builders, David Seiders, said that California, Las Vegas, Florida and Washington, DC, regions "have the greatest potential for price slumps" as price increases in those markets are fed by speculators who buy homes that want to " flipping "or selling it for quick profit. Dallas Fed President Richard Fisher said in 2006 that the Fed kept its target at 1 percent "longer than expected" and inadvertently encouraged speculation in the housing market.
Various real estate investment advisors openly advocate the use of no money down flipping properties, which led to the death of many speculators who follow this strategy like Casey Serin.
Sale and purchase above normal multiple
House prices, as multiples of annual rent, have been 15 since World War II. In bubbles, prices reach a total of 26. In 2008, the price has fallen to a multiple of 22.
In some areas, homes are sold at multiple replacement costs, especially when the price is appropriately adjusted for depreciation. The cost per square foot index still shows wide variability from city to city, therefore it may be that new houses can be constructed cheaper in some areas than asking for prices for existing homes.
The possibility of this variation factor from city to city is the constraint of housing supply, both regulatory and geographical. Regulatory constraints such as urban growth limits serve to reduce the amount of land that can be developed and thus increase the price for new housing construction. Geographic constraints (water bodies, wetlands, and slopes) can not be ignored. It is debatable which types of constraints further contribute to price fluctuations. Some argue that the latter, by inherently increasing the value of land in certain areas (due to the amount of land that can be used less), gives homeowners and incentive developers to support regulations to better protect their property values.
In this case, the geographical constraint becomes a regulatory action. Conversely, others would argue that geographic constraints are only secondary factors, pointing to a more visible effect that urban growth limits have housing prices in places like Portland, OR. Despite geographical constraints in the surrounding Portland area, their current urban growth limits do not cover the area. Therefore, one would argue, such geographical constraints are not a problem.
Bubble bubble dot-com
Yale economist Robert Shiller argues that the stock market crisis of 2000 displaced the "irrational excitement" of the stock market that fell into residential real estate: "As soon as stocks fall, real estate becomes the main channel for speculative insanity that the stock market releases."
The collapse of dot-com and the technology sector in 2000 caused a 70% decline in the NASDAQ composite index. Shiller and several other economists argue this has resulted in many people taking their money from the stock market and buying real estate, believing it to be a more reliable investment.
Risky mortgage products and loose loan standards
Excessive consumer housing debt is in turn caused by mortgage backed securities, credit default swaps, and collateralized debt obligations in the financial industry sub-sector, offering irrational low rates and high levels of irrational agreements for subprime mortgage consumers because they count aggregate risks using a copulan gaussian formula that strictly assumes the independence of individual component mortgages, when in fact the credit worthiness of almost every new subprime mortgage is highly correlated with others because of the linkage through the level of consumer spending that falls sharply when property values ​​begin to fall during the initial wave of mortgage defaults. Debt consumers act in their rational personal interests, because they can not audit the methodology of fixing risky financial industry risks.
Expansion of subprime loans
Low interest rates, high house prices, and flipping (or re-selling homes for profit), effectively create an almost risk-free environment for lenders because risky loans or repayments can be repaid by turning over the house.
Private lenders encourage subprime mortgages to capitalize on this, helped by greater market forces for mortgage initiators and less market forces for mortgage securitizers. Subprime mortgage of $ 35 billion (5% of total origination) in 1994, 9% in 1996, $ 160 billion (13%) in 1999, and $ 600 billion (20%) in 2006.
Products at risk
The latest use of subprime mortgages, adjustable mortgage rates, interest rate mortgages only, and income loans (part of the "Alt-A" loan, where the borrower does not have to provide documentation to justify the revenue listed on the application; the loan is also called "none document "(no documentation) of the loan and, somewhat degrading, as a" loan liar ") to finance the purchase of the house described above has raised concerns about the quality of this loan if interest rates rise again or the borrower can not pay the mortgage.
In many areas, especially among the most appreciative, non-standard loans changed from almost unheard of to prevalent. For example, 80% of all mortgages initiated in the San Diego area in 2004 were adjusted, and 47% were interest only.
In 1995, Fannie Mae and Freddie Mac began receiving affordable mortgage loans to buy Alt-A securities. The academic opinion is divided into how much this contribution is for the purchase of GSE nonprime MBS and for the growth of nonprime mortgage origination.
Some borrowers deal with advance payment terms using a seller-funded down payment program (DPA), where sellers give money to charitable organizations that then give them money. From 2000 to 2006, more than 650,000 buyers received advance payments through nonprofits. According to Government Accountability Office studies, there is a higher default and foreclosure rate for this mortgage. The study also shows that sellers are raising house prices to recover their contributions to nonprofits.
On May 4, 2006, the IRS decided that the plan no longer qualifies for nonprofit status due to the circular nature of the cash flow, in which the seller pays the charity "fee" after closing. On October 31, 2007, the Department of Housing and Urban Development adopted a new regulation that prohibits so-called "seller-funded downpayment programs". Most should stop granting loans on FHA immediately; someone can operate until 31st March 2008.
The mortgage default becomes negligent because of the moral dangers, in which each link in the mortgage chain collects profits while believing that the risk is passing. The rate of mortgage refusals for conventional home purchase loans, reported under the House Mortgage Revocation Act, has declined markedly, from 29 percent in 1998, to 14 percent in 2002 and 2003. Traditional gatekeepers such as mortgage securities agencies and ratings agencies credits lose their ability to maintain high standards due to competitive pressures.
The mortgage risk is underestimated by any agency in the chain from the originator to the investor with underweighting the possibility of house prices falling due to historical trends of price increases. These authors argue that false belief in innovation and over optimism leads to miscalculations by public and private institutions.
In March 2007, the US subprime mortgage industry collapsed because of a higher-than-expected home foreclosure rate, with over 25 subprime lenders declaring bankruptcy, announcing significant losses, or placing themselves for sale. Harper's Magazine warned of the danger of rising interest rates for recent home buyers who hold such mortgages, as well as the overall US economy: "The problem is that prices fall even as buyers' total mortgages remain the same or even increase.... Payment of debt payments will further divert revenue from new consumer spending.To all together, these factors will further undermine the "real" economy, lower real wages that have decreased, and encourage a debt-laden economy to stagnate the Japanese style or worse. "
Factors that may contribute to the rise in interest rates are the US national debt, inflationary pressures caused by factors such as rising fuel and housing costs, and changes in foreign investment in the US economy. The Fed raised interest rates by 17 times, increasing from 1% to 5.25% between 2004 and 2006. BusinessWeek magazine mentioned the ARM option (which may allow minimum monthly payments for less than interest payments only) "The most risky and most complex mortgage product ever made" and warned that more than a million borrowers spent $ 466 billion in the ARM option from 2004 to the second quarter of 2006, citing fears that these financial products could be detrimental to borrowers individuals and "aggravate [housing] bust."
To solve the problems arising from "lying liars", the Internal Revenue Service updates the income verification tool used by lenders to make the claimed income confirmation of the borrower faster and easier. In April 2007, financial problems similar to subprime mortgages began to emerge with an Alt-A loan made to homeowners deemed less risky; the delinquency rate for the Alt-A mortgage rose in 2007. PIMCO's world's largest bond fund manager, warned in June 2007 that the subprime mortgage crisis is not a separate event and will ultimately have an impact on the economy and whose ultimate impact will occur. are at a disrupted house price.
See also
- Corporation Trust Resolution
- Savings and loan crisis
References
Source of the article : Wikipedia
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