US housing prices suffered a major market correction after the housing bubble peaked in early 2006. Real estate prices were then adjusted downward at the end of 2006, causing a loss of market liquidity and default subprime
Real estate bubbles are a type of economic bubble that occurs periodically in local, regional, national or global real estate markets. The housing bubble is characterized by a rapid and sustained increase in real property prices, such as housing 'usually due to some combination of confidence and excessive emotion, fraud, synthetic risk imposition using mortgage-backed securities, the ability to repackage adjust debt through government-sponsored companies, availability public credit policy and central bank, and speculation. The housing bubble tends to distort upward valuations relative to historical, sustainable, and statistical norms as described by economists Karl Case and Robert Shiller in their book, Irrational Exuberance. As early as 2003 Shiller questioned whether or not there was a "bubble in the housing market" that might be in the near future.
Video United States housing market correction
Timeline
Maps United States housing market correction
Predicted market correction
Based on historical trends in US housing valuations, many economists and business writers predict a market correction, ranging from a few percentage points, to 50% or more of peak value in some markets, and, although this cooling does not affect all areas. from the United States, some warn that corrections can and will be "evil" and "severe".
The chief economist Mark Zandi of research firm Moody's Economy.com predicts a two-digit depreciation fall in several US cities in 2007-2009. Dean Baker of the Center for Economic and Policy Research was the first economist to identify a housing bubble, in a report in the summer of 2002. Investor Peter Schiff gained fame in a series of TV appearances in which he opposed many financial experts and claimed that bust was coming.
The housing bubbles are partially subsidized by government-sponsored entities such as Fannie Mae and Freddie Mac and federal policies intended to make housing affordable to all.
Market flaws, 2005-2006
The booming housing market stalled abruptly in many parts of the United States by the end of summer 2005, and by the summer of 2006, some markets were facing swollen inventory problems, falling prices, and sharply reduced sales volumes. In August 2006, Barron magazine warned, "the housing crisis is approaching", and notes that the average price of new homes fell by almost 3% since January 2006, that new home inventories reached a record in April and remained close to an all-time high, existing home inventories were 39% higher than just a year earlier, and that sales fell by more than 10%, and predicted that "the national average housing price may drop by nearly 30% in three years front... simple return to the average. "
Fortune magazine labeled many of the formerly powerful housing markets as "Dead Zones"; other areas are classified as "Hazard Zones" and "Safe Havens". Fortune also omits "four myths about the future of house prices". In Boston, year-on-year prices declined, sales fell, inventories increased, foreclosures rose, and a correction in Massachusetts called a "hard landing".
The previously booming housing market in Washington, D.C., San Diego, California, Phoenix, Arizona, and other cities also stalled. The Arizona Regional Registering Service (ARMLS) indicates that by the summer of 2006, inventory of housing for sale in Phoenix had grown to more than 50,000 homes, nearly half empty (see chart). Some home builders revise their forecasts to decline sharply during the summer of 2006, for example, D.R. Horton slashed its yearly projection of one-third income in July 2006, the value of Toll Brothers' luxury home company shares down 50% between August 2005 and August 2006, and the Dow Jones Home Construction Index fell by more than 40% by mid-year. -August 2006.
CEO Robert Toll of Toll Brothers explains, "builders who build speculative homes try to move them by offering big incentives and discounts, and some buyers cancel contracts for homes under construction". Homebuilder Kara Homes announced on September 13, 2006 "the two most profitable quarters in our company history", but the company filed for bankruptcy protection less than a month later on October 6. Six months later on April 10, 2007, Kara Homes sold unfinished developments, causing potential buyers from the previous year to lose deposits, some of which cost more than $ 100,000.
As the housing market began to weaken from the winter of 2005 to the summer of 2006, NAR chief economist David Lereah forecast a "soft landing" for the market. However, based on unprecedented increases in inventory and a market that slowed sharply throughout 2006, Leslie Appleton-Young, chief economist at the California Association of Realtors, said she was uncomfortable with a mild "soft landing" to illustrate what really happened at California real estate market.
The Financial Times warned of the impact on the US economy from "hard edge" in the "soft landing" scenario, saying "The slowdown in this red-hot market is inevitable." It may be gentle, but it is impossible to rule out falling sentiment and prices.... If housing wealth stops rising... the effect on the world economy can be very sad ". "It would be difficult to characterize a home builder position other than on a hard landing," said Robert I. Toll, CEO of Toll Brothers.
Angelo Mozilo, CEO of Countrywide Financial, said: "I've never seen a soft landing in 53 years, so we've got a way to go before this level comes out, I have to prepare the company for the worst that can happen." Following these reports, Lereah acknowledged that "he expects house prices to fall 5% nationally", and says that some cities in Florida and California could have a "hard landing."
National home sales and prices both dropped dramatically again in March 2007 according to NAR data, with sales falling 13% to 482,000 from a peak of 554,000 in March 2006 and the national average price falling nearly 6% to $ 217,000 from a peak of $ 230,200 in July 2006. The slump in existing home sales is the steepest since 1989. The new home market is also suffering. The largest year-on-year decline in average house prices since 1970 occurred in April 2007. Average prices for new homes fell 10.9 percent according to the US Commerce Department.
Based on declining sales and prices in August 2006, economist Nouriel Roubini warned that the housing sector was in a "free fall" and would thwart the rest of the economy, causing a recession in 2007. Joseph Stiglitz, the Nobel Prize winner in economics in 2001, agreed, that the US may enter recession as home prices decline. The extent to which an economic slowdown, or a possible recession, will persist depends heavily on the resilience of US consumer spending, which makes up about 70% of the US $ 13.7 trillion economy. Evaporation of wealth effects amid the current housing slump could have a negative impact on consumer confidence and provide further challenges for the US economy and other countries in the world.
The World Bank lowered the rate of global economic growth due to a slowdown in housing in the United States, but did not believe that the malaise of US housing would further spread around the world. Fed Chairman Benjamin Bernanke said in October 2006 that there is currently a "substantial correction" happening in the housing market and that the decline in housing construction is one of the "major obstacles that cause the economy to slow down"; he predicted that a corrective market would reduce US economic growth by about one percent in the second half of 2006 and remain a barrier to expansion into 2007.
Others speculate about the negative impact of the Baby Boomers' retirement and the relative costs of renting in a declining housing market. In many parts of the United States, it is significantly cheaper to rent the same property than to buy it; the average national mortgage payment is $ 1,687 per month, almost twice the rent paying an average of $ 868 per month.
Big decrease and subprime mortgage collapse, 2007
The White House Economic Advisory Council lowered its forecast for US economic growth in 2008 from 3.1 percent to 2.7 percent and forecast higher unemployment, reflecting the turmoil in the credit markets and residential real-estate. The Bush Administration's economic adviser also revised their unemployment outlook and predicted the unemployment rate could rise slightly above 5 percent, up from the prevailing unemployment rate of 4.6 percent.
The appreciation of home values ​​far outstrips the income growth of many home buyers, encouraging them to take advantage of themselves beyond their means. They borrow more money to buy homes that cost far more than they can to fulfill their mortgage obligations. Many of these home buyers take mortgages with interest rates adjusted during the low interest rate period to buy their dream home. Initially, they were able to fulfill their mortgage obligations thanks to the low rate of "teasers" imposed in the early years of the mortgage.
When the Federal Reserve Bank imposed its monetary contraction policy in 2005, many homeowners were dumbfounded when adjustable mortgage rates began to return to higher levels in mid-2007 and their monthly payments soared well above their ability to meet monthly mortgage payments. Some homeowners began to fail in their mortgage in mid-2007, and the gap in the US housing foundation became clear.
Subprime mortgage industry collapsed
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. Shares of the largest subprime lender, New Century Financial, fell 84% amid an investigation by the Justice Department, before finally filing for Chapter 11 bankruptcy on April 2, 2007 with liabilities exceeding $ 100 million.
PIMCO, the world's largest bond fund manager, warned in June 2007 that the subprime mortgage crisis was not a separate event and would ultimately have an impact on the economy and impact on the fall in house prices. Bill Gross, "the most distinguished financial guru," sarcasticly and trepidously criticized the credit ratings of a mortgage-based CDO that now faces collapse:
AAA? You are persuaded Mr. Moody's and Mr. Poor's, with makeup, six-inch high heels, and a "bum stamp." Many of these beautiful girls are not high-grade assets worth 100 cents.... And sorry Ben, but the derivatives are two-edged swords. Yes, they diversify the risks and steer them away from the banking system into the hands of unknown buyers, but they multiply leverage like Andromeda strains. As interest rates rise, Petri dishes change from benign experiments in financial engineering to destructive viruses as the cost of leverage eventually reduces asset prices. Any house?... AAAs? [T] he points out that there are hundreds of billions of dollars of these toxic wastes and whether those in the CDOs or the Bear Stearns hedge funds have only an effect on waiting times. [T] he subprime crisis is not an isolated event and it will not be contained by a few days of headlines in The New York Times... Defects are located in houses that are financed cheaply and in some cases haphazard money in 2004, 2005 and 2006. Because while Bear's hedge funds are now primarily history, millions and millions of homes do not. They are not going anywhere... except for their mortgage. Mortgage payments will go up, up, and up... and so does the delinquency and default. A recent study by Bank of America estimates that about $ 500 billion of adjustable mortgage rates are scheduled to reset to the sky in 2007 with an average of more than 200 basis points. 2008 has more surprises with nearly $ 700 billion reusable ARMS, almost ¾ of which are subprime... The issue - aided and supported by Wall Street - is basically at the heart of America, with millions and millions of expensive homes and assets -back guarantee with different address - Main Street.
Financial analysts predict that the collapse of subprime mortgages will result in a reduction in revenue for large Wall Street investment bank trades in mortgage-backed securities, especially Bear Stearns, Lehman Brothers, Goldman Sachs, Merrill Lynch and Morgan Stanley. The solvency of two hedge funds run by Bear Stearns was faked in June 2007 after Merrill Lynch sold assets seized from funds and three other banks closed their positions with them. Bear Stearns funds used to have more than $ 20 billion in assets, but lost billions of dollars in securities backed by subprime mortgages.
H & amp; R Block reported a quarterly loss of $ 677 million in discontinued operations, including One's subprime lender option, as well as writedowns, terms of loss on mortgage loans and lower prices available for mortgages on the secondary market for mortgages. The net asset value of the unit fell 21% to $ 1.1 billion as of April 30, 2007. The head of mortgage industry consulting firm Wakefield Co. warned, "This will be a crisis of unparalleled proportions." Billions will disappear. " Bear Stearns pledged a loan of up to US $ 3.2 billion on June 22, 2007 to rescue one of the hedge funds that collapsed because of a bad bet on subprime mortgages.
Peter Schiff, president of Euro Pacific Capital, argues that if bonds in Bear Stearns funds are auctioned off the open market, a much weaker value will be revealed clearly. Schiff added, "This will force other hedge funds to equally mark the value of their holdings.Is it any wonder that Wall Street pulls a stop to avoid such a disaster?... Their true weakness will eventually reveal a ravine into the housing market will fall."
The New York Times report links the hedge fund crisis to loose lending standards: "This week's crisis of nearly two hedge funds managed by Bear Stearns stems directly from the slumping housing market and its downturn from loose borrowing practices who showered people with weak credit, or subprime, made many of them struggle to stay in their homes. "
After the mortgage industry crisis, Senator Chris Dodd, Chairman of the Banking Committee held a hearing in March 2007 and asked executives from five leading subprime mortgage companies to testify and explain their loan practices. Dodd said, "The practice of predatory borrowing jeopardizes homeownership for millions of people". In addition, Democratic senators such as Senator Charles Schumer of New York proposed a federal bailout of subprime borrowers to rescue homeowners from losing their homes. Opponents of the proposal reiterated that the government's bailout of subprime borrowers is not in the best interest of the US economy as it would set a bad precedent, create moral dangers, and exacerbate the problem of speculation in the housing market.
Lou Ranieri of Salomon Brothers, the inventor of mortgage mortgage market effects in the 1970s, warned of the future impact of credit defaults: "This is the spearhead of the storm.... If you think this is bad, imagine what it will be like in the middle crisis. "According to him, more than $ 100 billion of home loans will likely fail when problems in the subprime industry appear in the primary mortgage market. Fed Chairman Alan Greenspan praised the rise of the subprime mortgage industry and the tools used to assess creditworthiness in an April 2005 speech:
Innovation has brought many new products, such as subprime loans and niche credit programs for immigrants. This development is representative of the market response that has driven the financial services industry throughout our country's history... With this technological advancement, lenders have taken advantage of credit rating models and other techniques to efficiently expand credit to a wider spectrum. consumers.... Where more marginal applicants are denied credit, lenders can now efficiently assess the risks posed by individual applicants and establish the risk appropriately. This increase has led to rapid growth in subprime mortgage lending; indeed, currently subprime mortgages account for about 10 percent of the total of all outstanding mortgages, up from only 1 or 2 percent in the early 1990s.
Because of these statements, along with his drive to use a rate-adjusted mortgage, Greenspan was criticized for his role in the resurgence of the housing bubble and subsequent problems in the mortgage industry.
A-Alt mortgage issues
Subprime and Alt-A loans accounted for about 21 percent of outstanding loans and 39 percent of mortgages made in 2006.
In April 2007, financial problems similar to subprime mortgages began to emerge with an Alt-A loan made to homeowners deemed less risky. American Home Mortgage says that they will earn less and pay less dividends to their shareholders because they are required to repurchase and write down the value of the Alt-A loan made to the borrower with proper credit; causing the company's shares to fall 15.2 percent. The delinquency rate for the Alt-A mortgage has increased in 2007.
In June 2007, Standard & amp; Poorly warned that US homeowners with good credit are getting left behind in mortgage payments, an indication that lenders have offered high-risk loans outside the subprime market; They say that the increasing payouts are late and the defaults on the Alt-A mortgage made in 2006 are "confusing" and troubled borrowers seem to "find it increasingly difficult to refinance" or pursue their payments. A late payment of at least 90 days and a default in 2006 Alt-A mortgage has risen to 4.21 percent, up from 1.59 percent for a 2005 mortgage and 0.81 percent for 2004, suggesting that "subprime slaughter is now spreading to near prime mortgage ".
Increase foreclosure rate
The 30-year mortgage interest rate increased by more than half a percentage point to 6.74 percent during May-June 2007, affecting the borrower with the best credit only as a crackdown in subprime lending standards limiting the pool of qualified buyers. National average home prices are poised for the first annual decline since the Great Depression, and NAR reports that unsold home supplies are at a record 4.2 million.
Goldman Sachs and Bear Stearns, each of the world's largest securities firms and the largest mortgage-backed securities insurer in 2006, said in June 2007 that an increase in foreclosures reduced their earnings and the loss of billions from bad investments in the subprime market jeopardized the solvency of multiple hedge funds. Mark Kiesel, Pacific Pacific Management Co's executive vice president based in California said,
It's a blood bath.... We're talking about a two- to three-year slump that will bring a lot of character to it, from job creation to consumer trust. Finally will take the stock market and corporate profits.
According to Donald Burnette of Brightgreen Homeloans in Florida (one of the states hardest hit by the bursting housing bubble), equity-related losses from declining housing values ​​are causing new problems. "It even keeps borrowers with good credit and solid resources from refinancing to a much better term.Even with tighter loan restrictions and the loss of subprime programs, there are many borrowers who will indeed qualify as" A "borrowers can not refinance they no longer have the equity in their homes they had in 2005 or 2006. They have to wait for the market to recover to the terms they deserve, and that could be years, or even a decade. "It is estimated, especially in California, that this recovery process could last until 2014 or later.
The 2012 report from the University of Michigan analyzed data from the RDD, which surveyed about 9,000 representative households in 2009 and 2011. Data appear to indicate that, while conditions are still difficult, in some cases the crisis subsides: During the period studied, the percentage of families behind mortgage payments fell from 2.2 to 1.9; homeowners who think it's "very likely or somewhat likely" that they will be left behind payments falling from 6% to 4.6% of families. On the other hand, family financial liquidity declined: "As of 2009, 18.5% of families have no liquid assets, and in 2011 this has grown to 23.4% of families."
See also
- The economic crisis of 2008
- Creative Real Estate Investment
- Deed instead of foreclosure
- Foreclosure consultant
- List of entities involved in the financial crisis 2007-2008
- dot-com bubble
General
- Real estate prices
- Real estate appraisal
- The real estate economy
- Real estate trends
International property bubble:
- Chinese property Bubble
- British property bubble
- The Indian property bubble
- Irish property bubble
- Japan asset price bubble
- Spanish property bubble
Further reading
-
Muolo, Paul; Padilla, Matthew (2008). Chain of Blame: How Wall Street Causes Mortgage and Credit Crisis . Hoboken, New Jersey: John Wiley and Sons. ISBN: 978-0-470-29277-8.
References and notes
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Source of the article : Wikipedia
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