The last 18 months have been amongst the more turbulent chapters in the history of the US economy with the property market at the root of all that has gone wrong. The current credit crunch began after a number of sub-prime mortgage companies went under, dragging with them literally billions of dollars worth of sub-prime investments which had been spliced and diced and sold to anyone who wanted exposure to the sector.
The problem was that many of the banks around the world which acquired these new sub-prime based investments – which seemed to offer excellent returns for very little risk while the US property market continued to move upwards – did not fully understand what they were buying. As competition
for more traditional mortgages became more intense many banks decided to take a step down in quality and increase their risks in doing so. But this was the US, this was a country where literally everyone wanted a slice of the property market, what could go wrong?
US property
A quick look at the past trends in the US housing market will show that prior to the last boom in the property sector there were more people renting homes than owned their own properties. However, as the property sector (and the stock market) continued to boom, more and more people rushed to invest their savings into property and the stock market under the impression that this was easy money. How wrong they were!
Just prior to the crash in the sub-prime sector it had been widely reported that US consumer debt was riding at record levels, savings have never been lower and people were paying silly prices for property just to get exposure to the market – sure fire signs that a big change was just around the corner. While many people may look back now and ask why people were so foolish in hindsight, much of the blame must go to the Bush administration which called American’s to arms and encouraged them to invest in property and the stock market.
Lax regulation in the mortgage markets also opened up the potential for mis-selling and other illegal activities in the market as traders were pushed on by the carrot of higher and higher bonuses. However, this was all stacked up like a pack of cards waiting to fall!
What happened to turn the property market?
Like so many asset classes in the US, the late 1990s up until 2007 saw the property bubble continue to grow and grow with heavier and heavier interest fuelling the fire and pushing the bubble further and further. Then when we saw what some had predicted to be a slight cooling of the US economy the citizens of America were told that the economy was fine and it was ok to go on spending and investing at the same rate.
This constant denial that the economy would need to cool, fanned the flames as more and more US investors began to think their country was recession proof. But when the slowdown finally came, nobody could have predicted the impact it would have!
First we saw a small sub-prime lender declare that it was in financial difficulties and would need to close down. This was noted by many but in reality it was ignored as the greed is good age continued to roll, but when the next sub-prime company went under a number of people began to take notice. What started as a couple of the lesser known sub-prime lenders going under soon infested the sector and we saw the emergence of toxic investments as more and more sub-prime lenders announced that default levels were moving higher and many homes would not even cover the amount outstanding. This was the first sign that many US citizens had in fact been misled and acquired mortgages which they stood no chance of being able to finance from their income.
As they say, the rest is history as more and more US firms came out to declare they had a number of sub-prime market assets which were affectively worthless. This then led to more and more companies being forced to retain their capital in-house, taking away much of the liquidity from the money markets. This wave got bigger and bigger until it began to crash on the shores of many of the US’s partners such as the UK.
How long will it take for the US property market to recover?
Perhaps the only time which is any way comparable to the state of the US property market at this moment in time is the great depression of the 1930s, a time when investors shut up shop, stock markets went into freefall and nobody was interest in property.
We now have a situation where nearly 2 million US homes have been reclaimed by the banks over the last 18 months, growing ‘tent villages’ dotted all over the US and tens of millions of US citizens in serious financial trouble and in a position of negative equity with their homes. The figure of 2 million reposed homes is on a par with the traditional number of new builds introduced to the US market each year – but we can say good bye to new homes for some time yet!
While the financial status of many US citizens will see demand for property being very low for at least the next couple of years we may see some overseas investors come in to pick up distressed assets at rock bottom prices. There is an awful lot of slack in the US property market, a market which many believe has not even bottomed out yet.
The US bailout, when it finally comes, will allow banks and mortgage companies to replenish their asset bases but is unlikely to lead to a widespread return to buoyant mortgage markets for some time to come. Will the rental market pick up? Will social housing come into play with more and more people headed for the streets?
The truth is that the US population are currently near bankrupt and will need to take some time out to replenish their savings and get themselves back on tack. The US housing market will struggle to make any real headway over the next couple of years at least with many predicting an extended period of concern.