Housing Market Fallout
Posted on 17. Jan, 2010 by toniarney in Blog
After the Fallout
By Mark G. Dotzour
A year has gone by since the real estate mortgage markets
experienced the first day of “nuclear winter.”
For three or four years prior to July 2007, the credit markets
for real estate lending were on fire. The thinking among the
“smart money” on Wall Street was that under modern central
bank policies, risk was a thing of the past. The economy would
still move up and down, but in much gentler waves, and when
things got rough, the Fed could fix it.
“Fix-It” Fed
Remember the Y2K crisis? The Fed fixed it. Remember
the stock market difficulties after 9/11? The Fed fixed them.
Remember the 1998 Russian ruble crisis and the ensuing credit
market turmoil it caused? The Fed fixed it. Even when the
stock market crashed in October 1987, the Fed fixed it.
These examples prove the Fed will not tolerate more than
minimal corrections in the U.S. economy. Investors have
now succumbed to the notion of “The Greenspan Put.”
This catchy little phrase essentially means there is
no longer any risk in the markets that the Fed cannot
fix by lowering interest rates.
When global investors perceive no risk,
investment capital flows everywhere. Investment
prices go up and yields go down. Cap
rates on real estate hit record lows. In this
kind of environment, how do investors
find higher yield? The answer
is that they take on more risk. They
make home loans to people who cannot
afford to pay them back. Then they
sell those loans to investors who do not
know what they are buying. The profits
roll in.
Housing Wheel of Good Fortune
This new “no risk” era has had a remarkable
impact on the housing market. Prices
started rising and suddenly homes were
no longer just places to live — they became
investments as well. As prices continued to
escalate, investors figured if one house
was a good investment,
why not buy more?
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