Transcript realestate
Real Estate Business Ethics Real Estate and Consumption • Increasing real estate prices has made increasing consumption possible Magnitude • The Economist, – the total value of residential property in developed economies rose by more than $30 trillion over the past five years, to over $70 trillion – an increase equivalent to 100% of those countries' combined GDPs. Magnitude larger than – the global stock market bubble in the late 1990s (an increase over five years of 80% of GDP) or – America's stock market bubble in the late 1920s (55% of GDP). – In other words, it looks like the biggest bubble in history. Causes • historically low interest rates have encouraged home buyers to borrow more money • households have lost faith in equities after stock markets plunged Bubble • Michael Mandel at Business Week – Residential investment is absorbing a staggering 5.8% of gross domestic product. – That’s the highest level since the late 1940s and early ‘50s, when an entire generation of returning soldiers was setting up families and expanding into newly built suburbs. – This time, Americans are building second homes and enlarging current ones at a record pace. Bubble • Measured by the increase in its share of GDP, the housing boom so far is 40% larger than tech Current Situation • Housing affordability nationwide has dropped to a 13-year low • The household debt-service ratio has soared to a record high. • Over one-third of all homeowners devote more than 30% of their incomes to monthly mortgage payments. • Twelve percent of homeowners devote over half of their incomes. Current Situation • Sub-prime borrowers accounted for 28% of all new mortgage lending in the past six months, vs. 5% five years ago. • In the first half of 2005, two-thirds of homebuyers financed more than 80% of their purchase. • 17% of homeowners have a loan-to-value ratio (LTV) of 95% or more, versus only 3% one decade ago. (That means that 17% own less than 5% of their home's value free, and clear). • About 42% of first-time buyers made NO downpayment on their home purchases in 2004. Current Situation • Nearly 20% of ALL American home-owners would see their home equity wiped out entirely by a mere 5% decline in home prices. ARMs • ARMs are typically initially made at a lower rate and then increase after a fixed period of time, usually one, three, five, seven or 10 years. • This fall the adjustable-rate mortgages (ARMs) that millions of Americans took out during the recent housing boom will be reset • Many homeowners will see their monthly mortgage payments shoot up by as much as 20%. ARMs • According to the Mortgage Bankers Association, of all mortgages financed in 2005, 36% were ARMs -- the highest ever. • Between $400 billion and $500 billion in ARMs are due to be reset by the end of 2006. • Next year more than $1.5 trillion will be reset. • Year-to-date, there has been a 39% increase in foreclosures over last year. Current Situation • The Enrons of the bust phase will be the firms now pedaling – adjustable-rate, – no-interest/nothing-down – assorted other types of “sub-prime” mortgages. Current Situation • At Countrywide Financial, the largest mortgage lender in the U.S., the principal value of negative amortization loans rose almost 100 times, from a value of $33 million at the end of 2004 to $2.9 billion on June 30. Real Estate Bubbles= More Debt • Twofold borrowing by household owners is needed: – FIRST, to boost housing prices – SECOND, to withdraw equity Real Estate Bubbles= More Debt • they heavily entangle banks and the whole financial system as lenders – property bubbles have historically been the regular main causes of major financial crises – Japan’s property deflation has continued for 13 years now Consequences • Yale economist Robert Shiller predicts a 25% drop in residential property prices. • The Economist hints at a worldwide recession when the air goes out of the real estate market. Consequences • Yale economist Robert Shiller predicts a 25% drop in residential property prices. • The Economist hints at a worldwide recession when the air goes out of the real estate market. Consequences • Since the end of 2001, housing-related industries have produced a whopping 43% of the nation's total net private sector employment growth. • Any slackening of real estate activity would slow employment growth in the industry. • These ferocious excesses of the housing bubble – soaring prices – shriveling home equity – vanishing affordability – idiotic lending practices Policy-Fairness • Should the large lenders be bailed out? • Will the million of homeowners be bailed out?