Ten years ago, the US real estate market began to fall after a long period of growth. Prices were falling for 31 months in a row. And in 2007, falling prices created mass panic on Wall Street, which dried out money markets and as a result, the banks started to cut lending, finally causing the crash in 2008.
Ten years after, most of US banks are reorganized to withstand a disaster like the one in 2008. They now have the basic capital of over $1.2 trillion, which is 2 times more than it was before the crisis. Restrictive policies of banks to loan approval have cut their profits, so they had to find other ways to satisfy the shareholders. They did it by cutting costs and increasing prices, so they returned profit to 10%. At this moment, the banking sector is well capitalized with low profit and with high discipline.
On the housing market, besides banks, exist other lenders which fulfill more than half of the demand for loans. Those participants are not so well capitalized as banks as they are small lenders that work with small profit. They are mostly nationalized and subject to administrative control.
US housing has the biggest asset in the world, worth $26 trillion, and almost half of that amount is in the debt zone, making highest concentration of risk to investors.
This debt has more implications on common people who are trying to buy their first house than on the investors. Situation now looks like this - about 70% of new mortgages are controlled by state institutions. Contrary to other countries, US housing system offers new buyers cheap 30 year mortgage loans which can be repaid early. This unique shielding system protects lenders and buyers.
After 2008 crisis structure of mortgage owners is changed, banks were partially withdrawn from the market and that left a hole for new independent companies like Quicken Loans and Freedom Mortgage, which play more conservative game without risky loans.
Besides that, the state has an important role since it took over majority of shares in Freddie Mac and Fannie Mae, mortgage companies which now work in a more conservative way.
No matter how this new ownership structure helped the US real estate market recover from crisis, it still has numerous flaws. Regulation of new mortgage originators trough government guarantee companies is too loose, and a second even bigger danger lies in the fact that mortgage bonds were transformed from risky to safe ones since they are state-run bonds.
Strict government policy caused drop in home ownership rates from 69% in 2008 to 63% in 2016 because the young don't have good wages to afford a new house. From 1990 to 2007, private sector recognized that and loosed the rules on what caused the increase in home ownership percentage. Now we can see the first signs of more relaxed system, but not in the measure it was. State granted us homogeneous mortgage bonds which are risk free and easy to trade in value of $200 billion each day, which might help a bit.
There a lot of concerns because government is a key player, but after witnessing previous mistakes in governing of mortgage loans by private sector, we could say - leave it as it is. For now, debt-income ratio below 10% as a long term average is not causing new concerns.
Saturday, October 1, 2016
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