I know nothing about real estate. I've heard on the news a lot about the housing market falling. Can someone give me an "idiots guide" with simple terms as to why this has happened? Real estate is a piece of property (land or a building) which has some monetary value attached to it. The value of the real estate is directly correlated to some factors like the attractiveness of the property (whether it prime or non prime), the future value of the property (attached with the development prospects of the area in which the property is), the development of the property (whether the property has some development activity done - purpose linked with the property and whether it has been started to be in existence) etc
The availability of property is also a key driver in the value of the property. In that if there is a surplus demand for the scarce resource as land the valuation increases. That means there are more buyers than the actual land available and hence buyers are willing to increase the amount of money there are willing to pay for the same.
Normally not everybody has the adequate amount of money to buy a property with cash payment. Only the super rich and the rich can afford that luxury. Average people have to resort to home loans for gaining access to funds to acquire the property. The loan available to a person is according to his current income profile and his current liabilities (whether they have other loans or expenses). The loaner (banks and financial institutions) normally does a thorough check on an individual who has applied for a home loan. They check whether they have past defaults, their payment records, their current liabilities etc. They do proper documentation of everything about the individual and gauge his ability to repay the loan the person is going to take.
In the US the real estate prices where on rise for the past few years due to the following main reasons
- Surplus demand
- Easy availability of home loans
- Avail of loans on existing property/collaterals (some other things of high value which could be kept as mortgages
- Rise in the number of financial institutions which were looking for tying in more and more people through loans
In the effort to garner more and more consumers, banks and financial institutions started to expland their reach from the people who would be financially healthy and could repay loans to people who were not so financially healthy but were wanting to buy property. For this purpose these banks/financial institutions/funds started devising mathematical formulae for making the loan avail against a collateral.
In an effort to increase the reach of these offerings the banks/FI/funds started ignoring the stringent norms and started passing on loans to financially weaker lot basis some collaterals.
While on paper these seemed fine but practically it was on shaky ground. First of all u r giving a loan, that too to a person who shouldnt have got it (bcoz he isnt financially healthy or reliable) .
The people who got the loans and procured the property then took more loans to develop the property. Why wud they do that? Bcoz once u have bought a house, for example, u have to furnish it.....but u dont have the money for the same. POP!!! appears the banker with loan against ur home....so now u have bought a loan with existing loan.
There were not 1 or 1000 but millions of people who started availing of these facilities in a bid to enhance their lifestyles.
Now all was well bcoz the price the property was constantly on the rise and u were holding on to something of increasing valuation. Its like u have 100 units of gold with u but u owe someone 150 units of gold in value. U hav to pay it over a period of time. U r on negaive but everyday ur gold value is increasing too and fast.....hence u really are in a good position. But wat happens if the value doesnt increase???? Wat happens if it actually decreases??? u are holding a hot potato right? wat do u do? u drop it!!!!
Thats exactly wat happened here......let me explain further......Property rates in some parts of US plateaued - remained flat. Simultaneously some really really financially ill people who bought properties on loans and then bought loans on the basis of those already loaned properties started defaulting on their payments, they simply cudnt pay. Once that happened the loaners jumped on to them and started asking for their money back.......some people actually went bankrupt bcoz they had almost everything on loans.....so when the bankers came to take their money back they had to sell away watever the individual owned even the real estate to get watever they cud recover. For selling the property as fast as possible to recover their money they had to sell it at the rate it was currently or maybe lesser.
One peculiar thing abt property or real estate is that the the valuation of one property takes up or takes down the valuation of the one adjoining it or near it........so if u r next to or near something which is getting sold at lower rate possibility is that the rate of ur property will go down (HOT POTATO!!!!). So even if u r good payer, but u r stillholding on to something which is decreasing in value bcoz the guy next door defaulted on his payments.....and this happened in many many cases and started escalating. Banks/Financial institutions/ Real estate funds started making heavy losses as the property rates crumbled......and there u have it a crisis of epic proportions
There are various articles and detailed explanations on the internet of wat i might have mentioned. Infact there are many more components of the real estate crisis which is happening in the US, i have but tried to explain in a layman's language. I might not be perfectly right but thats the gist of it...
Hope it helps u to start understanding..... Look up the history and causes of the Great Depression.
There's a bigger picture to the housing market.....! The market fall is due to the increase in foreclosures in the US due to unscrupulous loan officers, and lenders unrealistic loan programs. You have borrowers that were put into loan programs that would eventually cause them hardships. Lenders also offered what's called "stated" programs for investors and the self employed that are now imploding due to the market fall. Like a domino effect this downturn has slowed buyers to purchase and lowered values of homes preventing sellers from putting their homes on the market. I figure once the government bails out some of the unfortunate homeowners we should see a rise in the market. Housing is dependent on financing.
Low interest rates and easy programs brought housing to lots of people wh were previously underserved in this market. As more bought houses, demand increased and prices went up. As prices went up lenders became more lenient to qualify more buyers and demand further was fueled. However eventually the amount of sellers started outnumbering the buyers as houses got too expensive and people continued to try and sell at high prices.
Now you have people not paying their loans and houses being repossessed and sold at a discount to get the loan off the bank's books. When houses are sold at a discount that has an effect on prices in the market. COuple that with the fact that more and more cannot pay and there are no programs out there for them to use to fix this problem, so they are forced to sell. When there are more sellers than buyers, the prices come down.
The way for this problem to end is for lenders to put programs in place that are streamlined refinances that allow folks in trouble to get out of their loans. Also we will not see strong housing growth until either wages catch up with the price gains (which will take years) or lenders start making programs available that serve the more credit challenged borrowers. A credit folks can still buy houses, but is is the average folks that are being forced out of the market right now After the stock boom and crash, people were looking to invest in something else. Housing became the target and builders began building more houses to meet the demand.
The builders couldn't keep up so prices skyrocketed. The rising prices fed an artificial demand for speculators. This continued for several years until the supply caught up with the demand and the prices could not be logically supported.
The scales tipped and fear took over. People stopped buying houses and the prices started to drop. The fear caused many investors to put their houses on the market and the market was flooded with supply, causing the price drop avalanche.
Prices are now reflecting a more healthy market, but there are many people who will get burned by the criminal behavior of the lending institutions. When their mortgage rates go up after a couple of years, lots of homes will be lost to foreclosure. Check out http://www.ml-implode.com for many answers to your question. Here are a couple of reasons (out of thousands): highly obscene rate of foreclosures due to loan programs that most borrowers did not understand and fraud running rampant in the mortgage banking industry. | 