Why is the housing market dropping?
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.....
Robert Sofia's Speaking Reel
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