If there is a market in the world which most reflects the current problems in world markets it has to be the US property market where years of indiscriminate lending have now come back and hit them harder than anyone ever imagined. First we saw the slaughter of the US housing market and now we are seeing some of the US’s proudest companies falling like nine-pins. Life is tough in the US but will investor shun the property market even when the recovery final comes?
Problem with the US
The main problem with the US is the fact that so many homes have been repossessed over the last few months – the last count was approaching 2 million homes over the last 18 months. Not only has this left many people financial destitute and homeless but it has flooded the market with cheap properties which the mortgage companies need to convert into ready cash as soon as possible.
The more desperate these mortgage companies become the lower the price and the more long term pressure on the housing market. There are many suggesting that it will take a decade for the housing market in the US to regains its former strength and there are just as many saying that it will not reach the recent highs for the foreseeable future.
Prior to the housing market boom, which lasted in excess of a decade in the US, the trend in the country had been more of saving and renting than investing. However, during the late 1990s and the early 2000s we saw the property market showing signs of strength and the government encouraging both investors and mortgage companies to sell the idea of owning your own property.
This strategy was carried out with what is commonly known as a ‘light touch’ regulatory framework which saw a great deal of self regulation, such as that in the UK, but nobody cared as long as markets were moving higher. As the property market continued to rise we saw more and more of the US population dip into their savings in order to ‘grab a ticket for the great property market ride’. The more money investors made the more interest this encouraged.
This was where the problems started to appear as mortgage companies were under more and more pressure to deliver the best bargains, the best deals and keep the new customer and new mortgages flows coming through the door.
The mortgage industry
Initially the mortgage boom was mainly centred round the traditional sector with sub-prime mortgages still growing but having no material impact upon the overall sector. However, as this trend continued we saw more and more mortgages companies look towards the sub-prime market where the risks were higher but the rewards were much larger than in the traditional market.
As margins at the quality end of the mortgage market continued to deteriorate interest in the sub-prime area hit fever pitch. Customers were being offered mortgages which they plainly could not hope to repay on their income, but with the property market moving higher and higher the value of property was in many ways compensating for this. The mortgage companies were happy, they were making more money than ever before, prime and sub-prime customers were making good money on their property, but then the cracks started to show.
How the collapse began
Nearly a year prior to the eventually sub-prime collapse there were signs that the US economy was over heating and property prices were being pushed too high too quickly. However, at the time the stock market was still holding up very well and when the first sub-prime lender collapsed there was no mention of this in the popular press – ‘this was a one off’. Then rumours began to swirl around the markets that more sub-prime companies were in trouble but again the confidence in the overall market meant that these further warning signs were ignored.
The suddenly back in July of 2007 we saw a massive collapse in the sub-prime market, the players were falling like flies and many properties were on the verge of being repossessed. Suddenly what had been a slow trickle of warning signs became a tidal wave which literally blew over the US mortgage and property market, uprooting well known companies and ripping balance sheets to shreds. The sub-prime bad apple had now affected the whole US mortgage barrel and the sector was now crumbling, not to mention the US economy.
The emergence of the US sub-prime market was a pie which more and more international companies wanted a bit of. They saw US investors making money hand over fist and they saw very little risk with the property market still very buoyant and the economy stronger than for some time. A number of specialist investment houses bought up billions of dollars worth of loan books and spliced and diced these into income stream and capital streams in order to repackage and sell on as bonds – where the risk could be adapted to the investor’s needs.
It was the collapse of the sub-prime sections of these international bonds which saw the collapse of many worldwide financial institutions, the eventual credit crunch and the worldwide slowdown which we are seeing today.
The future of the US property market
There are grave concerns that too many people have been too badly burnt over the last 18 months to see any substantial bounce in the US property market even when the economy recovers. There are also rumours that the US population will now be returning to the traditional savings led financial planning strategy which was prevalent for so long. The US property market is not dead and buried but will need a seriously long period of recuperation.
Too many people were seemingly led up the garden path by many in the US mortgage market, and the government to a lesser extent, and they will not be returning for some time. The credit crunch has opened the eyes of many in the US to the risks associated with property and equity investment and this is a lesson they will not forget for some time.