The American Real Estate Market
The United States of America is a developed country. It also has the best-known transparent market system in the entire world. Because many countries are so closely integrated with American economies it is easy to see how a move in American markets can have ripple effects across the globe.
This was made more apparent in 2007 when a global crisis caused by a local realty crisis in the American market sparked a crisis of global proportions that threatened to bring down the entire financial system. Without a thorough understanding of American market history, the study of real estate markets will not be complete. This article will discuss the boom-bust cycles the American real estate market has seen since the 1980s.
Stage 1: The Bust
From the 1980s, the American real estate market experienced a bust. The Savings and Loan Crisis, which was prevalent in these markets at that time, caused this bust. Most of the homes purchased in America before the 1980s were purchased with money borrowed from these Savings and Loans institutions.
Inflation began to spiral out of control in the 1980s, and the Fed realized this. Paul Volcker, who was at the time leading the Fed, increased interest rates by as much as 20%. The interest rate rises almost destroyed the savings and loan industry, as they couldn’t attract capital at these rates. The number of people willing to borrow at this rate to purchase a home fell dramatically, causing a crash in the tulum real estate for sale market.
The savings and loan crisis led to what would be one of the most devastating points in American real estate history. But, the people didn’t know what was coming for them.
Stage 2: The Manufactured Boom
The 1990s were spent recovering from the loan and savings crisis. Savings and loan institutions were insolvent. Some other financial institutions were also suffering severe financial hardship. Thus, lending activity was very low. To increase lending, and especially lending to the real-estate sector, the government passed various laws.
To increase minority community lending, legislation such as the Communities Reinvestment Act was made. The political motivation to fulfill the so-called “America Dream”, quickly overtook all rationality. Politicians were determined to create policies that would allow more people to own homes. These policies had no long-term consequences.
The period that followed is known for being one of the most significant boom periods in American history. The rock-bottom interest rates, i.e. The close to 1% rate that was common in the United States at the time enabled this boom. To make loans as easy as possible, the law required banks to reduce their lending standards.
All these activities led to the real estate market being flooded by buyers who suddenly had lots of money and were willing to purchase properties that would always make their owners wealthy. The policies of the American government created the boom in American real estate that lasted from the late 1990s through 2007. It is sometimes called the manufactured boom.
Stage 3: The Crisis
2007 was the year of one of the most severe financial crises the world has ever witnessed. The American real estate sector was the source of this crisis. The government policies quickly created a boom, which soon turned into a crisis. Because President Alan Greenspan was afraid of inflation once more, he had to increase the interest rates in his economy.
The subprime mortgage crisis was created by the unprecedented rise in interest rates. Due to rising interest rates, mortgage monthly payments went up. Many homeowners couldn’t afford the increased mortgage payments. The houses were foreclosed as a result. Due to the declining value of the homes, there was an excess supply and prices began to fall further.
Nearly all markets around the globe were affected by this bloodbath. The worst was the American realty market, which lost nearly half its value.
Stage 4: The Post-Crisis Market
After the 2008 depression, the US real estate market is now recovering. But it has taken a while for the market to heal. The dramatic drops in the real estate market have been replaced by steady growth. The good news is that the government is not intervening in the market at this point and the moderate growth is not being driven by ridiculously low-interest rates. Some critics point fingers at the Quantitative-Easing policies in the United States that are responsible for the steady rise. But it is impossible to say conclusively at this point.
The history of the United States’ real estate sector is filled with ups and downs. Real estate is not the steady and predictable rising investment class many people believe it to be. It can be just as risky as other investments, if not more.