Are Realtors Responsible for the Crisis ?

For Sale Sign by David Neubert

There have been lots of discussions about the causes of the financial crisis, the most controversial economic topic of the last decade. One of the main aspects of the financial crisis is the housing bubble. The housing bubble in the U.S. developed alongside the stock bubble in the mid ’90s. Housing prices began to inflate and then popped in the second quarter of 2006. The burst of the U.S. housing market was followed by the outbreak of a global financial crisis on August 9, 2007.

Significant credit losses in highly rated RMBS and CMOs caused investors to lose confidence in the accuracy of credit ratings. Banks began to be uncertain about the credit risk in lending to other banks, and the performance of real estate loans rapidly became weaker. In many theories and speculations, real estate agents received much of the blame for playing an important part in causing the financial crisis. There’s no doubt that real estate agents were a part of the problem; however, they definitely weren’t themselves the cause.

What caused the crisis?

A number of factors contributed to the housing market crash before the country went into recession. The unsustainable price hike was a result of easy access to loans for unqualified buyers and record-high levels of speculation. Banks and financial institutions were providing mortgages at five to ten times people’s annual incomes, which highly exceeded the safe value of three to four times. These institutions underestimated the importance of making an investigation before providing a mortgage. This resulted in an easy cashflow in the market that boosted housing prices.

After the first housing crashes in markets such as Florida, California, Nevada, and Arizona, the economy itself went into a recession. After falling into recession, the combination of ill-conceived loans and an increasing rate of unemployment made the high standing inventory of housing and an enormously high level of foreclosure activity unmanageable.

A well known real estate expert, Lewis M. Goodkin, says that it was obvious:

The long-extended weak economy and lender resistance to providing new home loans has precluded any real recovery. It is important to note that if it were not for the very high level of investors buying foreclosures, short sales and distressed merchandise and renting the homes/condominiums out, the problems would be even more severe than they are. Also, do not forget that we also had record high refinancing and home equity financing that placed many homeowners who had bought at the right price under water when they borrowed to the max and prices began to dive.

Realtors and the Crisis

Property Market by Alan Cleaver

We have already mentioned how easy access to loans for unqualified buyers affected the overall market situation. This is the part for which real estate agents receive most of the blame, since they knew that their home buyers could get a loan that they wouldn’t be able to pay. Mr. Dworkin and other experts point out that this was also true of homebuilders and of course mortgage brokers and their sources of financing.

Real estate agents played only one part of the whole story. However, it’s unacceptable to excuse their conduct by saying that they weren’t the only ones. A huge number of new home buyers were encouraged to buy more expensive houses than they could afford. We should also keep in mind that the economists in the National Association of REALTORS and the National Association of Home Builders failed to release any preventive warnings.

Overall, the crucial mistake of the smartest financial figures around the world was supporting the falling market with immense mortgage packaging flow. Neither realtors nor homebuilders nor mortgage brokers were motivated to caution buyers on the risk. “They drank the same cool-aid as the rest of the players but in reality were the first people that buyers work with and thus were in the best position to curtail the abuse," explains Goodkin.

Is there a risk of a housing bubble in Canada?

The possibility that a similar scenario could happen in Canada is higher than we think. Canada relies on a more conservative attitude among realtors, builders, and lenders. who are more cautious when qualifying buyers, trying to limit speculation and to be realistic about supply and demand.

To evade a similar catastrophe, we should continue in the cautious approach and perhaps introduce heavy penalties for those that misrepresent purchasers in the process. Furthermore, people should be more realistic and aware of their possibilities. Prevention and early response are the key if we want to avoid a housing bubble.