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.
4 thoughts on “Are Realtors Responsible for the Crisis ?”
Are we actually more conservative with our lending practices? As a perspective buyer, I find that mortgage brokers are pretty liberal, but this could be due to my fairly stable credit. The thing that perplexes me is the HELOCs? If a person has just purchased a home at the top end of their affordability, a $50,0000 line of credit might be too much to handle. To me, this will be the straw that broke the camels back. Were Americans given access to these home equity loans?
My name is David Larock – I am mortgage planner and Jamie, who I work with, has asked me to field this question.
Canada is certainly more conservative in its lending practices than the US was before their bubble burst. Here is a post I wrote on that topic if you are interested:
Canadian mortgage brokers (and mortgage planners like me) help our clients choose the best of what a myriad of lenders from coast-to-coast offer to customers. Our job, if we do it well, is to help clients find the best combination of interest rates & terms and conditions. To be clear though, we do not set underwriting policy so it is not up to us to be aggressive with polices or not.
(If you have good credit, strong income and a substantial down payment then you are probably getting the best of what is available – and if so, good for you. Choice and flexibility will work to your benefit.)
HELOCs were a huge contributor to the US housing bubble but some of that was because a features and characteristics in the US market that are not present in Canada (for example, in the US there are no penalties to break an existing mortgage, and borrowers had the ability to refinance over and over etc.). That said, HELOCs do present a significant risk to Canadian lending and real estate markets and I expect them to be much more restricted in future.
Hope that helps answer your questions.
Do you mind if I quote a several of your articles or blog
posts as long as I provide credit and sources returning to your
Please let me know if this is okay with you. Thanks!
Sure, you can repost the articles as long as you link to the original source and give me credit as the author of the articles.