Saturday, September 1, 2007

US Housing Crisis that Greenspan Built

A blog posting by Vancouver Home Mortgage:

It was reported in The Financial Post on Sept 01,2007 in an article "Ultra-low Fed rates stoked housing boom: Taylor"

The bursting of the tech bubble and September 11/2001 terrorist attack on World Trade Center has resulted in Greenspan aggressively cutting interest rates and holding them too low for too long. The asset inflation had resulted in the US housing boom built with too much liquidity and un-regulated mortgage lending. With the collapse of the housing market, US home owners lost billions of dollars in their property asset values all over the US. And, the bottom is not in sight yet!

The recent injection of liquidity by the US and the likely reduction in interest rates will not solve the current problem on US housing deflation. The correction in house prices will take many years to unwind until consumer confidence returns to the market.

The housing problem in the US was explained superbly by the blog posting by Dr. Housing Bubble on the housing and real estate problem in Los Angeles.

The 2001-2006 US housing bubble, built on low interest rates and loose lending regulations is now too big a problem for the US government to solve. The bad mortgage papers created and the financial ramification will take many years to be sorted out. Meanwhile, the US housing recession will likely spill over and result in the contraction of the US economy.

The housing deflation will continue until house prices are once again supported by market fundamentals. The equilibrium is reached when the cost of renting (which currently costs around 50% of owning) is about the same as owning a home and making the monthly mortgage payment. This may take many years for it to happen.

Presently, with dropping house prices, many home owners are having mortgages equal or exceeding their house values. Although a financial crisis may be averted for home owners with option mortgages through the support of the US government, the cycle of declining house prices is already in motion. The US housing recession will affect the general economy as the loss of consumer confidence/dwindling wealth effect will depress consumer spending.

Canada's real estate and housing market will be affected when economic growth in the US is slowing down. There are already signs that the demand for housing is slowing down. The Edmonton market is now facing declining sales and house prices leveling off. Many homes were reported to be sold with large price reductions from the listed prices.

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