Wednesday, November 19, 2008

Real Estate Crisis

In the past year we have been year we have been seeing real estate decline significantly.  I personally held of on buying real estate as whenever I looked at it, I thought it was well overpriced.  So the downturn did not come as a surprise to me but the size and ferocity of it, did. 

The lifecycle of this real estate crisis’s can be summarized as follows:

  1. As long as housing prices were rising homeowners were willing to borrow more and more to buy real estate.  And as long as someone was willing to lend them money at cheap rates everything was ok.
  2. The lenders reckoned that as long as they could package the securities and sell them to financial institutions, then it was of their balance sheet and they did not care.
  3. The financial institutions were of the view that as long as the securities were rated by an accredited credit rating firm, then they could buy that security and hold it.
  4. The credit rating firms were rating security based on current home prices and foreclosure rates and accordingly gave them high ratings.
  5. Regulators turned a blind idea to the possibility that home prices could decline because they had a vested interest in keeping the bubble going and turned a blind eye to any naysayer who dared to think otherwise.   That is why Alan Greenspan looked at it and called it a froth and not an bubble. 

How can we fix this going forward.  The most important thing would be for regulators to call a spade a spade.  Next time we are in a bubble, the regulators should be able to recognize and say it is a bubble.  Of course, we do need to look at how we can fix mortgage fraud which became systemic during the bubble. 

This is my personal view and in no way represent the view of my company or any one within the company.