The Real Estate Crisis – A More Accurate Approach

By: Carlo Barbieri

The epigraph theme has been sung in prose and verse for four years, always from the same observational viewpoint. If we, however, do not consider other perspectives on the housing situation as reported in the media, we will have great difficulty in understanding the big picture and consequently, the future expectations related to price and value. We will, instead, be left with narrow-minded and short-term observations.

So as not to make this article too long, we have excluded high price residential properties and commercial ones. We will instead concentrate on fundamentals and the international overview of the situation.

Fundamentals are among the most important factors, more emphasized by the professor at Pennsylvania Real Estate University, Joseph Gyourko.  Fundamentals are factors to be taken into account when it comes to our examination of the “housing bubble” and its implications.

In general, the contractors who build homes normally construct enough to supply the market’s needs for the current year and to meet the predictable needs for the upcoming year or two.

In the ´bubble´ these contractors reached a volume equivalent to a predicted demand for the next seven years.  But when the ‘bubble’ burst, it was not possible for demand to keep up with supply.  And it will not until supply reaches a compatible level with the demand.

Another point to be taken into consideration is not only the price for home lots but also for the necessary construction materials to finish the work. With an explosive demand, lots had a price increase that skyrocketed.

On the other hand, basic products for the construction industry became unavailable for the desired volume as well as the logistics because there was no preparation for this housing boom.  As a result, it caused an extraordinary increase in the product costs – with some items reaching three times the initial costs.

In short, this model had no sustainability, not because of the simple financial aspect, but because the fundamentals were
completely impacted and compromised.

Bank World and Excessive Liquidity

Another outstanding point refers to the international economy influence – about what has been happening and about what will happen in the future. Without exempting the errors and internal abuses, our ´bubble` happened at a time when the rest of the world experienced great financial flow in most markets.

There was an excess of money and greed on one side, and a lack of rules and controls as well as ethical parameters on the other.

This explosive conjunction pressed its financial advisors to issue more paper than the money available, taking a risk much greater than the economy would allow. Banks started “playing” with the market as if they were speculators on Wall Street.  This was activity they were not prepared to handle.

The basic rules of bank loans were not followed, neither the
form nor its security level. Banks all over the world were holding high profitability paper and disregarded completely their analysis, as the
demand surpassed the market availability exponentially.

Literally, money was issued as if it were toilet paper. The International Dragon searching for profit needed to be fed to satisfy its voracious and endless hunger. We are all aware of the consequence. Banks, cities and countries went into bankruptcy.

Now, we have a different situation, but one equally important
to the real estate market. The reduction of the Chinese economy
due to the loss of investments in that country and the European financial crisis must lead the whole continent to a stagnation for at least two years. This will make international investors return to their initial growth demands which are best found within the USA. This movement will remain for a couple years.

As the appetite for risks in the US is being reduced, the natural spillway to these resources is and will be the real estate business. This should also shorten the recovery time.

Let’s look at the international and fundamental aspects which must be taken into account as we move into the future of the real estate market.

The Negative Facts

  • The first residence is no longer the essence of the American dream;
  • There is no money available for the “down payment”;
  • We still have at least two years for the basic real estate solution which is or will be reflected in foreclosures.
  • The demand for residences is high, as millions of people
  • have lost their homes through foreclosure. But these people do not have access to the financial resources as their credit has been severely damaged with the crisis.
  • The prices today are equivalent to 20 years ago, which really takes motivation away from housing contractors as the sales value of newly built homes would be too low.

The Good News:

  • Today we have a market that is approaching stability, but it’s
  • still weak.
  • With this change, the growth must increase and more
  • jobs will be generated as the demand for houses increases.
  • The small American investors and investors from other countries, aware of the excellent equity, will return to the US marketplace and invest in small properties for rent.
  • The lack of international alternatives will increase the influx of resources to the USA which includes a significant portion of revenue for the real estate market.

Well, it appears to be a great time for investors to put their money into rental property.


By: Carlo Barbieri
Source: Boca Raton Tribune (2012, May 11)

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