Tuesday, November 20, 2007

Housing Market Crisis Tied to Speculation, 'Predatory' Lending

As the crisis stemming from high-risk sub-prime mortgage lenders' collapse in the US spreads, the real estate market beyond US borders is being hit by what observers are calling the 'credit crunch', taking for granted this will affect all international financial endeavors, such is the situation. The governor of the Bank of England has now warned that the United Kindom is facing what should be its tightest economic year in a decade, warning that the slowdown could last into 2009.

As such, it's worth rehashing a story published by Sentido.tv in January 2006, on the coming crisis in housing markets, as a result of overpricing and over-exuberant speculation. The Economist magazine had in June 2005 published an article on the unprecedented bubble of the global housing boom. The boom in developed economies amounted to a value increase of 100% of combined GDP, a figure whose trajectory could not be maintained by existing wealth or regular economic growth.

Sentido's reporting took into account "outlyer" values —cases where cost per property had literally gone of all charts— like the town house renting for £23,000 per week in Knightsbridge, the high-rent corner of the Royal Borough of Kensington and Chelsea in central London. The mood was that expanding prices were so inherently good, they would somehow generate the wealth necessary to feed the boom.

The problem, obviously, is that this is not how economic growth occurs. Mystical presumptions do not a prolonged expansion make, and at some point the biggest boom markets, like Ireland, Spain and the UK, would have to reach a maximum of capital available, at which point, cost of use could not justify cost of purchase for most properties at then current —or feasible— growth rates.

The Sentido report reads as follows: According to [The Economist's reporting], property values in South Africa increased by 244% between the first quarters of 2004 and 2005. Ireland's expanded by 192%, Britain by 154% and Spain by 145%. The piece also warned that like Germany, Japan and Hong Kong, some major markets were beginning to "fizzle out" and enter a period of likely decline.

The Economist proposed the possibility that the global economy, not just that of one nation or one region, had become too dependent on the untenable expansion of property values and profit from real estate sales. If the bubble were to burst, it could be the trigger event for the most severe and widespread economic downturn —potentially, a worldwide depression, in technical terms— yet seen in modern times and measured.

It's a sticky problem, because preventing such an event means first of all identifying the aspects of any given real estate market which contribute to overvaluation and to growth beyond real market potential. Then, it means persuading those with most direct invovlement in that aspect of the market to act to reform their methods or their outlook, to reign in a new kind of "irrational exuberance".

One worry is that as property values soar, many people will be forced to abandon neighborhoods they have largely built and maintained, possibly stripping the community fabric and undermining the inherent value of a given urban area. That flight would also mean average incomes reach too high a range, and basic services become less widely available and cost of living continues to escalate, further pushing community breakdown and/or flight.

A big part of the secret to the record boom in housing markets was lending practices, which were significantly liberalized to allow 'new money' —as if materializing out of nowhere— to flow into the home-buying markets, which in and of itself artificially inflates speculative earning potential for resale over the short term. The added value is 'artificial' because this new money depends heavily on the lending practices themselves, and represents theoretical wealth which may not actually be available to flow into those purchases.

Sentido pointed out in January 2006 that "The solution to the problem could be linked to lending; if banks are aware of the bubble risk, then they might take a more thoughtful approach to planning for lending for long-term buys, considering the sustainability of property values or the risks posed by increased volatility from excessive financing of 'flipping' schemes."

They did not. The thinking that prevailed across financial markets tended toward the boom-time logic: there's money to be made, and the way to make it is to invest in markets ripe for growth. That logic was not in itself inaccurate, but by the nature of the moment, it was applied to situations where the money to be made would stem in many cases from sales which could only occur with the help of risky mortgage schemes.

The lack of proper adjustment to lending policies and lack of assistance to borrowers overburdened by adjustable mortgage rates has led to the failure of many of those mortage accounts and the collapse of many smaller lending institutions. At present, economists predict this crisis is just the beginning of a serious credit shortfall, in which no less than 2.5 million American families may face losing their homes, further affecting equity valuations, lending practices and saleability of properties internationally.

Legislation is pending in the US to ban "predatory lending", but the nature of such practices is that they are tied to the logic of the demand for low-interest loans, provided with highly adjustable rates whose incremental rise in cost is justified by the notion of further borrowing power (assuming property values continue a steep rise, even where many are tied to risky loans).

Among the side-effects of sub-prime mortgages is the resulting upward price pressure on markets that require sustainable cost-to-funding ratios to be fruitful. Homes are bought for living in, in most cases, and require a sustainable local economic picture to be used as intended.

As overextended buyers find themselves priced out of communities they've just moved into, other areas of economic measurement slow accordingly, undercutting the very loans that in theory were to help create new wealth. This is part of the ripple effect now slowing world markets already affected by disappearing credit.

Sunday, November 11, 2007

The Cost of Going Green May Be New Boom Economy

Sentido.tv :: Through existing economic structures and technological systems, we can fund and implement the ecotech revolution, Part I...

Ecological advancement and retro-fitting will be the new boom economy. Let's make sure we do everything possible to fund not only research, but implementation. What will it cost to produce an environmentally-oriented overhaul of the US economy, by way of the private sector, with government incentives, and to the ever-growing benefit of private sector interests?

These are key questions being asked by scientists, activists, economists and politicians, not to mention energy industry executives and those whose core business involves fossil fuels. One British economist has proposed that wealthy countries should voluntarily embark upon a planned economic recession, under the assumption that costs will be staggering and profit-growth will slow, as the transition is made from a wasteful carbon-based economy to a more elastic renewable-recyclable one.

It would seem a daunting task: after all, not only is every major mode of civilian and commercial transport run on petroleum-based fuels, but most military transport and artillery are as well (barring nuclear submarines). So there would need to be a very well-crafted, very cautious and steady overhaul of the tax system and research subsidies, to ensure that the transition is inspired not only by humanitarian or ecological interests, but also by sound long-term financial planning.

What we need now is to make the calculations, for politicians in Washington, DC, to talk to MIT, to the Worldwatch Institute, the Earth Policy Institute, to current and former EPA experts, top scientists at the IPCC, and engineers and researchers working toward the needed advances in renewable energy technologies.

We, as a society, as an argumentative and curious press-driven public, as academics and policy-makers, need to look at how to make those calculations more affordable in the short-term through better planning and decentralization. A comprehensive plan to achieve certain targets by 2012, incentivizing private business to do well by taking part can afford the intelligence and dynamism of a decentralized but collective enterprise, where local efficiencies built into the marketplace compensate for the time we cannot afford to waste, and help us to optimize the outcome of a courageous national endeavor.

Small businesses may be the driving force behind the coming ecological revolution. They may find it more economical to invest in ecologically efficient zero-emissions technologies, if there is no added cost in the moment. We can help with that, if we put serious policy into making the transition a time of opportunity. [Complete Text]