Is the market going to crash?
Everyone jostled by the news the housing market could crash has every reason to be worried. And why is that so? Because when the last time the housing market sored like this — it sparked a great recession that left many in financial ruins.
The Real Estate Market Crash is Coming Sooner Than You Think
Always — fueled by a rapid increase in home prices, a rising housing demand, and home flippers — the market then crashes.
Real estate is experiencing record low-interest rates that make housing affordable. However, that has skyrocketed the house prices. It’s crystal clear demand is outpacing supply; what next? Could the mobile and modular homes be the fix?
Mobile homes for sale (tyrone woods) might just be the potential fix to the American housing shortage going by the fact they take a shorter time to build than site-built homes.
Recently, Google reported that the search “When is the housing market going to crash?” had spiked 2,450% in the past month. Many are anticipating history to repeat itself, just like the 2008 housing market crash.
Speculations are rampant about how when the real estate markets could crash — but first, what can we learn from the 2008 housing market crash? Here are some interesting facts about the events preceding the crash back then.
What Caused the Housing Market Crash 2008?
The housing market crash 15 years ago ignited a worldwide recession. The sole reason for the crash and financial crisis were down to predatory private mortgage lending and unregulated markets. Here’s what preceded the great recession in 2008.
Housing Prices and Foreclosures
A similar event like the one happening now ruled prior to the market crash in 2008. Housing prices shoot through the roof, with speculative buyers flooding the market, leading to a demand exceeding supply.
In the early-to-mid 2000s, mortgage lenders revised their lending standards of a desirable borrower which opened a window to borrowers with poor credit to get access to loans and secure home purchase. The easing of lending standards created an opening for many to access mortgages.
The rise of Mortgage-Backed Securities (MBS) was hugely misunderstood by many investors.
The high demand in the housing market propelled an increase in risky mortgage lending practices. On the other hand, the Federal Reserve Bank raised the interest rate to 5.6 percent by June 2006.
What About Adjustable Rate Mortgages?
While those with conventional type of loan weren’t affected, the majority with Adjustable-Rate Mortgage (ARM) were the casualties. Plunged into unforeseeable debt, many defaulted, leading to a huge rise in foreclosures in the housing market.
In 2008, the number of foreclosures spiked to a record high of 81%, according to a CNN report. A total of 861,664 families lost their homes to foreclosure that year. This led to more inventory availability, and subsequently, a crash followed suit.
Banks’ Risky Behavior
The rise of Mortgage-Backed Securities (MBS) led to financial institutions extending their mortgage lending. Many banks seized the opportunity for a lucrative long-term benefit. All was well until the bubble burst. Leaving huge collateral of subprime mortgages.
On the other hand, banks stopped lending to each other in fear of being trapped with subprime mortgages. Even after the Federal reserve cutting down the interest rates, it wasn’t enough to stop the bleeding economy (the panic).
The Stock Market Crash
The stock market crash led to many losing their wealth caused by the increasing number of closures and housing busts. In fact, the major financial markets lost more than 30% of their value by September 2008, when the Dow Jones Industrial Average fell 777.68 points, which surprised 684.81 loss on Sept. 17, 2001, the first trading after the September 11 attack.
According to a report by NCBI, between 2007-2011 one fourth of American families lost at least 75 percent of their wealth, and more than half of all families lost at least 25 percent of their wealth.
Are You Following Current Events?
Now, back to our topic discussion, can you see the similarity in the current events? Well, it’s crystal clear the housing markets are in a bubble. In this article, we’ll uncover why we think the real estate market crash coming soon.
Real Estate Market Crash Coming Soon
Analysts have made their point; the federal government has had its say, different perspectives have been put forward in a bid to break down the events of the current housing market.
Statistics and History
Statistics and history all have been gathered around and pinned to where it’s due. The only question remains, will the housing market crash this year?
Whether you love statistics or not, we’ll try to make it as lenient as possible, a step-by-step guide on how and why the market could crash sooner rather than later. Market crash doesn’t happen in a split of a second; it builds over time.
Watch Economic Factors
Economic factors at play, the forces of demand and supply, are often the case of a free market like real estate. Frank Nothaft, a chief economist at CoreLogic, says, “We’ve got an acute shortage of supply on the market for sale at the same time that record-low mortgage rates are driving the appetite to buy by millennials and Gen-Xers.”
New York City Prices Among Others
For instance, Bloomberg reported New York City home prices are rising fast. New Yorkers who may still be working from home a year into the pandemic are fanning out across the boroughs in search of another housing that is spacious and cheaper housing.
Whenever one side outplays the other, a disequilibrium is created, an imbalance in the market that needs a solution to revert to the initial position. For example, basic economics dictates that interest rates and housing prices have an inverse relationship. As such, when the interest is low, the house price goes up. Why is that?
It’s simple when the rate is low; housing becomes cheaper or affordable to acquire; this, in turn, creates a high demand for housing since it’s affordable at the time.
Investors or homeowners on the other hand will try to take advantage of the rising demand by increasing the prices. As prices rise it’ll cut off some people who will suddenly be unable to purchase the home at the asking price. Now, demand is being brought down by price growth, thus justifying the inverse relationship with the interest rates.
The Housing Bubbles Burst
Up until now, the most common term you’ve probably heard is a housing bubble? Do you know what it means? What causes it? And if it burst, then what could be the factors or forces that are the last straw that breaks the camel’s back?
Day by day, it’s harder to deny the fact the US housing market is overheating.
According to the Wall Street Journal, some regions are experiencing low inventory, which is a worrying sign as far as the housing market crash is concerned. Across the country, the housing market is 3.8 million single-family homes short of what is needed to meet the country’s demand, according to a new analysis by mortgage-finance company Freddie Mac.
Home price surge also suggests an asset bubble.
The COVID-19 hasn’t slowed home prices at all, Instead, they’ve skyrocketed. In September 2020, they were a record $226,800, according to the Case-Shiller Home Price Index.
According to the National Association of Realtors, the sales rate reached 5.86 million homes in July, and by October, it had blossomed to 6.86 million, beating the pre-pandemic peak. Many people are taking advantage of the low rates to buy either residential homes or income-based apartments, which seem affordable.
The COVID-19, on the other hand, has created a slow economic activity resulting in a high unemployment rate.
According to the Labor Department, the US lost 140,000 jobs in December 2020 alone. A rising number of job losses means few people will afford to buy houses, while those with mortgages will likely default and increase the number of foreclosures.
On the other hand, the job losses have forced many people to seek Plan B, going for mobile homes for rent that is exceptionally cheaper and affordable during this time.
What is a Housing Bubble?
A housing bubble happens when the market price of residential real estate sharply rises. Usually, this happens when the demand for houses exceeds the supply in the market. The sudden rise of house demand triggers speculators to enter the market to profit from future expectations.
The presence of speculators in the market further pushed the demand higher.
So, yes, speculators entered the market, and in response, the home prices shot up, creating a bubble stretch in the housing market to grow even further. Now it reaches a time when the home prices are high up and no longer affordable to buyers. The unsustainability caused by the rising prices leads to homes being overvalued. In other words, price inflation.
When the prices become unsustainable and buyers pull out, demand falls.
The prices become unsustainable — but interestingly, the supply increases. Simple economics at play here; now that the demand has fallen, what happens next? Prices come down crashing and the bubble bursts.
When questioned about the possibility of a bubble:
Ali Wolf, chief economist at housing research firm Zonda says, “Homebuyers today are purchasing for many healthy reasons: Low-interest rates, more flexibility to work from home and increased saving are all rational reasons for buying a house. The frenzy fueled by these factors, combined with fear of missing out, has the potential to create a bubble though.”
What Causes a Housing Bubble?
Real estate is a free market; the law of demand and supply applies unconditionally. When the demand for housing increases, subsequently, home prices go up. Usually, the supply of homes takes time to match the rising population of young Millenials who are seeking first-time home buying. It always plays a catch-up game.
Building a house takes time, causing a deficit in supply and thus demand exceeding it. Either way, prices will eventually increase the moment demand outpaces supply. To sum it up, the asset bubble is down to a combination of factors. One such factor — a healthy economy, where disposable income grows, and people feel secure in their jobs and confident about searching for a house, increasing the demand.
The mortgage rates also play a huge role in the asset bubble.
Low mortgage rates drive up demand; why so? The mortgage has become more affordable and buying a house is a lot easier attracting many borrowers to run for cheap loans.
The rising number of subprime borrowers also causes the demand to further rise in the real market. The market is currently experiencing a record low mortgage, driving housing demand up. Record low mortgage with 30 years fixed rate fell to 3.20 percent, according to Bankrate.
The other factor is the speculators who are always in waiting mode to take advantage of an opportunity whenever it presents itself. Further rise in demand leads to overvaluation of houses which asserts the asset bubble growth.
Forces that Burst the Bubble
When pushes come to shove, and the prices aren’t reflective of anything close to fundamentals, the bubble burst. At this point, the demand decreases while supply increases resulting in a sharp fall in home prices.
No one has to pay for high home prices anymore; on the other hand, investors are at a huge loss, mortgage lenders reeling on the risk of defaulters. How does that happen?
Firstly, the interest rises to put some homeownership out of reach, while at the same time, in the case of Adjustable-Rate Mortgage, makes the home a person owns unaffordable, leading to defaulting and foreclosure.
Secondly, a downturn or slow economic activity often leads to less disposable income, fewer jobs, and job loss. Such a situation causes a decline in demand for housing since a person can not afford to buy a home.
Lastly, when demand is exhausted, an equilibrium is restored, slowing down the rapid rise of the home price growth. When house price appreciation stagnates, those who depend on it to afford their home may lose their houses, bringing more supply to the market.
Higher Interest Rates
As stated earlier, interest rate and house prices tend to have an inverse relationship such that when the interest is low, price appreciation occurs, and the reverse is also true. Interest rates play a huge role in marketing crashing. And if it’s going to happen soon, it’ll surely be a contributing factor by far.
Rates rise will make mortgages very expensive.
It’ll discourage borrowers from taking loans. On the other hand, home buildings will be affected too, costs will rise, and an immediate effect will be the supply of housing in the market falling.
However, a steady rise in interest rates will not cause much damage in the housing market, unlike a rapid rise. In 2006 before the housing market crash, many people were tied to interest-only and adjustable-rate mortgages that are initially cheap within the first few years, and then a reset that increases the monthly mortgage payment.
Unlike conventional loans, adjustable-rate mortgage rises along with the feds fund rate.
Between 2004 and 2006, the Federal Reserve increased the rates rapidly. For instance, The top rate was 1.0% in June 2004 and doubled to 2.25% by December. It doubled again to 4.25% by December 2005. Six months later, the rate was 5.25%.
Rising Number of House Flippers
A flipped home is basically bought, renovated, and sold in less than a year. Usually, the rise of home flippers further increases the demand for housing in the real estate market, resulting in a further increase in house prices. Surging prices are reflective of an asset bubble that could potentially burst.
Home flipping played a huge role in factors contributing to the 2008 recession.
Speculators would buy homes, make moderate improvement, and sold it to fast-rising house prices. In 2006, flips comprised 11.4% of home sales.
According to Attom Data Solutions, in the third quarter of 2020, 5.1% of all home sales were bought for quick resale. That’s down from 6.7% of home sales in the second quarter of 2020. It’s also lower than the post-recession high of 7.2% in first-quarter 2019.
The decline in flipping is due to the reduced inventory of housing stock. However, Attom Data Solutions reports that the pandemic’s effect on flipping is contradictory and difficult to forecast.
The Alarming Increase in Unregulated Mortgage Brokers
In the events leading to the 2008 financial crisis, mortgage lenders fueled the asset bubble by issuing out loans to high-risk borrowers. Many of the lenders opted to borrow against lines of credit, a totally different strategy than what banks and mortgage lending normally work by tapping into deposits.
Non-Bank lenders are a warning sign of a crash.
The increase in non-bank lenders is alarming and a clear warning sign of what may come sooner rather than later in real estate. In 2019, they originated 54.5% of all loans. That’s up from 53.6% in 2018. Six of the 10 largest mortgage lenders are not banks. Three years ago, five of the top 10 were unregulated.
The most worrying part about unregulated mortgage brokers is that they don’t have the same government oversight as banks. Making them vulnerable to collapse in case of anything going south in real estate.
A section of the Washington Post read “Although observers say non-bank lenders are probably not engaged in the sort of risky lending that dragged down their predecessors, the business model still makes them vulnerable to a housing market downturn.”
Inverted Yield Curve
Prior to the recession of 2008,2000 and 1991, 1981, the yield curve inverted. According to a definition by Investopedia, an inverted yield curve represents a situation in which long-term debt instruments have lower yields than short-term debt instruments of the same credit quality. When the yield curve inverts, short-term interest rates become higher than long-term rates.
The inverted yield curve is the rarest and considered to be a predictor of economic recession.
Usually, they draw attention from all parts of the financial world. A normal yield curve slopes upwards reflecting the fact that short-term interest rate is usually lower than long-term rates.
Affordable Housing Crisis
The affordable housing crisis is caused by the imbalance in the market forces of supply and demand. A market boom in real estate will result in home prices skyrocketing. The scarcity of affordable housing across the country is always a sign that the market is in a bubble.
The Bottom Line
Is the market going to crash?
The market could crash if the combination of the above factors comes to pass. Already many are in play, and as the home prices sores, it’s evident that the US housing market is overheating.
The pandemic has had a mixed reaction on the real estate performance.
While many people expected COVID-19 to crash real estate, there was a sudden surge in homes for sale. More homes for sale listings were done last year, with people rushing to buy homes in the suburbs. The rising homes for sale listings sparked the speculators to enter the market, further pushing the demand up.
Move to Prevent Foreclosures
Elsewhere, millions went behind their mortgage payment plan; however, the Consumer Financial Protection Bureau (CFPB) mortgage servicing changes to prevent a wave of COVID-19 foreclosures.
Consumer Financial Protection Bureau (CFPB) Acting Director Dave Uejio says, “The nation has endured more than a year of a deadly pandemic and a punishing economic crisis. We must not lose sight of the dangers so many consumers still face.”
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Fintech Kennek raises $12.5M seed round to digitize lending
London-based fintech startup Kennek has raised $12.5 million in seed funding to expand its lending operating system.
According to an Oct. 10 tech.eu report, the round was led by HV Capital and included participation from Dutch Founders Fund, AlbionVC, FFVC, Plug & Play Ventures, and Syndicate One. Kennek offers software-as-a-service tools to help non-bank lenders streamline their operations using open banking, open finance, and payments.
The platform aims to automate time-consuming manual tasks and consolidate fragmented data to simplify lending. Xavier De Pauw, founder of Kennek said:
“Until kennek, lenders had to devote countless hours to menial operational tasks and deal with jumbled and hard-coded data – which makes every other part of lending a headache. As former lenders ourselves, we lived and breathed these frustrations, and built kennek to make them a thing of the past.”
The company said the latest funding round was oversubscribed and closed quickly despite the challenging fundraising environment. The new capital will be used to expand Kennek’s engineering team and strengthen its market position in the UK while exploring expansion into other European markets. Barbod Namini, Partner at lead investor HV Capital, commented on the investment:
“Kennek has developed an ambitious and genuinely unique proposition which we think can be the foundation of the entire alternative lending space. […] It is a complicated market and a solution that brings together all information and stakeholders onto a single platform is highly compelling for both lenders & the ecosystem as a whole.”
The fintech lending space has grown rapidly in recent years, but many lenders still rely on legacy systems and manual processes that limit efficiency and scalability. Kennek aims to leverage open banking and data integration to provide lenders with a more streamlined, automated lending experience.
The seed funding will allow the London-based startup to continue developing its platform and expanding its team to meet demand from non-bank lenders looking to digitize operations. Kennek’s focus on the UK and Europe also comes amid rising adoption of open banking and open finance in the regions.
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Fortune 500’s race for generative AI breakthroughs
As excitement around generative AI grows, Fortune 500 companies, including Goldman Sachs, are carefully examining the possible applications of this technology. A recent survey of U.S. executives indicated that 60% believe generative AI will substantially impact their businesses in the long term. However, they anticipate a one to two-year timeframe before implementing their initial solutions. This optimism stems from the potential of generative AI to revolutionize various aspects of businesses, from enhancing customer experiences to optimizing internal processes. In the short term, companies will likely focus on pilot projects and experimentation, gradually integrating generative AI into their operations as they witness its positive influence on efficiency and profitability.
Goldman Sachs’ Cautious Approach to Implementing Generative AI
In a recent interview, Goldman Sachs CIO Marco Argenti revealed that the firm has not yet implemented any generative AI use cases. Instead, the company focuses on experimentation and setting high standards before adopting the technology. Argenti recognized the desire for outcomes in areas like developer and operational efficiency but emphasized ensuring precision before putting experimental AI use cases into production.
According to Argenti, striking the right balance between driving innovation and maintaining accuracy is crucial for successfully integrating generative AI within the firm. Goldman Sachs intends to continue exploring this emerging technology’s potential benefits and applications while diligently assessing risks to ensure it meets the company’s stringent quality standards.
One possible application for Goldman Sachs is in software development, where the company has observed a 20-40% productivity increase during its trials. The goal is for 1,000 developers to utilize generative AI tools by year’s end. However, Argenti emphasized that a well-defined expectation of return on investment is necessary before fully integrating generative AI into production.
To achieve this, the company plans to implement a systematic and strategic approach to adopting generative AI, ensuring that it complements and enhances the skills of its developers. Additionally, Goldman Sachs intends to evaluate the long-term impact of generative AI on their software development processes and the overall quality of the applications being developed.
Goldman Sachs’ approach to AI implementation goes beyond merely executing models. The firm has created a platform encompassing technical, legal, and compliance assessments to filter out improper content and keep track of all interactions. This comprehensive system ensures seamless integration of artificial intelligence in operations while adhering to regulatory standards and maintaining client confidentiality. Moreover, the platform continuously improves and adapts its algorithms, allowing Goldman Sachs to stay at the forefront of technology and offer its clients the most efficient and secure services.
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UK seizes web3 opportunity simplifying crypto regulations
As Web3 companies increasingly consider leaving the United States due to regulatory ambiguity, the United Kingdom must simplify its cryptocurrency regulations to attract these businesses. The conservative think tank Policy Exchange recently released a report detailing ten suggestions for improving Web3 regulation in the country. Among the recommendations are reducing liability for token holders in decentralized autonomous organizations (DAOs) and encouraging the Financial Conduct Authority (FCA) to adopt alternative Know Your Customer (KYC) methodologies, such as digital identities and blockchain analytics tools. These suggestions aim to position the UK as a hub for Web3 innovation and attract blockchain-based businesses looking for a more conducive regulatory environment.
Streamlining Cryptocurrency Regulations for Innovation
To make it easier for emerging Web3 companies to navigate existing legal frameworks and contribute to the UK’s digital economy growth, the government must streamline cryptocurrency regulations and adopt forward-looking approaches. By making the regulatory landscape clear and straightforward, the UK can create an environment that fosters innovation, growth, and competitiveness in the global fintech industry.
The Policy Exchange report also recommends not weakening self-hosted wallets or treating proof-of-stake (PoS) services as financial services. This approach aims to protect the fundamental principles of decentralization and user autonomy while strongly emphasizing security and regulatory compliance. By doing so, the UK can nurture an environment that encourages innovation and the continued growth of blockchain technology.
Despite recent strict measures by UK authorities, such as His Majesty’s Treasury and the FCA, toward the digital assets sector, the proposed changes in the Policy Exchange report strive to make the UK a more attractive location for Web3 enterprises. By adopting these suggestions, the UK can demonstrate its commitment to fostering innovation in the rapidly evolving blockchain and cryptocurrency industries while ensuring a robust and transparent regulatory environment.
The ongoing uncertainty surrounding cryptocurrency regulations in various countries has prompted Web3 companies to explore alternative jurisdictions with more precise legal frameworks. As the United States grapples with regulatory ambiguity, the United Kingdom can position itself as a hub for Web3 innovation by simplifying and streamlining its cryptocurrency regulations.
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