Looking for property bargains? Don’t turn to the US

property bargainsHow US housing went from boom to bust

From the 1950s to the late 1990s, US house prices roughly kept pace with inflation. After all, America is not a densely populated country and there are much fewer constraints on supply than in the UK, for example. This led to plenty of suburban sprawl, but also kept housing reasonably affordable.

However, from around 2000, prices began to take off. The Federal Reserve’s efforts to shield the economy from the collapsing tech bubble by slashing interest rates helped to fuel a property bubble instead.

Banks got creative with mortgages. They loaned large sums to people with low or no incomes, and then sold the loans on to yield-starved investors – the notorious ‘subprime loans’. With more money being thrown at houses, prices went up.

And of course, people then came to believe that property prices would never fall. The house could always be ‘flipped’ for more than it cost. So neither borrower nor lender fretted about how the loans would be repaid.

As a result, from 1999 to 2006, the average US house price doubled (a gain of around two-thirds, if you account for inflation).

Then the party ended. One too many dodgy loans had been dished out. Repackaged loans started to go bad, poisoning the complacent financial system. The US housing market was hit by a wave of foreclosures (repossessions).

Prices ended up sliding by more than 33%, after inflation. And it took until 2012 for them to hit rock bottom.

Since then, prices have risen by about 25%. And US property-related stocks have been strong performers.

So what changed? Why did the market rebound?

Many people did end up losing their homes. But the wave of foreclosures that was supposed to swamp the market turned out to be smaller than predicted. That was partly because many loans turned out to have such shoddy paperwork that the contracts couldn’t be enforced. And quantitative easing and low interest rates also kept the mortgage market working, keeping many people in their homes.

Meanwhile, construction collapsed. This cut the number of new homes coming onto the market. And finally, investors piled in. Banks bought up property bargains as an investment. Private foreign investors jumped in too. Last year, Chinese investors alone poured an estimated $22bn into the US property market.

Source: http://moneyweek.com