Real Estate Crisis

1. Introduction

The U.S. real estate crisis - a sudden phenomenon, or just the greed for high returns of the American and international capital markets.

Because of the steady demand for residential property and the associated increase in value past 10 years, the American market participants went in a grateful certainty that this trend will continue steadily (from the point of view: Quality, durability of buildings and a steady population growth). Thus moved the Real estate market closer to the sight of American investors and institutional investors, who demands investments with low risk on the capital market. As well the international banks showed their interest in the products of the U.S. real estate market with all its segregation. They invested in productive products with low default risks and best financial ratings.

The international real estate crisis was triggered, which is also known as mortgage crisis, by awarding mortgages to borrowers with low creditworthiness that have no sufficient collaterals available. Customers were prompted with high-quality buying incentives to conclude a Real estate sales contract, which was secured by a mortgage debt. On the other side confidence and security was suggested by the investors rating agencies. The apparent security and the high return so called international banks in the financial maelstrom. The author is going to give an overview about the behavior of market participants, just to demonstrate in which points the causes of American property crisis in the 21st Century is justified.

2. Behavior pattern of American and international market participants in the real estate market

The real estate market in the United States of America was valid until 2007 as very solid. In the Years from 1995 to 2000 the demand for real estate and their value increased steadily. Despite the high interest rates on the capital market and the relatively high opportunity cost for investment decision in favor of the New Market, which could offer lucrative returns, the boom on American real estate held on. The boom was also without prejudice to the international collapse of the New Market 2000 shake, but even began to win on momentum. By falling base rates of the U.S. central bank (Federal Reserve, former central bank chief Alen Grenspan) , the market turns lucrative for institutional investors. The life and pension insurer, which in previous years had invested on the international capital market and wanted to recover from the negative experiences, particularly welcomed the high yields of the ABS Fund and the Risk assessment of AA on the domestic Real estate market. A special consideration must be taken on the behavior of U.S. consumers in the transaction of real estate and financing through mortgage banks. The questions on creditworthiness as well the vario-interest in the credit financing plus the role of the U.S. estate agent will be exposed in the subsequent chapters.

2.1 The American households and their consumption patterns

The private households and their consumption patterns played at the birth of American property crisis a decisive role. Households cannot be attributed fault, because they acted like “profit maximizer” in their system. To understand the actions of American consumers, it requires the analysis of the wealth distribution. 90% of households are on the lower rank and have counted over 29% of assets. The population can be further divided into classes, according to clarify the distribution of assets. 58% of the households in the United States does not belong to the wealthy population and have only a small equity ceiling, in order to make major purchases. Those households dominate the consumer behavior of the American market. Due to the high flexibility of the Americans is the willingness to change the federal city for a new job and sell short-term the home ownership in the property market.

A financing from 100% of the property purchase price is not uncommon in

America, as well as all consumer goods are bought by credit. Thus, the Houses of Americans were esteemed as a consumer good and financed on the basis of the current income funds. The protection of consumer credit happens by a mortgage bonds on the basis of current income (creditworthiness). If exists a low credit rating and only the security of mortgage debt of the debtor, it is spoken about a “subprime-market”, which causes an increased demand on the real estate market.

2.2 Reasons for the steady demand growth in real estate

The price trend on the American real estate market grew during the last ten years of a steady upward trend. In 2005, the market in this segment could note a sales growth of 15%. From 1995 to 2000 the boom is attributable to the American economy, which restored an increasing demand in real estate. In 2000 Alen Grenspan, head of the U.S. Federal Reserve Bank, began to reduce the rate of over 6% up to 2% until the end of 2001. The base rate reduction of the National Bank involved a cheapening of borrowed money. Companies used this as an incentive for investments while the private households have decided for higher consumer spending. Consequently, durable consumer goods such as cars, houses, boats and household appliances were acquired with a loan burden. The reduction of the base rate aroused greediness for financial transactions with high return of investments so that the investors of the hedge fund managers began their activities. They acquired mortgage deeds of the mortgage