What society realized is that real estate, under the norm, is not as liquid as stocks and bonds and the real estate market is a lot larger than equity markets. In the equity markets, liquidity is defined by the number of buyers willing to take ownership at a set price. In the real estate market, liquidity is determined by how willing the lenders are to lend money to buyers.
The fuel of the market boom was the availability of funding and the need to place it. Lenders created new products to introduce a new type of homebuyer- the subprime market, which would essentially increase the rate of homeownership. We saw the introduction of sub-prime option-arm loans (which were a bad idea from the beginning but no one raised their hand to question them). Today, many of these new-found homeowners are in an adjustable rate mortgage and do not have the income to cushion the anticipated fluctuating mortgage payments.
The over willingness of lenders to lend, and over lend, to the sub-prime market during this real estate boom along with the marketing practices of players, from mortgage brokers to direct lenders, caused irrational exuberance in real estate markets and real estate valuation. Today the real estate market is living with a “hangover” due to that behavior. Lenders are coming to the realization that the pendulum must swing in the other direction. There is a consensus in the residential mortgage industry that underwriting standards must be tightened to preserve the integrity of the overall industry and the valuation of U.S. residential real estate. The question today is: How far to the right must the pendulum swing?
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