The Dynamics of a Housing Bubble

The 2008 financial crisis was spawned by an entire universe of shaky investments that involved the packaging of mortgages into securities. It turned out that many of these mortgages had virtually no chance of ever being repaid. When higher interest rates kicked in on these bad loans, the borrowers ended up defaulting en masse.

Much of this was related to an overarching characteristic of the pre-crash economy: there was a massive housing bubble. A housing bubble occurs when average home prices reach a level that is far higher than historic norms, based on things like the Consumer Price Index (CPI). In the case of the 2008 crash, the homes had reached all-time historic highs, with the average home across many communities being completely unaffordable to the average worker. Because so few people could afford these homes, many of the less solvent of them turned to the loose lending practices of companies like Countrywide. These were the mortgages that would go on to be repackaged into so-called collateralized debt obligations or CDOs. And it was these CDOs and the derivatives relating to them that nearly destroyed the entire Western economy.

Are we in a housing bubble today?

Over the last few years, the term housing bubble has been creeping back into the mainstream discourse. And to be sure, there are a few indicators that are pointing in the direction of a housing bubble forming today, especially in specific areas of the country.

What has caused today’s housing bubble?

Unfortunately, the conditions that caused the last housing bubble and subsequent financial disaster were never adequately addressed. One of the ways that the country was able to pull out of the recession that followed the 2008 market crash was a program known as quantitative easing and the Zero Interest Rate Policy (ZIRP). Combined, these two policies were enacted by the Federal Reserve to flood the markets with cash that would get the economy moving again.

However, all of that cash, easy credit and low-interest rates have conspired to run up housing prices to new all-time highs. Throughout much of the country, housing is once again completely unaffordable for the average worker. In Los Angeles, for example, the median wage earner would have to work nearly 120 hours per week just to afford the median home! And these sky-high prices are also driving up rents. Eventually, the fact that few people can afford the most basic apartment in major cities will force housing prices back to Earth, possibly sending them crashing.

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Neighborhood Factors To Consider When Buying A House

There are a lot of factors to consider when buying a new home. Of course, you’ll want to consider things like the number of bedrooms and the size of the yard, but it’s important to keep in mind that you will not spend 100% of your time on your own property. The area around your potential home is just as important as the area within it.

Vet possible properties by canvassing the potential neighborhood and surrounding areas. Specifically, you should check these six items or statistics prior to purchasing your next home.

School Districts
If you have or plan to have children, you will want to find out about the local school district. What school will your children attend? What are the average student test scores in the area? Are there extracurricular or athletic activities available for your child? How involved are parents expected to be in the school? These are all things you may want to consider before buying a home in the district.

Crime Rates
You probably don’t want to move to a neighborhood that is unsafe. Luckily, it is easy to look up crime rates for any town you’re interested in. You can also gauge the relative safety of a location by observing the number of people on the streets, especially after dark. If you see a lot of children and families playing or people taking walks at night, it’s probably a safe area.

If you have children or enjoy walking to local food and entertainment, you’ll definitely want to consider the walkability of your new neighborhood. Of course, this includes things like safety and proximity, but you’ll also want to take into account the cleanliness of the streets, traffic,  and maintenance levels of your intended routes.

Distance to amenities
Prior to moving, decide how far you’re willing to drive or walk for everyday things. Consider the distance to the local grocery store, your doctor, and any other places you’re likely to visit on a regular basis. Set a limit for your travel time and search for a neighborhood within an acceptable radius of these places.

Your drive to work is an important aspect of your new location given that you will need to do it nearly every day. Assess the distance to your place of employment, but also research the traffic and commuting patterns in your new area. Does the drive home take significantly longer than the drive to work? What kind of gas mileage can you expect to get? Is easily-accessible public transportation an option?

Internet/Cable Service
Finally, take some time to consider the connectivity of any potential location. Services like internet and cable can vary from town to town, so it’s important to make sure that you’ll have access to the level you require on a daily basis. Research local provider coverage areas and rates prior to choosing your new home.

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It has recently been estimated that among high-net-worth individuals, approximately 33 percent of their portfolios are currently made up of real estate holdings. Among those, a large percentage is made up of private real estate equity, typically including properties that the individuals are involved in managing on a daily basis, even if they have hired a professional management company to do the dirty work.

However, there is still a high demand for hands-off real estate equity investments. Many investors with large amounts of capital looking to diversify into significant real estate holdings are having trouble because there has previously been no middle ground between outright private ownership and the completely passive investing experience offered by real estate investment trusts, also known as REITs.

Many people simply don’t have the time, skillset or the inclination to jump headlong into managing commercial properties, even if the majority of tasks can be effectively delegated. That has left those with significant investment capital who would like to diversify into real estate grappling with the many shortfalls of REITs, at least until now.

Private real estate equity firms are gaining in popularity, and these firms have some huge advantages over REITs. The types of properties that typically make up a private equity real estate portfolio are office buildings, industrial properties, retail shops and multifamily apartment buildings. There are also specialized investments such as elderly and college dormitory housing, hotels, self-storage units and medical buildings, to name a few.

One of the reasons that people are drawn to this type of investing is that private real estate equity companies don’t suffer from the immense pressures that REITs are under to produce dividends. This means that they are under no obligation to quickly acquire properties when they are cash-rich but property-poor. A private real estate equity firm can sit on a pile of cash for as long as it chooses to do so. And this means that the well-run variants of this company structure never have to make questionable purchases in overbought markets. It also means that they can hoard cash, optimally positioning themselves to pounce when genuine market opportunities arise.

Additionally, REITs have become notorious for consuming large amounts of the funds’ capital through fees and costs. This has caused a steep decline in the amount of money being invested in the REIT market. Private real estate equity firms, on the other hand, can often maintain high levels of both vertical and horizontal integration, keeping all management, maintenance and construction functions in-house. This can dramatically reduce the costs associated with middlemen and outsourcing.

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The Future of Digital Fundraising

As strange as it may seem, raising money online is still in its infancy. The legal ramifications of crowdfunding have just recently been faced squarely by regulators and governments and the next steps in both capital formation and non-profit and charitable giving are right around the corner. With the steady stream of news articles about online funding scams, it’s no surprise that people are still so hesitant to use this medium. From stories of funerals and hospital bills to tales of woe, there’s currently no regulation in place to protect prospective donors. The companies with the biggest stakes in the fundraising future are obviously the social media platforms, which are in a headlong race to deploy front-ends for all manner of crowdfunding features.

The success of non-profit organizations is entirely dependent on budgeting and efficiency. For donors, patrons, and the companies they support, things have to become more practical. Since non-profits and technology go together so well, there are some new concepts you should consider looking into if you plan to raise money in the near future.

Equity Sharing

Commercial companies are bound to discover that equity will be the killer feature in any crowdfunding project going forward. Capital markets discovered the wealth-building power of equity sharing decades ago, and while governments can’t and won’t allow future online capital markets to become a free-for-all, the tools now exist to not only realize the dream of buying a share of your dream project but also to automate and regulate such projects. This is not only for the benefit of shareholders but also for the overall growth of electronic commerce.

Digital Currencies

Non-profits and charity fundraising efforts are very likely to become early adopters of digital currencies for a number of reasons. One of the primary motivators will be the robust and unalterable record-keeping of the blockchain, which will lead to a more exact record-keeping of tax deductions, as well as disclosures on people’s charitable giving. A cottage industry is likely to spring up around this feature of the blockchain, alongside several companies that will work with non-profits to invest or spend the digital coins they have collected.

Virtual Assistants

Advertising, marketing and customer service are among the numerous obligations that smaller non-profit players would love to either outsource or automate. With the emphasis on chatbots and virtualized customer care platforms now underway in technology circles, online services will soon combine with listening applications like Alexa, Google Assistant and Cortana to produce a “reassurance engine” that will not only prevent ejections by nervous contributors but turn them into repeat and upsold contributors instead.


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