This theory doesn’t work for one of the biggest bubbles of 2007, which was Las Vegas. It has nothing but surrounding land to build on.
They built like crazy and still had massive price inflation followed by a bubble popping, prices dropped almost 50% and vast swathes of empty houses remained for years and prices only recovered to the peak in the last year or two.
Erdmann adds to the thesis in a very valuable way by pointing out that people move out Zoned zone to Phoenix and other US metros.
Sorry, I missed out some more of this.
Erdmann divides US cities into Closed Access Cities (CACs), contagion cities (CCs) and Open Access Cities (OACs). The CACs were New York, Boston, the Bay Area and Los Angeles where building housing has become very difficult and where the prices are shooting up. The contagian cities were places that people who moved out of the closed access cities went to. These include Phoenix and Florida. The Open Access Cities were places like Houston, Atlanta and Dallas where sufficient housing for population increases was being built. Erdmann describes the CACs as having a chronic undersupply that has caused many people to move into the CCs. The OACs saw some ride and an increase in homebuilding but didn’t see nearly the drop in prices as the other types of cities.
Shut Out suggests that a reaction to the rise in housing prices that was occuring in CACs led to policy that brought up interest rates and caused prices in the CCs to drop which then led to a loss in confidence and a drop in housing prices across the board. Erdmann says that excess credit wasn’t the primary driver and points to the fact that the increase in US house prices was well underway before the bad loans came in.
Interesting but to claim excess credit wasn’t the primary driver seems to ignore that credit was clearly in excess in it couldn’t be repaid, even when prices correctly slightly. That’s pretty much a definition of credit becoming available in “excess”.
And the categorization seems "after the fact". I mean if you look at prices and then lump cities into categories, you're not really predicting anything.
>..Las Vegas. It has nothing but surrounding land to build on.
Not to focus on one single point of your post, but Vegas is in fact nearing the point of having developed the easy area in the surrounding flatland of its valley, and is now beginning to abut the surrounding mountains (and federally owned land). Vast tracts of surrounding uninhabited land does not necessarily mean it is easily developed and habitable.
That's not totally inexplicable. It takes time to do the construction so in the meantime the price goes up.
In a normal market the investors would predict the price coming back down when the construction catches up so it would only go up a little bit, since most prospective buyers would e.g. rent until they could pay less for one of the new units. More to the point, the bank would predict that and not give you a loan that size.
Pre-2007, banks weren't doing that. They were giving loans to everybody regardless of creditworthiness or risk because they were buying credit default swaps which create moral hazard. So unsavvy borrowers overbid on existing properties about to revert to their construction cost and you got a bubble in a place you normally wouldn't.
But how exactly can you launder money through buying a house? If you buy, essentially you declare you have the money, thus question can be asked where you got it from.
When I bought recently, I wasn't asked the source of my downpayment as long as I could show I had the funds going back at least 3 months. I presume they do some sense check against income sources (i.e. if you have $300k down payment, but only make $30k/yr and you're 25, they'll ask where it came from), but otherwise if it was "seasoned" (you could show you had such funds over some time period), they didn't dig further.
Now that's much more scrutiny than lenders were showing back in 2007. Back then, if you had cash in a bank account, all good.
In terms of laundering, it's basically passing money through enough legitimate transactions as to conceal the source. So let's say you have $1M in money from illegal activities. If you can get it into a foreign bank account, you could transfer it to the US, buy a house, sell 2 years later. If anyone asked where the money came from you've got a few years history of legitimate investments.
That is an interesting bit from the lined article:
"One of the biggest issues that the report cites is the use of geographic targeting orders as the U.S.’s primary tool to identify potential money laundering events. GTOs impose reporting requirements on real estate purchases, but only in narrowly targeted scenarios — large cash purchases by legal entities in specific geographic areas."
I reckon flipping houses and renovating is one way - Buy an older house. Spend dodgy money into some serious renovations. Sell house for <original price> + <cost of renovation>. Money washed.
It’s typically done at the construction stage, with high-rise buildings and other assets more valuable than a family home. Banks or other lenders are typically involved. Here’s one example.
I imagine you can pay some extra in cash to get the property while the official price is lower, but still realistic. You are then getting an asset that you would otherwise not get, using cash in part.
They built like crazy and still had massive price inflation followed by a bubble popping, prices dropped almost 50% and vast swathes of empty houses remained for years and prices only recovered to the peak in the last year or two.