What is true for the US is true for countries. While countries like Canada and Spain might be able to deal with a housing price collapse in a few years, a housing collapse in India and Brazil might take decades to clear. In China with few laws at all, the impact could be devastating and long lasting
How do you determine when a real estate market hits bottom? Determining the strength of any particular housing market may be difficult when an overhang of distressed properties represents a drag on the market. But this is not only a problem between various markets in the US; it is also a major issue in determining the strength of markets around the world.
Recessions caused by a real estate collapse all have a major problem. The market can inflate rapidly, but the recovery can take a very long time. This occurs for a very simple reason. Buying a piece of property can take days or weeks. Foreclosing on a piece of property can take months or years. Add to the issues of foreclosure to the dissimilarities between properties and you end up with a very inefficient or ‘sticky’ market.
The problems with the housing market in the United States have also exacerbated the jobs market in two ways. First, since the property construction market makes up a large percentage of GDP (gross domestic product), a downturn causes massive unemployment. This is especially a problem in China where it makes up about 13% of the economy well over twice the percentage of more developed markets. Second, the inability of owners to sell their homes makes movement to local—where jobs are more plentiful—difficult.
A lengthy foreclosure procedure can exacerbate the level of distressed property. A large number of distressed properties create asymmetries of information. Buyers do not know the size of the overhang, when the properties will come to market, how many properties will come to market and the prices. Without information, the markets freeze up and cannot clear. If the market cannot clear, there is no way to know when it hits bottom.
Obviously the best way to increase the efficiency of these markets is to make the foreclosure process as fast and efficient as possible. However, efficiency of the market is not really on the minds of a large number of the populace who are in danger of losing their homes. The political issues produce large differences in property rights between jurisdictions. This is true not only between countries, but also between different states in the US.
Basically there are two types of foreclosure processes in the US. One is a judicial process that requires the supervision of a court. The other is a non-judicial process that does not. Although a court might provide better protection of the property owner’s rights, judges and courts everywhere are not known for their speed.
In the US the time necessary for foreclosure can vary substantially depending on the jurisdiction. The faster procedures are found in Georgia at 37 days or Maryland with 47 days. The fastest is Texas at just 27 days. In contrast a foreclosure in New Jersey and Pennsylvania take 270 days. In Illinois it takes 300 days and the slowest is New York, where it takes 445 days—almost 15 months.
As one might expect, the real estate markets in states with faster foreclosure laws have probably already bottomed out. Phoenix, a city in the state of Arizona, was one of the worst hit by the housing bust. Its foreclosure procedure lasts only about 90 days. Thanks to an improving local job market and people often from Canada looking for warmer weather, the inventory of unsold homes has declined to about the pre-crash average. After price declines of as much as 55%, the market has most likely cleared and house prices are rising again.
Where the market is the most rigid in places like New York, prices are probably still falling. For example, the median house price increased substantially from 2000 thru 2006 in California and New York. But after the crash, California prices in 2011 fell back to the 2000 level, while New York prices remain well above the prior level. California’s foreclosure procedures take about one quarter of the time required for a foreclosure in New York. So the presumption is that California prices are nearer equilibrium while New York prices are expected to fall further.
What is true for American states is true for countries. The US is hardly the only country to have a real estate bubble. There are possibilities of real estate bubbles in diverse countries including China, India, Canada, Brazil and Spain. Although I have not found a comparison of global foreclosure laws, the World Bank Doing Business report does give a rough guide to insolvency procedures.
These indicate that countries like Canada (ranked 3rd) and Spain (ranked 20th) might be able to deal with a housing price collapse in a few years. However, in India and Brazil, ranked 128th and 135th respectively, a housing collapse might take decades to clear. In China with few laws at all, the impact could be devastating and long lasting.
(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages. Mr Gamble can be contacted at [email protected] or [email protected]).
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