Uh-oh, it seems like US financial market is on its last limb. Government is bailing out AIG, one of the largest financial companies in US that is heavily vested in the securitized mortgage backed instruments. In another words, it looks as if the subprime meltdown has more of a deeper reach than people originally thought.
People often ask, what is the correlation between insurance and real estate? Well, a lot.
Two of the largest industries that fund real estate mortgages are insurance and pension/401k companies. Why? Because they have a steady stream of cashflow that builds equity for its clients. In another words, they have to have a return on their clients investment if the client were to retire or, God forbid *knock knock*, pass away. In another words, for that one big bang payout, they're receiving a small sum every month.
In order to do that, they have to invest in safe (and I do mean, safe) investment vehicles. What better and stable investment is there than real estate? Stocks could plummet, companies can go under, gold and other commodities fluctuate wildly. But real estate is, just there. It's either there or it's not. Unless there is major natural disaster or an accident, the real estate will pretty much just be there. Even if the homeowner forecloses, the house is still THERE.
So these long term financial companies invest in real estate mortgages to get a healthy but stable return on their client's money.
The difference, this time, however is that these mortgages were heavily securitized - meaning lender A made the loan and sold to lender B... who sold to lender C, etc etc. until the bottom "recipient" who is the actual lender with client base who gives them a steady stream of cash, such as AIG, CalPERS, or any company with a large amount of cash, looking for a return.
And every time the loan changed hands, it became more and more unclear what was happening to the real estate market. Eventually the bubble bursts and the domino effect happens, such as the one happening currently.
This is the direct result of the de-regulation of the Savings + Loan industry from the late 80's/early 90's, except that the government provided a safety net for these banks and financial companies to take more risks (i.e. FDIC and other government bailouts). So they did, and now here we are.
We'll see what will happen in the next couple of years. Government will start regulating the mortgage industry and once again, the real estate market will tank even more or hit a flat, rock bottom for a couple of years after that.
What a great time to be a real estate investor.
