Is the Real Estate Market too heated?

Reading time: 6 minutes

Recently, the housing market in the US has been experiencing a major boom quite unlike anything that has been felt in the past 14 years.

According to the National Association of Realtors, demand has been skyrocketing for the past months, with prices hitting all-time highs: median sale prices close to $350,000 and asking prices even higher. This price-frenzy is in large part due to supply being unable to quickly catch up to the unsurmountable demand, with almost 50% of offers under contract just one week after listing. For all involved, this expansion of the real estate business after such a long-lasting stagnation is indeed cause for celebration; however, for those whose memory does not falter, this scenario may seem reminiscent of what the American economy was experiencing prior to the housing bubble burst of mid 2000s that paved the way to the 2008 financial crisis. Thus, this poses the question: are those concerns valid and if so, should we worry that a new crash may be on its way?

What forces have been triggering this spike?

Numerous reasons have been behind the current real estate rally. As we have mentioned, demand has been pressuring a relatively distressed supply in the past months, leading to an increase in prices that is far beyond the levels one would expected in an economic crisis of this dimension.

Starting on the demand side of the equation, experts point out to three different reasons driving this demand mania.

First, by decreasing interest rates as a way to ensure liquidity during 2020, the FED forced mortgage rates to fell considerably during this period, reaching a record low of 2.65% in 2021 (from 3.73% in February 2020). Now, a 1 pp decrease might sound small for non-homebuyers. However, imagine a homebuyer buying a $300.000 house just before the crisis began. In this situation, he would, most likely, be paying up close to $499.000 over a 30-year mortgage agreement. Now, if that buyer had done the same deal in January 2021, he would be paying around $436.000, a discount of more than $60.000 (or 12.5%). This effect has incentivized buyers to look for more expensive houses than before, as it pushed them into the market to lock these mortgage rates before the FED tightens its policies.

Figure 1: 30-year Mortgage Rates in 2020. Source: Freddie Mac

Second, as Millenials are entering the housing market more fearlessly, the largest generation on Earth is now dominating demand, as they are keen to either leave their parents’ or just quit rentals. According to the National Association of Realtors, the median age of first-time homebuyers is now 33, which turns out to be the median age of Millenials. Alongside this, despite some increase in unemployment levels, salaries and overall income were kept stable the past year, as loose fiscal and monetary policies helped mitigate losses in purchasing power.

Combine low interest rates policies with no decreases in disposable income, plus a generation looking to buy their first house, well… you just set up a buying frenzy.

Finally, this pricing boom couldn’t be made possible without a supply shortage. In fact, after several construction companies went bankrupt during the Great Recession, fewer homes were built in the 2010s than in any decade going back to the 1960s. This sluggish construction activity has now been left out in the open in a market where home sellers are seeing double digit offers in the first 24 hours of bidding.

Moreover, with the pandemic causing some uncertainty regarding future paychecks, homeowners have had some reservations regarding the possibility of selling their current house and move to a more expensive one. Besides this, with a contagious disease spreading as fast as COVID-19, people do not want strangers traipsing through their living areas during open houses.

Finally, one recent element causing prices to rise is actually related to its intrinsic cost. Recent commodities shortages have been rising its prices significantly, ultimately increasing building prices and delaying orders. Lumber has been the most recent commodity on the spotlight, with its 3-fold growth in the past year raising housing cost by tens of dollars.

Figure 2: Lumber prices skyrocketed in the past year. Source: Refinitiv

Is history repeating itself?

This resurgence of demand in US real estate and the booming prices currently being practiced have led many to fear that a new crash similar to that of 2007 may be on its way. However, all evidence points out that this current boom is quite the inverse to that of mid 2000s.

For once, the current boom is mostly motivated by an excess of demand over the supply (the reason why prices are being pushed up), whereas prior to the sup-prime crisis the opposite was verified: the market was over-flooding with houses and there were not enough high-rating buyers for them, which led to an opening of the market to low creditworthy buyers (which inevitably was at the root of the problem). Currently, the market is still experiencing a shortage of houses (definitely not enough to meet demand), as construction is still catching up to the slowdown that was prompted by the pandemic.

Moreover, nowadays, the type of buyers is also quite different from that of the previous boom. They are of a higher credit rating and much more willing to put on their own money to buy their house. As a matter of fact, real estate companies are reporting that a lesser amount of the houses is being paid with resort to loans, as customers put more cash up front. This poses a great contrast to the low-credit-rating buyers that dominated the housing market in mid-2000s, most of whom could not afford the houses they were signing contracts to acquire.

Finally, lending rules are much more restrictive, carefully attributing loans only to those with enough credibility to ensure future payments. Back then, risky mortgages were provided to households with a high default risk who had no means of paying for them and only small down payments were required most of the times. Therefore, prior to the financial crisis, the so-called NINJA loans (no income, no jobs, no assets) were the rule, which ended up being the downfall of the market.

All things considered, current circumstances are much different from what was observable in the past.

Is There a Bubble Though? And What Does the Future Hold?

Housing experts claim that the housing market is not yet in a bubble. This is despite home prices being soaring at historical highs across the country. However, some claim that a small price correction can take place.

On the one hand, while the housing market is composed by low inventories, high demand and a risk-averse lending environment, extreme spikes in home prices could result in some prices rolling back soon. Subsequently, in the future, these peaks in prices can disappear as people will return to their normal activities

The future will depend on the pace of new construction, the strength of the economy, the quantity of homeowners willing to sell their houses and overall demand in the market.

When it comes to buyers, people who could afford a home pre-COVID-19, will be, most likely, in good financial positions to buy a home after Covid, as the majority of this people is stable and financially comfortable.

On the contrary, people who lost their job or received low wages, even before the pandemic, could not buy houses, as they usually rent the places they lived in. So, unless there is a recession in the future, the level of demand will, most likely, not change anytime soon, causing housing prices not to decrease as well.

Sources: Better Homes & Gardens, The Wall Street Journal, VOX

Francisco Nunes

Alexandre Bentes

Inês Lindoso

Mozambique’s Cabo Delgado Conflict

Reading time: 6 minutes

On October 5th, 2017, 3 police stations in the city of Mocímboa da Praia were raided by 30 armed attackers, killing 17 people, including two police officers and a community leader. This attack marked the beginning of a prolonged conflict in Mozambique which has destabilized the province of Cabo Delgado and has triggered a humanitarian crisis.  

Mozambique is being hit by a devastating wave of terrorist attacks. The unrest has already resulted in over 4.000 deaths and 700.000 internally displaced people within the Cabo Delgado province, where the conflict is centred. These attacks are part of an ideologically driven war, where Islamist militants are attempting to establish an Islamic State. The main insurgent faction is Ansar al-Sunna, locally called Al-Shabaab. It has ties to ISIL, but it is not controlled by them. There is, however, evidence that ISIL has sent trainers to aid the insurgent forces. 

Mozambique as a vulnerable country 

Mozambique, which ranks as one of the lowest countries in terms of GDP per capita, has extreme levels of internal wealth inequality, and the northern provinces have disproportionately high poverty rates. These inequalities are especially worrisome given the large amount of internally displaced people at the moment. One of the UN’s main targets currently is to ensure those people are assisted and taken care of. According to the UN’s World Food Program, over 950.000 people are currently facing severe hunger in northern Mozambique. Moreover, the north’s significant exposure to terrorism and violence is partly due to lower wealth in the region and explains how 100 radicals sufficed to occupy and control Palma, one of the largest cities of the province. Northern Mozambique was targeted due to its insufficient ability to oppose violence and fragile infrastructures. Most radicalized members are Mozambiquan nationals and come from Cabo Delgado. The other members come mostly from neighbouring countries, such as Tanzania, Somalia, and Kenya. The group finances its operations through illegal contraband, religious networks, and human trafficking, which they primarily use to send new recruits to neighbouring countries for military and ideological training. 

There’s no end to terror. What are the impacts? 

The terror in the Cabo Delgado province has lasted for almost four years now. In this period, there have been recurrent cases of group beheadings, violence and the raping of women, burning of houses, attacks on buses, and ambushes on public roads. The last major event was the attack on one of the province’s most important cities, Palma, located close to Total’s multi-billion-euro natural gas project. 

“Valued between 20 and 25 billion euros, the company’s extraction project is the largest private investment underway in Africa”, but after the continuous attacks in Palma, Total withdrew the remaining staff it kept in the project, delaying a billion euro valued initiative that had scheduled the first liquefied gas export for 2024. 

Strongly impacting the country’s exports, the attacks also resulted in important economic consequences for Mozambique. In fact, the sudden interruption of Total’s activities affected other companies with links to their value chain. The “armed attacks in northern Mozambique have caused losses of 174.4 million euros and led to the closure of 1.110 companies”, stated the president of the Confederation of Economic Associations (CTA). Of the total number of companies that have been forced to close due to the armed violence in Cabo Delgado, 410 are from the districts directly affected by the attacks. Due to strong connections within the value chain, many companies suffered indirectly from the attacks through exposure to those chains of trade. It is estimated that 198.000 jobs were lost, of which 56.000 in business units in the districts affected by the violence and 143.000 in the family farming sector, during the almost four years of conflict. 

Moreover, the crisis has officially been declared a humanitarian disaster. According to a report by the International Organization for Migration (IOM), 18.661 people have fled Palma following the attack. Of those displaced, 43 percent are reported to be children and 31 percent women. The organization raises concerns over the possible spread of cholera, “warning that, since March [2021], 15 local authorities in at least five districts of the province have recorded 3.141 cases and 16 deaths”, measles, and, of course, Covid-19. The country has also been experiencing the negative effects of climate change, as various cyclones hit the region. As the strength and frequency of natural disasters increase, existing wealth inequality and the country’s vulnerability continue to escalate. 

The world is watching 

As the conflict persists, the news of the dramatic events quickly spread around the globe, triggering responses by many countries and organizations. The Mozambiquan President, Filipe Nyusi, expressed the need for help from the Commonwealth to cope with Covid-19, as the country is having difficulty controlling the virus with so few resources and amidst a military conflict. “The Commonwealth can make a difference, acting as a whole, in mobilizing more resources to acquire vaccines against Covid-19 [for member countries with fewer means],” Filipe Nyusi declared. 

Portugal, which has close ties to Mozambique, sent 60 members of the military to assist the country following the Palma attacks, in addition to recently offering 250 thousand euros in aid. The Portuguese Ministry of Foreign Affairs (MNE) condemned “vehemently” the terrorist attack, while the president of the Camões Institute said that the next cooperation program with Mozambique, to be signed by the end of the year, should be marked by the crisis in Cabo Delgado, advocating the strengthening of aid: “We are going to start negotiating the strategic program of cooperation with Mozambique for the next five years and we obviously cannot be unaware of what is happening [in Cabo Delgado], both in humanitarian and development aid terms,” said Ribeiro de Almeida. 

Globally, the United Nations (UN) is also watching carefully the recent events in the African region. The president of the UN Security Council ensured that the situation is being followed with maximum attention, due to a possible “rapid expansion” of the violence to other African regions. The UN Under-Secretary-General and Special Representative of the Secretary-General on Sexual Violence in Conflict, Pramila Patten, also assured that the Office on Sexual Violence is closely monitoring the Mozambique region. However, the UN special representative to the African Union said that the insurgency in Mozambique is not advanced enough to justify international military intervention or peace operations. 

More humanitarian and economic aid is being planned both by the UN, Portugal, and other nations, but the conflict keeps persisting and seriously threatening the country’s economic development, says the IMF director for Africa. The question that remains to be answered is, still, for how long will this atrocious situation drag on? 

Sources: BBC, Expresso, Observador, Publico, RTP, TVI, UN News, Visão 

Christian Weber

Ana Terenas

Pedro Estorninho

Brazil, a story of socio-political divide

THE BACKGROUND: A (quick) political overview

Brazil’s past is no fairy tale. From 1964 to 1985, the country was governed by a military dictatorship. Although promised to last a few years, it took two decades for the nation to freely choose its leaders once again. The long years of authoritarianism left, however, a deep footprint difficult to cover in the transition towards democracy.

Instability is at the heart of a country whose motto reads “Order and Progress”. The men and women, that once promised to serve the country, have failed. Historically, elected presidents had a certain pattern: wealthy, full of promises’ mandates marked by economic distress but, mostly, corruption. The hopes (and fears) of the nation focused on Lula da Silva, a working-class man, that promised to save Brazil from corruption and poverty. In the latter, he saw a slight success, but in the former, he saw himself and his protected successor Dilma Roussef being involved in the greatest corruption scheme in Brazil.

In 2018, the elections shone a light on how Brazil had become divided. Those who remembered the dictatorship, feared the return of authoritarianism, while others had had enough of the system and rallied behind Jair Bolsonaro. In the end, Bolsonaro emerged as the 38th president with 55,1% of the votes. Now we ask ourselves how this once marginal political figure ended up winning half of the country’s trust, and how his influence evolved throughout the mandate and the current pandemic.

Source: Brasil de Fato, Bolsonaro greets demonstrators in Brasilia

THE CAUSES: What led Brazil to its current state?

I. A Never-ending Internal Battlefield

In 2017, Brazil was facing a record-breaking number of around 65.000 homicides; a country representing 8% of the world’s population accounted for 33% of all murders. This ever-growing trend of violence, stemming largely from drug gang rivalries, was further aggravated by the ill-management of security funds, which left police forces underpaid and underprepared. The established chaos fuelled police violence, including extrajudicial executions, which only undermined public security and further endangered the lives of police officers.

This incited support for the far-right candidate, who praised the armed forces and promised loosening gun laws and making the police force more affirmative. For many, this stuck a chord and Bolsonaro became a champion of law and order, most notably for a young core of supports, to whom the thought of oppression and violence of the military regime had faded into history.

At the end of 2019, Bolsonaro had seemed to uphold his campaign promise. Killings were down 19% from the previous year, reaching the lowest number since 2007. There were, however, doubts regarding his involvement in this feat, as the number had already begun to fall in early 2018 and the leader had signed an anti-crime bill at the end of 2019. Reports of a militia-run Rio de Janeiro – organized crime groups that control entry into neighbourhoods, run extortions and drug trade, i.a. – only seem to disprove this claim.

II. A Never-fully-honest Government

Though the war on violence gathered a large following, what secured Bolsonaro’s candidacy was the conviction of his strongest opponent, Lula da Silva, which barred him from the presidential race. The former president of Brazil was, however, only one of several convicted in one of the biggest corruption investigations of the recent ages, “Operation Car Wash”. It uncovered a laundry scheme that funnelled billions into politicians’ and big companies’ pockets. According to a Datafolha study, the general public’s faith in Brazilian institutions had eroded over the years, with trust in the presidency and congress falling below 40%. Bolsonaro seized this opportunity to emerge as an outlier and promised to end corruption.

Source: Agência Brasil, demonstrators take the streets to protest against Dilma Roussef’s government and the corruption scandal

Almost two years later, both the president and his family have been ensnared in corruption scandals. Most notably, his oldest son and former senator of Rio de Janeiro, Flávio Bolsonaro, was charged this past November of embezzlement, money laundering and criminal association.

The very probe, that shed light on the institutional corruption in Brazil via “Operation Car Wash”, has now wound down following pressure from parts of Congress as well as the Bolsonaro administration. The outbreak of the Coronavirus has only helped Brasilia in sweeping any talk of corruption under the rug.

III. A Never-stable Economy (in the heat of a pandemic crisis)

Social and political instability were not all that troubled the nation, which was coming out of the worst recession in its recent history. The economy had barely grown for almost a decade, incurring even in contractions. Both the commodities’ boom and tourism, one of the country’s largest economic motors, had collapsed. Inflation and unemployment had risen significantly, the former reaching 10.7%, in 2015, and the latter reaching a century-high value of 12.82%, in 2017.

Efforts of Bolsonaro’s administration to depart from the status quo of deep recessions were cut short as Brazil was hit severely by the global pandemic. Today, the country has the second highest death toll in the world and more than 2,000 daily deaths from Covid-19, which might be higher due to lack of reporting. In a country struggling with inequality, the disease has struck distinctly among social classes, affecting mostly people living in extreme poverty, who are less able to follow social distancing and other health norms. There are more than 14 million people unemployed, an astonishingly high number, since 40% of the workforce depends on daily wages to eat and survive.

Source: Market Watch, Workers bring the coffin of a police sergeant deceased from Covid-19 to the cemetery in Brasilia

At the beginning of the pandemic, a stimulus package of 50 bn$ was widely credited for Bolsonaro’s popularity and for boosting the economy. However, the president continued to dismiss and even mock health measures, while strongly questioning official statistics. He incited public disrespect of curfews and fired those who did not agree with him, such as the health minister.

Now, there is a new smaller stimulus package on its way. The package enables Bolsonaro’s administration to relaunch a cash transfer scheme to the nation’s poorest during the next four months, while limiting the impact on fiscal accounts, since investors are worried with debt rising above 90% of GDP. There are, nonetheless, questions as to whether they will be able to keep people from hunger.

IV. A Never-equal society and a Never-prioritized Environment

Bolsonaro’s mandate is full of controversies created by strong statements of the president against the LGBTQ+ community, black minorities, and women. His promise to make “Brazil safe for all its people” might not be real after all, as, socially, he turned out to be polarising, and excluding minorities. In addition, Bolsonaro and his government’s denialism of climate change remains unchanged. As widespread fires hit the Amazon forest last summer, the president intends to exploit deforested lands, rather than preserve them, which will severely affect indigenous communities.

Brazil: A Never-united country?

Source: LatinAmercian Post, A country divided in two by Bolsonaro

As the 2022 presidential elections draw ever closer, it seems the division that plagued the country four years ago has only deepened. Despite unfulfilled promises and mismanagement of the ongoing health crisis, Bolsonaro has managed to maintain a significant following.

New developments have seemed, albeit, to undermine his re-election campaign. Former president Lula da Silva has been released by the supreme court of justice, which decided to overturn graft convictions. While the decision has yet to be finalized, it has set the scene for a contest between opposite sides of the political spectrum in next year’s presidential race.

As the emerging candidate once said, “We all know that, all over the world, never did the workers’ win a single thing without fighting, without perseverance.” It remains to be seen who the nation will be fighting for.

Sources: BBC, Britannica, CSIS, Financial Times, Folha de S.Paulo, Forbes, the Guardian, Latin America Reports, Open Democracy, Vox, FRED, Human Rights Watch, Abc News

Afonso Monteiro

Pedro Estorninho

Maria Mendes