On 9th August 2007, the FT headlined with ‘Wave of debt traps London property “flippers”’. “Like the proverbial butterfly that flaps its wings and sets off a tidal wave on the other side of the world”, this article ascribed the seizure in global equity markets over the previous few days to a housing bust in Florida centred on Gulf coast resorts like Sarasota. At the time Sarasota had the dubious honour of experiencing the biggest drop in house prices in the US, with foreclosures peaking after a fall in prices of 15% in the year to March 2007.
In the Sarasota example, although high risk adjustable loans backed by credit securities were implicated, much of the distress in the market could be attributed, according to the FT correspondent, to “simple, old-fashioned, greed”. As house prices boomed right across the US until mid- to late-2006, investors took out second mortgages, risky loans and special bonds, in order to buy for a short-term speculative gain. When the market turned, they were left high and dry, with the “double whammy” of onerous repayment terms and negative equity.
Foreclosures in this market in turn destabilised the mainstream house markets across the US, leading to generalised price falls. This hit the construction sector which rapidly turned from boom to bust through the summer. In the financial sector thousands of jobs were lost overnight as the likes of Lehman Brothers shut down their sub-prime mortgage units. The whole debacle then began to impact on consumer confidence, lowering the growth prospects for the US economy as a whole.
