Commodities are items of value and consistent quality produced in large quantities and sold in the open market. While most all residential real estate is unique, these properties became uniformly wanted by investors because all property prices rose during the Great Housing Bubble. The commodification of real estate and enable trading in the free market that inspires houses caused to lose their identity as places to live and call home. Houses became tradable stucco boxes similar to baseball cards where buying and selling had nothing to do with the possession and use and everything to do with making money on the transaction.
In a commodity market or securities, rallies without the support of valuation measures fall back to fundamental values. It is very clear recovery in house prices was not caused by a concentration on fundamental valuation measures of income or revenue. Several people forgot the main purpose of a house is to provide shelter, something that can be obtained without the property for rent. The property was no longer provide shelter and instead became a way to access one of the largest product markets and higher degree of leverage in the world: Residential real estate.
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Commodities markets are notoriously volatile. In fact, this volatility is the main attraction of commodities trading. If market prices did not move significantly, traders would not be interested in the market, and liquidity would not be present. Without this liquidity, hedgers could not sell futures contracts and transfer the risk to other parties, and the whole market would cease to function. There commodity markets to transfer risk from one party you do not need for a party that is willing to take this risk for the chance to benefit from it.
Bag products controlled market volatility through the regulation of leverage. It is the change that sets the amount of a particular product that is controlled by a futures contract. They can increase or decrease the amount of leverage to create a degree of volatility attractive for traders. If you create too much leverage, traders accounts can be eliminated by small movements in market prices. If you create very little leverage, traders lose interest.
The same principles governing leverage commodity markets also work to influence the behavior of speculators in the market for residential real estate. If leverage is very low (large down payments or low limits, CLTV) then speculators have to use large amounts of their own money to capture what becomes relatively small price movements. If leverage is very high (small down payments or higher limits CLTV,) then the speculators do not have to put a lot of money to capture what becomes relatively large price movements.
The leverage (debt) that can be applied to residential real estate, the greater the degree of speculative activity that market will see. In addition, the lower the amount of money needed to speculate on a given market, more people will be able to do so because more people will have the funds necessary to participate.
When lenders began to offer 100% financing, was an open invitation to rampant speculation. This makes the return on investment infinite because there is no investment required by the speculator, and removes all barriers to entering the speculative market. In a regulated commodity market, the trader is responsible for all losses in the account. In a market dominated by non-recourse mortgage purchase money mortgage market, lenders end up taking responsibility for losses in speculative residential real estate market.
