Let’s start by reviewing the fundamental forces currently affecting real estate valuations.
Expanding the pool of potential buyers has reached the upper limit
Lowering the down payment increases the leverage from 4-to-1 to 33-to-1, a massive leap.
Increasing leverage increases risk. Over 90% of all mortgages are guaranteed or backed by Federal agencies such as FHA. This “socialization” of the mortgage industry means that losses ultimately flow through to the taxpayers, who are subsidizing the housing industry via these agencies.
Lowering the mortgage rate increases the leverage of income. It now takes much less income to qualify for greatly reduced monthly payments.
With mortgage rates barely above the prime rate and Treasury bond yields negative in terms of inflation, there is simply no room left for lower rates or down payments. The “increase home sales by expanding the pool of buyers” game plan has been run to the absolute limit.
The pool of buyers cannot be expanded any further; that boost to sales is done.
The unintended consequence of enticing marginal buyers to buy homes is that defaults are rising: 1 out of 6 FHA-insured loans are delinquent. This is the “blowback” of qualifying everyone with an income above the poverty line as a homebuyer.
The mortgage industry has escaped any consequences of “robo-signing” mortgage fraud
- MERS, the mortgage industry's placeholder of fictitious mortgage notes, would have been summarily shut down.
- All mortgages and derivatives based on mortgages would have been marked-to-market.
- All losses would be booked immediately, and any institution that was deemed insolvent would have been shuttered and its assets auctioned off in an orderly fashion.
- Regardless of the cost to owners of mortgages, every deed, lien, and note would be painstakingly reconstructed on every mortgage in the U.S., and the deed and note properly filed in each county as per U.S. law.
The $25 billion mortgage fraud settlement turned a blind eye to the fraud, and now the banks are applying losses they have already booked to the $25 billion, mooting the supposed “benefit” of the settlement to consumers.
The Federal Reserve’s purchase of mortgages – over $1.1 trillion in 2009-10 and now another $40 billion a month – is essentially a money-laundering operation in which the Fed exchanges cash for dodgy mortgages.
Analyst Catherine Austin Fitts (QE3 – Pay Attention If You Are in the Real Estate Market) summarized what this means:
“The Fed is now where mortgages go to die.”
"Thousands of mortgages on homes that do not exist or on homes that have more than one ‘first’ mortgage are now going to the Fed to disappear. Thousands of multifamily and commercial mortgages will be bought up as well. With documents shredded, criminal liabilities extinguished and financial institutions made whole, funds can return without fear of seizure.
QE3 proves beyond any shadow of a doubt that the extent of the fraud was as bad as I said it was. You can count up the bailouts and QE1, QE2, QE3 the numbers speak for themselves. The fraud was indeed in the many trillions of dollars.”
Banks are restricting inventory
The strategy has costs; thousands of defaulted homeowners have been living mortgage-free for years. But the gains have been impressive: with supply dwindling, beaten-down markets have seen gains of 20+% this year as strong investor demand has pushed prices higher.
ZIRP has attracted investment
Some are buying distressed properties to “flip” in strong-demand markets, but many are buying the homes as rentals with the plan being to hold them for a few years as prices rise and then sell to reap appreciation.
Anecdotally, every investor class is getting into the act, from Mom and Pop to big players such as insurance companies and Wall Street funds. One of my contacts in the insurance industry told me that his firm was buying large multi-unit apartment complexes, as these rentals generated a yield of 6% to 7%, far above the 1.7% yield of ten-year Treasury bonds.
In a non-ZIRP world, Treasuries and other asset classes would offer similar yields but without the risks and costs of managing rentals. But in a ZIRP world of near-zero yields for low-risk financial assets, rental real estate is a compelling investment: decent yields, relatively low risk, and strong appreciation potential if housing has indeed bottomed.
“The bottom is in” – isn't it?
Favorable rent/buy ratio
“Hot money” flowing into real-estate
- The mortgage industry escaped any real consequence from its systemic fraud
- The Status Quo plan to reflate the housing market with super-low mortgage rates and down payments has worked to some degree
- The financial sector’s plan to boost home prices by limiting supply has also worked
- ZIRP has created a “crowded trade” in low-risk investments with attractive yields such as corporate bonds, dividend stocks, and real estate, which is being fueled by a self-reinforcing perception that “the bottom is in”
My new book Why Things Are Falling Apart and What We Can Do About It is now available in print and Kindle editions--10% to 20% discounts.
1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
5. Technological, financial and demographic changes in our economyComplex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).
We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.
10% discount on the Kindle edition: $8.95(retail $9.95) print edition: $24 on Amazon.com
To receive a 20% discount on the print edition: $19.20 (retail $24), follow the link, open a Createspace account and enter discount code SJRGPLAB. (This is the only way I can offer a discount.)
|Thank you, J.D.Z. ($10), for your much-appreciated generous contribution to this site -- I am greatly honored by your support and readership.||Thank you, Tyson C. ($10), for your exceedingly generous contribution to this site --I am greatly honored by your support and readership.|