Will it happen again, or should I say, “Will they do it again?”
It worked out so well, so, of course they will do it again.
What am I talking about? Just one of the greatest transfers of wealth in our history.
And that is what the real estate crash of ’07-’08 was. When all was said and done millions of people lost everything and a few Wall Street types ended up with it.
If you did something that gave you huge returns beyond imagination, wouldn’t you do it again if you could?
And if nobody “knew” what you did, it would be easy to do it again. Because no one would be looking for it or expecting it.
So how did they do it?
They created a “bull market” in real estate by having a prolonged period of time with very low interest rates. Speculators “discovered” that they could buy something and sell it a few months later for a great profit. How did they know that? Well, if the speculators bid up the purchase price chasing after a limited supply of houses, the people that just wanted a home would have to pay more.
But the people that just wanted a home didn’t really care about the price they paid, just how much it would cost each month. The lenders were in on it. They kept monthly mortgage costs down by providing negative amortization mortgages, with little or no down payment and very low monthly payments.
Of course the lenders wanted to make money on these loans, so they put in a clause that allowed them to “reset” the interest rate to a more realistic market rate at some point in the future. And of course, the loan would have to become “fully amortized” which meant that the payment would necessarily go up.
But they said, ‘Don’t worry about it. You can re-fi.”
Well, enter The Federal Reserve. They “control” the interest rate that the bank has to pay for their money. See my post Do you know what happened?- For a more detailed description of just what part Alan Greenspan played in this giant shell game.
But here is the really sad part of this story. They are going to try to do it again.
Real Estate prices have been moving up steadily for the last several years. Only low interest rates can make them “affordable,” and “flippers” depend on an ever-increasing real estate market. So, if (and when) interest rates “return” to normal (whatever that means) the real estate market will crash again.
Up ‘til now mortgage rates have remained low, the hedge funds that ended up with most of the foreclosed homes from the last crash want to unload them, and they have been. They can’t maintain their ROI that they need to keep their investors happy. Soon this will come to an end.
We will need to build more houses to keep up with demand.
But, new construction is very expensive due to a tightening labor market and entitlement costs. Builders are only willing to build as long as they can see a profit in it for them. If cost of new construction is too high, then they just won’t build.
So, what is going to happen? The “flippers” will abandon the game, just like last time. Home prices will have to come down if buyers can’t afford the monthly mortgage payment.
Last time, the media played its part. Every day we heard about people that were under water. They owed more than their house was worth. Their variable rate mortgages reset. They couldn’t re-finance.
The “media” kept up the story about how “stupid” it was to keep paying so much for a house that wasn’t worth what they owed. Regular people walked away from their homes. The situation just kept getting worse.
Eventually, almost everybody was under water. So, even people that could “afford” their mortgages walked away. It was only smart to do so.
Will it happen again? It sure looks like it to me. We have recovered from the last crash, so another one could produce similar results.
And the Fed really wants to continue to raise rates. Maybe not this year, but they will do it. Home prices will have to “adjust” to higher interest rates.
Right now the economy is good. But the media keeps saying that a recession is just around the corner. That can’t be good.
Real Estate Crash
It all adds up to another real estate crash.
And a real estate crash means a major increase in foreclosures.
And if it is like last time a lot of those non-performing mortgages will be sold to the same Wall Street types who cleaned up last time.
We are destined to be a land of renters, not homeowners.