Housing starts are at their highest level since July, 2008. Mortgage interest is at an all time low. The median price of a house has gone up again. This all sounds like good news. What is not making the news is that 9.6% of FHA insured loans are seriously delinquent. Nor does the news mention the fact that almost a third of all purchases are by absentee buyers or that 20% of homeowners are still underwater.
The above news does not bode well for recovery. Right now the housing market is being kept alive by Bernanke’s QE3 program which is buying $40 billion dollars of Mortgage Backed Securities (MBSs) every month for the foreseeable future.
Between 2004 and 2010, there was a 5% drop in home ownership. The hardest hit people, not surprisingly, were those with household incomes under $20,000. Thus, Clinton’s subprime mortgage experiment ended in the Great Recession. Now we are entering another era where more and more of the properties being sold (mostly because of foreclosures and short sales) to fewer and fewer people. Thus, large groups of co-located properties are being consolidated. If an investor, who has purchased a large quantity of co-located properties, declares bankruptcy; the local market will be flooded with relatively inexpensive housing which will undermine the values of all the other co-located properties.
Thus, through interest manipulation and Qualitative Easing measures, Bernanke has been propping up the housing market. Eventually though, Bernanke will be forced to raise interest rates in order to control the inflation that is inevitable. When that happens, housing will once again lose value. This is when the above trend (of a few investors owning large quantities of properties) will devastate the housing market. The vast majority of foreclosed homes in the Oakland, CA area have been bought by 2 investor groups. Thus, if one of these groups ends up declaring bankruptcy, the Oakland housing market will be flooded with a large inventory of foreclosed homes (all being sold below their last sale price) – thus, once again, lowering the value of houses in Oakland and putting even more homeowners underwater. This scene could easily be played out in all of the housing markets that got hit hard by the original recession (in Phoenix, almost half of all housing is being purchased by absentee buyers).
The poor minority homeowner will be hit the hardest in this new round of foreclosures since they are the most likely to end up with the most expensive mortgages due to redlining and pricing discrimination. Thus, when a local major investor declares bankruptcy, these are going to be the people who will take the brunt of the housing collapse (again). Thus, the people who are supposed to have been helped the most through the Affordable Housing Act will actually be the ones who are hurt the most.
When credit is cheap, people tend to overextend themselves. When the interest rates go up, those same people are the ones who end up losing everything. And when they go down, their creditors lose money and the loses then extend across the board. Thus, cheap credit creates a bubble economy. When that bubble economy busts, we end up in another recession. I am sure Bernanke thinks he is doing the right thing by propping up the housing market but, eventually, we will all end up paying the price.
The post above was a very good read. I could only add that If I had a wish, I would wish that we had a few Congressmen and Senators that understood economics. It really is a simple conclusion that this great experiment of Bernanke and Obama will end in disaster. There is no way that a country can continue to print this much money and not have some degree of Hyper-inflation. Any successful country will always encourage it’s people to save their money and reward them for doing so. This experiment will end and when it does, we shall all pay the price.
Market distorting policies remain a problem, but inflation may not be as bad as you suggest if it were to inflate away negative equity for many homeowners.
Inflation will protect homeowners from bankruptcy. Even though the economy will suffer and housing prices will fall in real terms, housing prices will rise in nominal terms, so mortgages will not be underwater. Even floating rate loans will hit their caps and seem relatively affordable. Fixed rate loans will produce a debtor’s windfall.
We could easily see inflation over 50 percent annually for one or more years. The Fed will be very slow to raise rates because the massive size of
federal government indebtedness, most of which is now financed with short-term treasuries, will make it very difficult to pay interest at higher rates. So the Fed will delay rate increases and that will exacerbate inflation.
It is the value of the US dollar that is the current bubble. When the US government finds it cannot pay the interest on its debt, you’ll want to hold any hard asset, even housing, and no dollars.