They’re back! They’re back! They are helped by newspaper headlines that announce skyrocketing housing values and prices reaching their peak in Dallas and Denver. The Fed’s actions are the reason for almost all this boom, according to mortgage note buyers and smart investors . They keep interest rates low and pump trillions of dollars worth of “free” money into an economy to create the illusion that prosperity.
The reality in housing is very different. In a generation, the percentage of Americans owning their homes is at its lowest (65.1%) point. Since several years, ownership has declined across all income levels and ethnicities. There are many reasons why so few people own their home:
- High unemployment, especially in full-time positions. It is important to ignore the 7.4% rate that the government publishes, it is extremely inaccurate.
- It is still very difficult to obtain a loan for a home without having good credit and a down payment.
- Although banks have held onto houses in order to maintain inventory artificially low for a while, this is slowly changing.
- It has been difficult for first-time buyers in recent price increases to enter the market. Hedge funds, investors, as well as foreign money, have driven the price rises almost entirely.
- Some people are nervous about the economic and volatile markets, so they keep their distance.
High unemployment seems to be the greatest problem and is unlikely to get better soon. Nationally, full-time employment has dropped by 5.17million jobs and total employment has fallen by 2.2 million jobs. According to CNN Money, 76% of Americans are living paycheck-to-paycheck, meaning that they have no savings or, at best, a 3-month cushion. Around 36% of millennials (18-31 years old) still live at home with their parents. While rising college enrollment and delayed marriage are two factors, I believe the largest factor is the absence of full-time well-paying jobs.
You may wonder, however, how does this relate to the headlines claiming that the housing market is doing well according to all the traditional measures. California home prices have increased 25% in the last year. Someone paid $82K for a San Francisco parking space. Housing mania, which is characterized by interest-only loans and rising home prices, is returning for those financially able. There is a problem, because “financially capable” mostly refers to investors, hedge funds, and wealthy foreigners. These groups have driven up prices and sales, not the middle-class or those with lower incomes.
Markets and consumers will soon realize that all the good news about the economy is mostly a façade. It is not known when or what the trigger will occur, but it will result in some very ugly results. It’s almost like all the economic problems and bad news have been hidden behind a large dam. If the dam bursts and collapses, you won’t want to be downstream holding lots of stocks or potentially dangerous real estate.