Another day brings another flood of headlines about the amazing housing market. In some markets, home values rose nearly 20% in 2012 compared with the previous year. Inventory is low and foreclosures are down. Flippers are rushing to beat competitors for nearly every type of house. The future looks bright for real estate investors and mortgage buyers, as well as people looking to buy a home. It is more likely than not that real estate will boom in the next 12-24 month. My mortgage buyerbusiness is moving at a faster pace. However, the housing bubble is rapidly expanding, and must burst again.
Is it possible to keep this “recovery”, if not, going forward? My analysis and my gut feel tell me we are headed for another crash in real-estate, and possibly stocks. There are many reasons why this is happening, but I will summarize them in three categories.
1. Credit Expansion
Bill Gross, PIMCO’s Credit Supernova, explains that it took $4 to generate 1 of GDP (gross domestic products) in 1980. To generate the same dollar, it took $20 of credit since 2006. It takes more credit to produce anything. This is called Ponzi Finance by Gross. Credit financing that continues to be used becomes a drain on itself. We can pretend that everything is going smoothly if we pay off one credit card with another credit cards and then apply for a personal loan. However, the defaulted debt can cause collateral damage and make it difficult to pay off your interest payments.
The U.S. government is the largest debtor, and it doesn’t have any way to ever pay all its obligations. Instead, bureaucrats and some states and cities extend their control and pretend that the ship won’t sink under their watch. The majority of media is reluctant to dig into difficult issues so they only publish happy talk from Wall Street and government experts. This is what I mean…
2. Heavy-handed Involvement in Government and Wall Street
Zero Hedge (The Echo Boom in Housing-Recovery Stocks, 2/4/13), outlines how actions taken by the Federal Reserve Bank and the U.S. government prevented housing from experiencing an organic recovery. Low interest rates promoted by the Fed are meant to encourage Americans to invest more in riskier assets, and to allow the government to repay debts over a longer time. ZH points out that “high levels speculative activity could foster a false confidence.”
Although the Federal Housing Administration (FHA), has provided insurance for more than 30,000,000 homes, it has too many risky loans and a high default percentage. In November, it had a $16.3 million shortfall. It continues to insure loans with as little as 3.5% down payments. These government entities, along with Fannie and Freddie are involved in nearly all mortgages in the country. Over the course of history, government-manipulated markets and economies have had a poor record.
Private equity and hedge funds are now buying assets and companies along the entire housing supply chain. CNN Money reports that Paulson and Co. purchased enough land in Arizona and California to build 25,000 houses. Blackstone Group spent $2.7B last year to purchase 17,000 homes after foreclosure. These companies, which only invest in real estate to make a quick buck will eventually see signs of a downturn, and attempt to quickly sell their real estate holdings. As there are not enough buyers and too many sellers, this will accelerate the collapse of the housing bubble.
3. Wealth of the Poorest Household
Because of high unemployment and declining household wealth, there aren’t enough buyers. Food stamp use has almost doubled in states such as Arizona, Alabama, California, California, and California over the past five year. About 4 million Californians are on food stamps. This means that more than 10% of them are on food stamps. The Fiscal Times stated that almost half of U.S. households (13.1 million) couldn’t afford to finance long-term expenses or weather emergencies. According to them, “these people would not last three months if they were suddenly reduced in income.” Over 30 percent of these people don’t have any savings accounts, while another 8 percent don’t bank at all.” These are not only the poor, but many of the middle-class members of the working class who depend on government assistance.
The economy and the housing market are built on sand, and lack the foundation to support them. True production and demand will decline as government becomes more involved in daily life, and the average citizen becomes less independent and dependent on government handouts. If the U.S is to get on the right track, it must stop being obsessed with debt.