Tuesday, July 9, 2013

Pain and Gain in Housing

We live in a headline dominated world supported by 10 second sound bites and 140 character tweets.  Most people never get beyond the superficial to see the substance of anything.  In fact, a majority are probably not even getting to the surface of most issues, let alone any depth.

I started writing BeeLine to take that deeper dive.  My goal is to provide the perspective and context that you can't get from reading a headline or hearing that short sound bite.  Taking you on the shortest route to what you really need to know to understand what is current in our world.

A good example is the recent news in the headlines that housing is on the rebound with the highest level of pending sale contracts since 2006.

Existing Home Sales Surge in May

However, let's get beneath the surface on this headline.  Let's actually get beyond the curb appeal and get in the house.

At the same time that the news outlets were writing this headline based on data from the National Association of Realtors (NAR), Bloomberg was reporting that mortgage applications fell to their lowest level in nineteen months.

What gives?  How is that possible?  Shouldn't they be in sync?

If you look at the NAR data for May, 33% of existing home sales were for cash.  That's pretty incredible.  That also tells me that there are not a whole lot of first-time home buyers, who traditionally are the engine of home sales growth, driving this market.  After all, first-time home buyers are necessary to get the ball rolling by taking starter homes to clear the way for larger purchases up the chain.

Fritz Pfister, who is a realtor, and is very concerned about "The Disappearing First Time Home  Buyer" , puts it very well in TownhallFinance.com.

The Catch22 in housing: I won’t buy another home until my home is sold, but I won’t sell my home until I know where I’m moving. Life just isn’t fair sometimes, but without the first time home buyer in numbers many sellers won’t need worry about where they will be moving.
First time home buyers accounted for only 28% of sales in May, down from 34% a year prior, and from the 40% norm. That’s huge. This means there won’t be as many dominoes falling this summer.
Why is there a dwindling number of first time home buyers? The lack of jobs, increasing home prices, tighter lending guidelines, student loan debt, and rising interest rates are the primary culprits. Other than that, buying a home is easy.

Who is buying all the houses and using cash to do it?

Large Institutional Investors.

USA Today reported today that in April 10% of the houses sold in the nation's 100 busiest real estate markets were bought by institutional investors. They are buying them to rent to families with a longer term goal of selling at a gain down the road.

29% of the houses sold in Lakeland, Florida were sold to big investors.  In Miami and Las Vegas, 22% each.  In cities like Atlanta, Memphis and Charlotte, it is close to 20%.

In all, $10 billion has been "invested" in this sector by Wall Street.  The Blackstone Group alone has purchased 29,000 homes in 13 markets.  25,000 of them have been in the last year alone!

Where have the big investors gotten the cash? A big factor has been the Federal Reserve's zero interest policy (ZIRP) that has allowed many of the large Wall Street groups to borrow money at ridiculously low interest rates. This is not mortgage money. These are corporate borrowings that gives them the cash to buy these houses. At the same time, despite the low mortgage interest rates, many families cannot qualify so they are forced into the rental market.  The same with students and their student debt.

The result-Main Street takes the loss and Wall Street pockets the gain.

Does this sound familiar?  It is yet another example of The Redistribution of America.  If you have not read my blog post on this subject previously, you need to do that next.

Let me be clear.  I am not against anyone making a buck when they see a good opportunity.  And the fact is that many people had no business being in the houses they were with the mortgages they had on those houses in the 2005-2007 period.  Many people who bought houses should have been renting.

These big investors are also providing needed liquidity right now that is also helping the market recover.  However, it is all artificial and the table is tilted towards where both the big influence is as well as the big money.

The fact is that bad things seem to happen when the federal government starts taking sides. Favoring one person, one group, one business or region compared to another. Providing an advantage to one side at the expense of another. Taking sides where it should not be taking sides. Picking winners and losers. Tilting the playing field to play favorites.

It happened when the federal government forced banks to lend to those who should not have otherwise qualified.  It is happening now as the Fed is keeping interest rates low to save debtors while destroying savers.

Government should not be on the playing field calling the plays. Its primary role should be making sure that the playing field is safe, that people are playing by the rules and that penalties are assessed when the play is out of bounds. This is what are Founding Fathers had in mind when they wrote our Constitution.

And despite what is always argued is the best of intentions, it always seems that Main Street feels the pain and Wall Street receives the gains.

Even if it involves...

Credit: Canvas by Kristen Swain on GlueArts.blogspot.com

1 comment:

  1. This article is mind blowing I read it and enjoyed. I always find this type of article to learn and gather knowledge.

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