Should home buyers beware from another housing bubble?
The Federal Reserve bailed out Bear Stearns on March 14,2008 nine years ago. What has the Fed learned from that mistake? Not enough, perhaps.
Today, the Fed is again ignoring the GSEs and their potential contribution to future instability. According to Freddie's 2016 annual report, "Expanding access to affordable mortgage credit will continue to be a top priority in 2017." Fannie/Freddie have redefined "Sub prime" to a credit rating of below 620; previously, these firms and banking regulators had used 660 as the dividing line that defined a sub-prime borrower. Now by using the lower number, they may be buying even weaker mortgages than before the financial crisis.
Are we actually in another housing bubble just nine years later?
Many economists are saying, bubble talk is starting to raise its ugly head. Some analysts are saying, home prices are showing signs of being overvalued. But, is it really hard to spot a real estate bubble? Some economists with vast experience are saying, in their opinion, we are in a real estate bubble without a doubt. Anyone who has some experience in real estate cycles, can recognize a bubble before it bursts.
There is one critical difference between today's situation and that of 2008: There is very little private capital that would be at risk if there's another sub-prime mortgage bust. Before the crisis, there was some market discipline, however imperfect it was, because potential buyers of mortgages would look at their quality carefully. Now only Fannie and Freddie are examining the quality of the mortgages. And it is taxpayers who would carry the burden of bailing out Fannie and Freddie, since their obligations are guaranteed by the US government.
Millions Lost their Homes
About 10,000,000 families lost their homes in the 2007-2008 crash. Many of these homes were bought by hedge funds. The hedge funds companies didn’t really resell the thousands of houses they bought, but rather hung onto them and rented them instead.
Today, we see many of the same indicators we saw in 2008, but the character of the crisis is very different now from what it was in 2008. Real estate prices now age exceed their early 2008 levels. We still have a lot of easy money out there for mortgages. We have a Federal Reserve policy today that’s unfortunately like the early 2000s, and it’s conducive to bubbles.
People are desperate to have housing, It’s the one thing they absolutely need. But instead ,hedge funds companies bought those foreclosed houses for all cash and now they rent them out to those people, between 40%-50% higher than in 2008. These hedge funds companies make a large return renting those houses out. They can make 10, 15% on their investment. That’s much more money than they can make in the bond market and it’s much more secure money than they can make in the stock market, because stock prices may go down and corporate sales may go down as the economy shrinks. Rents now are rising and many can not afford to pay those high rent prices. They’re 40% to 50% of income in places like New York City, San Francisco, the high rent areas of the country.
There is a new reality for America’s Middle Class
Real estate prices do not make any sense. They are very expensive to afford. While interest rates are still low, property taxes are very expensive. The American family middle class, do not earn the money to really afford buying a house. According to new research by Harvard University, almost 40 million Americans live in housing they cannot afford. Home-ownership has gone down and rental prices keep going up, meaning that millions of residents are forced to pay more than they reasonably should. Home-ownership keeps declining, according to the Joint Center for Housing Studies' detailed and comprehensive 2017 State of the Nation's Housing report, in part because homes prices in many markets have continued to go up while wages have not kept pace. In 2016, the home-ownership rate fell to 63.4 percent, marking the 12th consecutive year of declines. At the same time, renting is more expensive, as rent gains across the country continue to far outpace inflation. And supply is tight. Since most of the new units being built are at the high end, the number of modestly priced units available for under $800 declined by 261,000 between 2005 and 2015, while the number renting for $2,000 or more jumped by 1.5 million.
People are Broke
The big danger, of course, is the next recession, which Stack views as inevitable. At some point we’re going to have another economic downturn, another economic recession. When we see that downturn, we are going to see housing prices come down quite hard over a period of 12- to 24 months. That doesn’t foresee a recession until at least 2018.
I’m not talking about people in poverty here – individuals and families who simply cannot save because they barely earn enough to cover basic needs; I’m talking about middle-class families – people who earn plenty – who piss it all away.
The average American family with credit card debt carries more than $15,000 in balances on their cards alone. This is why, when we need to buy our kids braces, pay for an emergency roof repair, or need to fix or replace a broken-down car, we have to take out a loan or charge the whole expense on a credit card.People are borrowing because they can’t afford to break even and pay for their housing and pay for their education without running into debt. And, they’re having to pay so much money in debt service that they can’t afford to buy goods and services. If you look around, the big shopping malls are boarded up. Many stores are closed and the malls becoming a one big food court. People can not afford to spend money in these malls, like they did 4-5 year ago. 46% of Americans said they couldn’t come up with $400 to cover an emergency.
What do you think, are we in a real estate bubble?
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