Real Estate: Is the Bottom In, or Is This a Head-Fake? (December 10, 2012)
Everyone interested in real estate is asking the same question: Is the bottom in, or is this just another “green shoots” recovery that will soon wilt?
Let’s start by reviewing the fundamental forces currently affecting real estate valuations.
Expanding the pool of potential buyers has reached the upper limit
There are two ways to expand the pool of qualified home buyers, and they both rely on expanding leverage: A) lower the down payment from 20% cash to 3%, and B) lower the mortgage rate to 3.5%.
The mortgage industry has escaped any consequences of “robo-signing” mortgage fraud
If the rule of law existed in more than name, this is what should have happened:
That none of this has happened is proof that the rule of law is “optional” for financial institutions in America.
In other words, the financial sector has gotten away with murder, and the “overhang” of systemic fraud has been erased with Fed connivance.
Banks are restricting inventory
The banks are withholding distressed properties to restrict the inventory of homes for sale.
If supply overwhelms demand, prices decline. That would be a bad thing for banks sitting on millions of defaulted mortgages and distressed properties. Millions of impaired properties are being held off the market so supply is lower than demand.
Since the strategy has paid such handsome returns, why change it?
ZIRP has attracted investment
The Fed’s ZIRP (zero interest rate policy) has pushed investors into a “search for safe yield” that has led many to buy corporate bonds, dividend stocks and everyone’s favorite “safe” fixed asset, real estate.
In many markets, one-third or more of all sales have been to investors.
“The bottom is in” – isn't it?
Once potential buyers see prices rise and they conclude that “the bottom is in,” they jump in and buy, pushing prices higher in a positive feedback loop. The higher prices rise, the more evidence there is that the bottom is in, and the greater the incentives to jump in before prices once again rise out of reach.
Favorable rent/buy ratio
With mortgage rates well below 4%, the rent-buy ratio is favorable in many areas. It may indeed be cheaper to buy than to rent in some locales.
“Hot money” flowing into real-estate
As economies in Europe and Asia falter, “hot money” is flowing into perceived “safe havens” such as the U.S. and Canada. Some of this “hot money” ($225-$300 billion a year is leaving China alone) is flowing into real estate, a well-known phenomenon in markets such as Vancouver, B.C., Miami, and Los Angeles.
What can we conclude from this overview of fundamentals?
The question now is will these forces continue pushing prices higher? If so, the bottom may well be in. If these forces deteriorate or lose their effectiveness, then the “green shoots” of investor interest may wither as the U.S. economy joins Europe and Japan by re-entering recession.
In Part II: Forecasting the Future of Rental Housing and Home Valuations, we will examine what forces could change "the bottom is in!" to "this is just another head-fake" -- with the real bottom is still ahead.
This article was first published on
peakprosperity.com, where I am a contributing writer.
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