Delinquencies are down because prices are up. This has enabled people to sell or refinance at lower rates. Prices are up because interest rates have been kept at artificially low levels (for far too long!), and because investors have been chasing yield all around the globe…and have found U.S. housing to be one of the better bets in a world where yields do not match risks.
Inventory has been kept off the market for quite a few years now, and investors who’ve had access to “back-room foreclosure deals” have made agreements with lenders to keep properties off the market a specified period of time, giving the artificial impression that inventories are low/declining via “natural” means. These homes/statistics are not visible to the general public.
Various investors have been piling into the RE market for the past few years, many of them entering a market in which they have no experience, and in which there is a LOT of existing and future competition (all those other investors doing the same thing). In many areas, investor demand has made up 30-50% of the housing demand. More investors than ever have been getting into the “buy to rent” market, and they are over-estimating returns on these rentals for a variety of reasons. Just like I’ve warned in the past, those rosy returns are not coming in many cases. The smart money has already been moving to the sidelines.
So…if you remove ~20%++ of the demand from the market, and add to that the fact that many of these funds will be rushing to put homes on the market once the market turns down, (let’s not forget that interest rates are still at/near historical lows, and more likely to go up than down over the long term), it would seem that the risks to housing prices would be greater than many are anticipating.
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I only read the part of your comment that I’ve quoted, because the rest didn’t seem to be the least bit pertinent to the discussion. (I’ll get to it later.)
The point of discussion is whether the market is at higher risk today than it was 4 or 5 years ago. Some of the things you describe are pretty accurate, though I’d take exception to your assertion that interest rates have been kept artificially low, and that’s somehow done something bad to the market.
Other parts of this comment are nothing more than conspiracy theory. Investors making back-room deals with lenders to keep inventory off the market and paying less than market prices would be a federal crime if the loans were owned by the GSE’s or federally chartered banks. A close friend did prison time for something similar in a deal with an RTC asset manager in the early 90’s. If you have any hard evidence it’s happened, I suspect the US attorney’s office would be interested in hearing about it.
And you kind of make your own two-sided argument with regards to investor influence. First they conspire keep properties off the market and buy at artificially low prices, and then they buy up all the properties on the market driving prices up. Either way, they have supplied capital to remove distressed assets from the equation.
If there ever was this “phantom inventory” you describe, eventually it would show up in the numbers of properties transferred. It hasn’t. It never existed. We’ve heard about it over and over again the last 5 years. Along with dire predictions that various dates will bring tidal waves of foreclosures as variable rate loans are reset.
Your description of the overall investor influence on the market sounds about right. But I don’t think it’s been a bad thing. As I said, it’s removed high risk capital from lenders and moved it to the private sector. And as much as I despise the economic influence of big banks, particularly of the TBTF variety, we need a healthy banking system. I think your predictions about what those investors will do with the properties remains to be seen. Most will not get the predicted returns, though I don’t suspect that any wholesale dumping of properties back on the market will occur. I would rather propose there will be both little incentive and too illiquid and inefficient a market for that to happen. (I expect more likely, the PE RE funds to develop a secondary market, where another round of smart money following less smart money will buy partnership interests at even deeper discounts.) I guess the key to the whole claim of higher risk today is centered on your prediction of mass dumping. Why and how do you think this will happen? And precisely what effect will it have on the market. Please show your work if it’s beyond speculation.
Interest rates that are charged on mortgages are real. My mortgage says right in the loan documents that my interest rate is below 4%. And that’s what I will pay until the loan is paid off. There is nothing artificial about that. You can argue that the market rates are manipulated. And you’d be right. Just as they’ve been manipulated at least since the mid-70’s, and somewhat similarly to how they’ve been manipulated since the Fed was established over 100 years ago. That’s part of the Fed’s job.
That’s not to say that all risk has been removed, it hasn’t. The general economic condition is still fragile at best, the recovery has been primarily for those at the top, and those at the bottom continue to be left behind. Monetary policy to stimulate improvement has all but been exhausted, and I doubt there will be much help from fiscal policy, as it’s frozen, both in the US and abroad, and “do less harm” is about as good as gets. Hopefully we’re at the end of the delta in public spending being a continued impediment to growth.
And back to the main discussion point, even if we disagree about some of the details on how the RE market got to where it is today, I’m still unclear on what evidence there is that the market is less healthy today that it was 4 or 5 years ago.
