Upcoming Housing Market Crisis.... Will it happen??

Question

I read a recent article today. Wanted others thoughts on it.

Mortgage Home Loan Crisis

Rick H. · Answer

Joel - I just started reading economist Harry Dent's book, 'The Demographic Cliff - How to Survive and Prosper During the Deflation of 2014-2019'

I'll let you know my thoughts once I get thru it.

In all fairness, it has been said that economists have predicted 11 out the last 8 downturns.

Dion DePaoli · Answer

I think one of the key concepts is where is the capital going that is entering the market. As the article points out with it's quotes, much of that capital is targeting median home values and higher, so the middle and upper price bands.

This could be good, if the equilibrium is one where, higher capital demanding loans are financed through the securities markets and lower capital demanding loans are financed in more of a traditional portfolio method. The caveat to that is we no longer have the abundant supply of small and medium sized investor distribution access.

I think it is an interesting time to watch the market. I do think some of this is new territory even though we like to attempt to relate it back to the recent past, the influences are not the same, although there is some overlap. In 88 of the top 100 cities in the US, rent is now more than a mortgage payment. That will put pressure on housing prices where income is a large factor in affordability. Paying higher rents slows the savings rate down for new or returning buyers to the market having to save for down payments and other transaction costs.

In addition, the market for private label MBS is making some headway. In short, many of those Issuers have figured out how to cut costs (and features) from those issues and have gained some traction in the market place. The plan to merge Fannie and Freddie under a Federal Mortgage Insurance Corporation can work but the insurance or guarantee costs might be the hitch in the equation. If we can get some hierarchy of risk vs reward vs safety as we travel up and down the types of MBS that is being issued the market just "might" sort of make itself. Where FMIC assets carry better ratings and less risk than lesser private issue investments carry lesser ratings and more risk. Which, they do, the investors are just not overly confident in performance of the new exotic private issue. However, they do seem to be working.

In general, we should not ignore what is happening with all of this. It is a slippery slope for sure. One that we may need to loose a little footing on a couple times along the way to sort of get it right. That said, there are many moving pieces to figure out.

Karen Margrave · Answer

@Ned Carey     Even a broken clock is right 2x times a day!

Ned Carey · Answer

My impression is Harry Dent has been good at predicting changes but usually he got the reason wrong. Which makes me wonder is he just lucky.

Dion DePaoli · Answer

Just an interesting aside after reading the posts above.  Over the last several years the majority of the housing market has been bought up by investors.  Something to the tune of 40% to 50% depending on the year.  Most of those acquisitions were cash.  That could be hiding a problem right in front of our eyes as we roll into Q4 and 2015 and you start to hear claims the market has returned to pre-crash levels.  The participation in the market is drastically different now, investors relieved the burden, if you will, from primary borrowers and buyers.  Those folks will not be a pillar of stability without some form of credit.  We also do not know what the best ratio mix of primary and investment buying is or should be.  Like I said, the game is a bit different now and the slope can be slippery.

Douglas Dowell · Answer

Thanks for posting this Joel.  I completely disagree with the assumptions he is making.

1.    Interest Rates:  I think just because we are seeing tapering doesn't mean rates are going to spike.   The unemployment situation is better but we have a tremendous amount of slack in the labor market in the form of underemployment still from what I have seen.  Couple that with the significant market correction when the taper begins I anticipate we will head into a mild recession.

2.  Fannie/Freddie:   Despite all of the talk my bet is that they are not going anywhere.  Why?  Too much risk of disturbing the current market and smart money (see Ackman on GSE: http://bit.ly/1lHRELJ ) is supporting this approach.

Overall, despite the hoopla and rate mongering rates aren't gonna spike and fannie and freddie are dead: long live fannie and freddie.

Hersh M. · Answer

Rick H. I am about to start reading that book. Whats your take on it, useful, worth reading?

John Thedford · Answer

I doubt the Fed with kill GSE's. They know the risks associated with that. Considering how important housing is to the US economy the Fed will not make any rash moves to "fix" a problem. They may change the name, but the game won't change. GSE's have been with us for decades as a conduit for housing financing. No matter what the markets do, people must have a place to live whether they are owners or tenants. I don't care what the game is there will always be losers: homeowners, speculators, bonds, stocks, gold, oil, marriage:), RE investors....and the ones that plan well have the best chance of survival. I saw one poster on BP refer to the potential "problem" of being "underleveraged" and laughed my rear off! One prediction of a future crisis won't cause me to sell and run for the woods.

Wendell De Guzman · Answer

Either way, the smart real estate investor will make money. If the market continues its upward climb, fix-n-flip remains a viable strategy to raise cash to prepare for the eventual market downturn. If the market crashes, that's OK too because now we can accumulate more properties cheap to keep for long term cashflow.

Paul C. · Answer

I think his article is exagerrating the potential effects of tapering and the elimination of Fannie Freddie.

1.  Yes, the Fed is tapering and they're already most of the way through with tapering.  They're currently only buying 1.8 billion mortgage / day.  The funny thing is, as the Fed has reduced their purchases, mortgage prices have actually gone up relative to other rate instruments.  So thus far, the opposite effect of what one would assume has been happening.Even when the Fed is completely done with QE, there are banks, money managers and hedge funds who will continue to invest in mortgages.  And for now, the Fed will continue to reinvest their paydowns back into mortgages.

2.  The elimination of Fannie and Freddie will take years, if it ever happens.  The leading legislation for making it happen is the Crapo-Johnson bill, but the imlementation allows for 5-years with possible extensions.

The article makes for an interesting headline, but I think the predictive value is minimal.

Upcoming Housing Market Crisis.... Will it happen??

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