House Hack Bubble and Return of the Sub Prime

[Joe Splitrock]

Yesterday was an interesting day. I was at the gym and overheard a gym member talking to the trainer. He as trying to talk the trainer into buying a house. He was explaining his own house hacking experience and how he was able to "live for free". As he explained it, you just get a couple guys to pay $400 an month and you can pay your mortgage. The trainer didn't seem super interested, but still it made me think about the old saying:

"When even shoe shine boys are giving stock tips, it is time to sell." - Joseph P Kennedy

It is important to note that Joseph Kennedy profited from the stock market crash of 1929 by predicting it and this was how he knew it was coming. It is basically just commentary on the herd mentality. When you hear the common person talking about how great an investment is, it is clearly hit the mass stage of popularity. Once an investment hits mass popularity, it starts moving towards peak and eventual over saturation. The fact that "house hacking" has been popularized enough that some random guy at a small gym in my small city is talking about it, scares the crap out of me.

The rest of my day went on as normal, then when watching my nightly business news one of the lead stories was, "Return of the Sub Prime Mortgage". They said the bank Carrington isn't calling it sub prime and they referred to it as "nonprime" (OK whatever). Angel Oak and Caliber Home Loans are already offering these type of loans. 

This is how they described the loans:

1. Accept credit scores down to 500

2. For self employed do not require tax returns. Borrower can use bank statements for proof of income. (could be good for investors)

3. Foreclosure, bankruptcy and late payments on credit report are acceptable.

4. Up to $1.5M loan amount or $500K HELOC.

Full story:

http://nbr.com/2018/04/12/subprime-mortgages-make-...

They talk about the loans being targeted towards millennials. I couldn't help but draw a connection to the millenials I heard talking at the gym. It makes me wonder if all the hype around "house hacking" and financial independence is driving the hype even higher and encouraging more millennials to jump in. I see all the time on BP where a millennial with heavy student loan debt asks if they should pay off their loan or invest in real estate. The overwhelming advice is buy real estate. It makes me wonder if we are sending the herd to be slaughtered. 

Wise investors always say, when everyone is buying, I am selling, when everyone is selling I am buying.

At the same time so many of our economic fundamentals are looking great. So I am not saying the end is near. As long as unemployment is low and all these people have jobs, we are fine. The problem is when people start losing jobs or when loans are given to unqualified people.

I know these "end is near" and "are we at the peak" type posts are totally click bait. But it is fun to talk about right? Happy Friday everyone!

[Bill F.]

@Joe Splitrock great discussion and they are fun to talk about, but I'd have to say most likely not...or at least the next contraction will not center around the RE markets.

1. We don't have the state/fed gov backed push to increase home ownership that planted the seeds for sub prime/ NIJA/ No Doc loans. Home ownership is back around 64%, down from a 2006 high of 70%.

2. It is hard to have a bubble when there is a housing shortage. I just finished reading that article last night it its kind of revisionist history of the 2008 credit crisis, saying that there was no over supply of housing.

3. Sub Prime loans are, in and of themselves, not bad. The  bond market is loaded with sub BB loans (Junk Bonds) it manages just fine. The issue came with the poor structuring of bond into tranches as a way of loading up sub BB bonds into pools that allegedly had a A or AA rating. The very nature of having prime loans means that you must also have sub prime loans. 

4. If you have concerns about the heard mentality and its impacts on the economy I'd look at the valuations of the FANG stocks and potential localized impact they could have a RE market.

5. Mortgage Defaults are around historical norms.

@Sam Josh Most if not all of the data you've asked about is publicly available, you just need to hunt for it. Bill McBride at Calculated Risk  does a good job of writing about most of it. Plus he is a guy who called the 2008 crisis with data instead of wild speculation used for personal gain (think Peter Schiff)

6. Out if state and foreign investors may be the new norm in primary MSAs  at least for awhile since bond yields are low (for out of state/institutional investors) and the since US markets are so much better regulated and trustworthy (Foreign investors) The former may taper off, but the latter won't change for awhile. The US isn't perfect, but we aren't on the verge of a coup or imprisoning journalist wholesale so that lends an air of perceived stability.