Predicting the Next Boom

InvestorDirector.com

Certain signs will appear signifying the best possible time to jump into the housing market

History always repeats itself

Economic booms and busts, like the recent housing bubble, are planned scenarios built into our monetary system. The goal of a boom, followed by a bust, is to transfer wealth from the people who work hard for what of it they have, to the banks. This is how banks make money, aside from collecting interest on outstanding consumer credit. Get it out of your head that banks lend money. They do not “lend” money. Commercial banks are allowed to create checkbook money for their own use  under fractional reserve banking practices, which can be understood in greater detail by reading Behavior Never Lies, an article published in the April 2010 issue of InvestorDirector.com Magazine (http://www.investordirector.com/2010/04/page/2/). Expansion of the money supply as a result of fractional reserve banking practices is called inflation. Banks extend this easy money (in the form of credit) to borrowers who replenish the fractional reserve “checkbook” money, with money earned by working hard at a job or owning a business. Rent is charged on this money in the form of interest. When certain borrowers inevitably default on their credit, the bank can take any collateral attached to the credit. In order to speed up this process, banks will often deliberately contract the money supply, along with consumer credit, to force loan defaults.

Why wait for the apples to fall when the harvest can be hastened simply by shaking the tree?

- G. Edward Griffin, The Creature From Jekyll Island

In the years leading up to the current mortgage crisis, beginning in 2007, banks extended credit so liberal that nearly anyone could buy a home. This easy credit became even more profitable for banks when the money and credit supply was pulled out from underneath borrowers like a trap door on a stage. Look at the result of the dry up in credit. People can’t refinance their houses because banks won’t extend the very same credit to them that they were happy to extend years prior. Even if banks did oblige, home values have plummeted from the sudden contraction of consumer credit, preventing consumers from refinancing. Banks will continue to just sit back, take a consumer’s home and sell it; with pleasure, and profit.

Now is not the best time

Knowing how boom-bust cycles operate can allow real estate investors and prospective home buyers to predict when the most profitable time to buy a home is. Right now, however, is not that time. While there are many great deals out there, a home buyer will have to wait several years for the current “bust” part of the boom-bust cycle to go away. There is strong evidence suggesting that banks are colluding to prop up real estate prices by withholding an estimated 66% of all foreclosures off the market. This limits the available supply of houses, forcing competition between buyers and driving prices up. If the true supply of foreclosures were to hit the market all at the same time, the true market price of real estate would be realized, knocking the current values of homes down even further. By withholding foreclosures, the bust just won’t go away.

Predicting the Next Boom

A rise in housing prices leading to the next “boom” can be predicted when foreclosed home inventories start to dry up and the foreclosure waterfall starts to trickle, which should take several more years. When it does inevitably happen, banks will get bored and create credit again by loosening the noose on borrower requirements; just not as liberally as the “original” mortgage boom. Creating checkbook money to extend to borrowers in the form of credit will help banks compensate for the decreased income stream derived from selling millions of former homeowners’ foreclosed properties. The sister of this problem will be the increase in the prices of everyday goods and services. Banks simply can’t inflate the money supply without inflating the price of everyday goods and services, which will be an easy indicator for investors and homeowners to jump in to the market if they’re looking for quick property appreciation.

Also look for satellite or “shadow” mortgage lenders to start popping up as they did in the mortgage boom years. A satellite mortgage lender is one spawned off of a large bank or investment firm to cater to a niche market. For example, a mortgage lender known as Long Beach Mortgage was formed as the subprime division of Washington Mutual during the mortgage boom years. Another example of a satellite mortgage lender would be Aurora Loan Services being spawned from Lehman Brothers, or First Franklin, born from National City Bank. All of the satellite lenders in this example are now defunct because they served their purpose, which was to create mortgages for borrowers with a high risk of default, collect as much interest as they could while the homeowner gagged on their own financial problems, then collect the house in the end before folding up shop. When unheard of “satellite” lenders pop up out of the blue or you hear of Mortgage Real Estate Investment Trusts beginning to raise capital for the purposes of creating mortgages for homebuyers, appreciation can’t be too far off.

Another good indicator of when we should see consistent increases in home prices will be when job markets improve and the unemployment rate declines. Once again, this will come at the hands of the banks when they decide to loosen the credit noose. Millions upon millions of jobs were created in the mortgage and real estate sectors of the economy during the mortgage boom years, earlier this past decade. With tight credit guidelines as we see now, businesses can’t expand or hire new personnel and prospective home buyers are denied mortgages. Homes sit rather than sell, keeping prices stagnant.

A mass amount of current and past foreclosure victims will be ripe for new mortgages roughly 3-7 years from now. Do you not think the banks are whetting their palates for this? An unchallenged foreclosure usually takes 7 years to drop off a consumer’s credit file. An FHA loan only requires a prospective homebuyer to be 2 years removed from a foreclosure to obtain a new mortgage. This wave of buyers will cause prices to rise as they caused prices to deflate by initially walking away.

Finally, the other major indicator of the next housing boom will be a few years after the term “short sale” becomes less popular or hopefully, disappears until the next bust. Many homeowners bought their current dwellings when prices were rising. They presently owe more on their homes than they are currently worth. A short sale is when a seller, usually through the help of a realtor or an attorney, tries to negotiate with their mortgage servicer to sell their home at a price substantially lower than what is presently owed on it. Short sales will continue until foreclosed home inventories are sold by banks, the job market employs new faces as a result of business credit being extended by banks and mortgage guidelines become less strict.