In 2004, I sold my residential investment property over concerns of a market top. In 2005, after that property rose nearly $100,000 more in market value, I registered with over 100 banks and asset management companies to become an REO broker readying myself for the next big wave in real estate. Eventually it occurred, and in 2006 I sold my first bank owned property. Today, after selling over $55 million in bank owned properties, the market once again is not seeming normal by any stretch of the imagination. In fact, it feels like 2005 all over again except with prices having already dropped 40 to 60% in most markets from the market peak of that year. It seems the housing craze of that time period is once again upon us.
How could this be? Didn't we learn our lessons back then and make some dramatic financial reforms to avoid another mess like the last one? Well, it appears not and to me this "false" sense of an improving market is even worse than the last one. It is taking a financially and emotionally "beaten and battered" homebuyer and "tricking" them into getting back into a "game" that likely shouldn't be played at this time. I refer to it as a game because to me this market is being rigged by the abundance of cheap money once again.
When a game or market is rigged, usually no one but the one in control wins. In this case, I seriously doubt even the rigger (our government and the Federal Reserve) can come out on top here either. They don't recognize or don't want to acknowledge the seriousness of the economic perils that this country faces. So, they try to stimulate growth by encouraging spending with cheap money whether in housing, autos, or anything else. The problem with spending at this point is it is not sustainable should that spigot of cheap money get severely reduced or cut-off entirely, and it will.
Seriously, what individual or financial institution would be willing to carry a 30 year mortgage on a home at an interest rate of 3.5% today even with a well qualified buyer putting 20% down? Forget the loans being made to low-income and zero-down payment buyers. The risk/reward tradeoff of this market is not in balance. The market has shifted away from a real capitalistic or free-market approach of assessing this trade-off to one that is government controlled. When the Federal Reserve fed funds rate is 0.25% for what banks will be charged for use of funds to lend, and then the government, through the "ownership" of Fannie Mae and Freddie Mac purchases home mortgages from these financial institutions, we have a housing market imbalance of catastrophic proportions. There are no real checks and balances in this scenario.
Of course, everyone will say this has been going on for years ever since the establishment of these government sponsored enterprises. Fannie Mae was established in 1938 and Freddie Mac in 1970 to coincidentally "prevent a monopoly" by Fannie Mae. The end result is we still have a monopoly by our government as both entities are now fully backed by taxpayers. How can any institution appropriately assess risk when they have the hand of the taxpayer absorbing any and all losses? When our government can no longer play this game of charades who's going to be there. How will housing survive?
Here's a thought. Through huge government deficit spending since the 1980's and the sponsoring of these secondary housing market entities, we experienced years of growth through consumption and a mis-allocation of financial resources to markets that may not have been there had there not been such vehicles to spur this growth. Maybe a 'true" market would've allocated financial resources to more city high rise residential "projects" rather than suburban sprawl. Maybe we all can't afford these larger suburban homes and eventually they will be priced down to a level that we can, similar to how a condo in a city might be priced and possibly lower given the cost to commute, cost of services to service, etc.
In any case, like 2004 I may be early in understanding when this market will peak and continue it's slide down but I do know like back then that this market is not real and anyone in the game better have a strategy beyond the foreseeable future. Yes, the government could keep mettling with things and keep the crisis at bay for some time. However, eventually a "true" market will right this ship and this storm will pass leaving a wake of destruction once again in its path. Unfortunately, this housing cyclone has not been reduced from a Category 5 even after wiping out a huge amount of property wealth with the first phase. We're still living in the eye!
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