The REAL Reason Housing Prices Have Skyrocketed

George Washington's picture

Preface: In Part 1, we showed that mortgage applications are down, and it is really institutional investors driving the housing boom. Part 2 explains why.

Housing prices have boomed because:

(1) Lenders are artificially keeping vacant houses off of the market

 

and

 

(2) The Obama administration has thrown all sorts of artificial incentives at institutional investors to pump up prices

Artificially Suppressed Housing Inventory

Naked Capitalism reported last August:

Two trends are apparent. One is that banks are delaying foreclosures, or not foreclosing at all despite long-term delinquencies. The other is that private equity firms – flush with cash thanks to Tim Geithner’s religious devotion to trickle-down economics and the resulting cascade of corporate welfare – have been bidding up and holding foreclosed houses off the market. These two factors have artificially limited supply and, combined with cheap mortgages rates, driven up prices. While we can debate whether these strategies represent the best public policy, these policies are obviously not long-term sustainable.

 

***

 

Lenders argue the drop in foreclosures is caused by delays in the court system. However, Judge Jennifer D. Bailey, lead foreclosure judge in Miami-Dade County – epicenter of the foreclosure crisis – solidly rebuts that argument. “Here in Miami-Dade County’s Eleventh Circuit, there has been no delay in foreclosure case hearings for nearly two years,” Judge Bailey said in an Aug. 19, 2012 interview with the Miami Herald. “If you want to see a judge to hear your trial or summary judgment, you get a prompt court date.” This coincides with my own observations in foreclosure court, where judges rail at bank lawyers for repeatedly delaying their cases, even when borrowers are in no way contesting their foreclosures.

 

Holding back inventory means that the houses that are put on offer sell faster and at higher prices. That creates an incentive to delay foreclosures or not foreclose at all even when a home is delinquent.

Indeed – in the real world -  12.6 million houses are vacant1.5 million more home than are underwater. In other words, without artificial scarcity created by banks, there would be more available houses than there are underwater homeowners having problems paying their mortgage.  There would – in a word – be a glut.

Government Is Secretly Helping Financial Companies to Snap Up Housing

There are realistic ways to help the economy. For example:

But instead, the government’s entire strategy is to try to paper over all of the real problems with the economy by artificially propping up asset prices  in an attempt to hide the fact (which has been obvious for years) that the big banks are insolvent.

Stocks, for example, are largely being driven by insiders and government policy.

Indeed, we’ve pointed out for years that all of the Obama administration’s “homeowner relief” programs are really just back-door bailouts to the big financial companies … and are not even intended to help homeowners.

Mike Whitney explained last September:

Private Equity firms are piling in to the housing market to take advantage of bargain basement prices on distressed inventory. The Obama administration is stealthily selling homes to big investors who are required to sign non-disclosure agreements to ensure that the public remains in the dark as to the magnitude of the giveaway. Aside from the steep discounts on the homes themselves, the government is also providing “synthetic financing to reduce the up-front capital required if they agree to form a joint venture with Fannie Mae and share proceeds from the rental or sale of properties.” (Businessweek)

 

In other words, US-taxpayers are providing extravagant financing for deep-pocket speculators who want to reduce their risk while maximizing their profits via additional leverage. The plan resembles Treasury Secretary Timothy Geithner’s Public-Private Partnership Investment Program …. Speculators are getting lavish incentives (gov financing, low rates, and severe discounts) in secret deals to buy distressed inventory which should be available to the public at market prices. If that’s not a ripoff, then what is?

 

***

 

Obama’s preferred customers are getting discounts of up-to 60 percent of the home’s peak value and generous gov-backed financing to boot!

 

***

 

As the article above indicates, there’s no shortage of delinquent homes that will eventually be foreclosed. That means the process is being dragged out so the banks don’t have to fess-up to the losses on their fetid pile of nonperforming loans Here’s a little more background from an article in Businessweek

“About 6 million U.S. borrowers will lose their homes in the next five years because of inability to pay their mortgages, creating demand for as many as 4 million new rental households, according to Scott Simon, head of mortgage bonds at Pacific Investment Management Co. in Newport Beach, California….

 

Single-family rentals are priced to deliver unlevered total returns in the range of 7.5 percent to 8 percent, or about 0.5 percentage point to 1 percentage point higher than institutional-quality apartments, according to a June 8 report by Ray Huang, senior associate at Green Street Advisors in Newport Beach, California.  (“Colony Said to Win Foreclosed Homes Sold by Fannie Mae”, Businessweek)[Link.]

If “6 million homeowners” will lose their homes in the next five years, then why are clownshoes media dupes touting a “bottom” in prices and a “market rebound”?

 

It’s all hype. And look at how calculatingly fiendish Obama’s foreclosure-to-rental program really is. The big boys have figured out the nearest penny how much they can make by throwing people out of their homes. (7.5 percent to 8 percent) Talk about heartless. And, of course, this whole process is being orchestrated by President Fairydust and his Wall Street Pranksters to keep prices artificially high and preserve the illusion that the banks are solvent.

 

It’s infuriating!

And if that isn’t hard-hitting enough for you, Jim Quinn writes:

The contrived elevation of home sales and home prices has been engineered by the very same culprits who crashed our financial system in the first place. This has been planned, coordinated and implemented by a conspiracy of the ruling oligarchy – the Federal Reserve, Wall Street, U.S. Treasury, NAR, and the corporate media conglomerates. Ben’s job was to screw senior citizens and drive interest rates low enough that everyone in the country could refinance, attract investors & flippers into the market, and propel home prices higher. Wall Street has been the linchpin to the whole sordid plan. They were tasked with drastically limiting the foreclosure pipeline, therefore creating a fake shortage of inventory. Next, JP Morgan, Blackrock, Citi, Bank of America, and dozens of other private equity firms have partnered with Fannie Mae and Freddie Mac, using free money provided by Ben Bernanke, to create investment funds to buy up millions of distressed properties and convert them into rental properties, further reducing the inventory of homes for sale and driving prices higher. Only the connected crony capitalists on Wall Street are getting a piece of this action. The Wall Street big hanging d[!@#*] have screwed the American middle class coming and going. The NAR and media are tasked with what they do best – spew propaganda, misinform, lie, cheerlead and attempt to create a buying frenzy among the willfully ignorant masses. The chart below reveals the truth about the strong sustainable housing recovery. It doesn’t exist. Mortgage applications by real people who want to live in a home are no higher than they were in 2010 when home sales were 33% lower than today. Mortgage applications are lower than they were in 1997 when 4 million existing homes were sold versus the 5 million pace today. The housing recovery is just another Wall Street scam designed to bilk the American middle class of what remains of their net worth.

Of course, economist Michael Hudson would put it a little differently: banks are trying to roll back all modern laws and make us all into serfs.

In other words, the giant financial service companies are attempting to privatize public resources, socialize losses, scam people out of their homes and other private property … and then rent back to us what we used to own for a hefty price.

Do you understand the game now?

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NihilistZero's picture

It's not the banks that will be upside down.  It'll be the FHA, Fannie/Freddie and the members of these Hedge Funds and REITs.  The goal was to clean the banks balance sheets.  The FED has accomplished about all it can in that regard this cycle so the next cRaSh will commence in the next 12 months or so...  Wash, rinse, repeat.

Doña K's picture

young people are moving back with parents and old folks moving with adult kids thus making, lesser demand for rental. Same with other young people who take in roomates.

Obama and the banks are going to fail miserably.

that 7 -10% profit will never materialize as people will use the tenant laws and stay 3-4 months before they get kicked out. Bring it on

 

tired_of_manipulation's picture

I've been looking for a rental house in CA, and the supply seems remarkably tight.  It certainly doesn't seem like there are thousands upon thousands of investor owned houses on the rental market.  Maybe a few, but most of the rental houses seem to still be mom and pop.  I suspect that most of these investor owned houses and condos are just sitting empty, making somebody big money on paper as prices rise.  With money almost for free, you don't need a renter to cover the interest.  What does Wall Street know about managing properties anyway?  It's probably easier for them just to let them sit like you would a stock that doesn't pay dividends, hoping for capital gains when the big wave of inflation hits.  Only it's going to be a lot harder to sell thousands of houses overnight when you need to raise capital if we get hit with another round of credit deflation.  A mass of investors scrambling to liquidate simultaneously might actually get us to the bottom in housing...   

Dingleberry's picture

Everyone is broke dick. The onyl way they can get a house is with FHA loans and shit like that with little down.

Free low interest money yet again.

The good news is that permanent PMI for FHA loans starts this month. 

 

 

Stuck on Zero's picture

The government has a solution to the lack of buyers.  Congress will bring in an additional 60 million immigrants and give them housing allowances and zero interest loans. 

 

lotsoffun's picture

i've been posting that for 2 years here - and i live in nyc area - and i'm living it.  with over 1 billion chinese and indians ( +2 billion) and h1b visas the rage - to find 60 million to take homes - peanuts.  watch.  it's said.  it is already happening here.

 

ejmoosa's picture

Cash for Clunkers, Home Edition.

El Viejo's picture

Foreign is always better. Didn't you get the memo? That's why so many imports are bought in this country.

autofixer's picture

It depends on your definition of "fail"?  If your goal is the destruction of private property, it seems you may be on course?  It is the Obama way; create a situation where the serfs plead for governemnt housing and "bam!"...you come home one day and there are 13 people living in your former property and you are being dressed down by the communist house cheif and shown to your new quarters. 

IdiocracyIsAlreadyHere's picture

Wow another dumbass calling the current regime "communist".  The correct term is "fascist" or maybe even better "feudalist"  Private property is only being destroyed for the masses, the politically connected can continue to keep their goods.  This is a good site but the comprehension of many of the commenters is moronic.

A. Magnus's picture

Ummmm private property was destroyed with the implementation of property taxes; if you have to pay rent to the government for your 'property' then you don't own it, you rent it. If they can take that property from you for non-payment of said rent then again, the property is NOT yours. Period, case closed. NEXT!!!

jughead's picture

I think the point was that your single-family "rental" is going to become a government mandated multi-family "rental"...most likely with you being the only one paying any "rent".  You best keep the fridge stocked with the government approved foods too.

NickVegas's picture

It's all designed so you, the peasant, can not accumulate capital. You are a hamster, and they need you to keep working, making stuff. If you actually owned something, like your own business and property, you might decide to relax, and not fight it out in a modern rat race.

The system is insidious, planned, battle tested, iterated, and almost self-sustaining thru voluntary slavery, if such a concept can exist. I want to fix it. I want to live in a paradise, a self-created utopia for everyone, everywhere all the time. 

The property taxes are one of the worst abuses of all, in a land of plenty, most go landless. Rootlessly wandering the wilderness, sold into slavery. They want you mobile, not rooted, protected, but exposed, hungry, keeping the hamster wheel spinning, and biting your neighbor trying to get an extra pellet.

I have hope still, our collective conscious can change the outcomes to the benefit of all.

 

 

 

DaveyJones's picture

thanks, I feel a lot better

joak's picture

"almost self-sustaining thru voluntary slavery" : not really voluntary. It's forced slavery. I try to explain to the people I talk to that the system is made to force you to be part of it. Even if you own a land and want to live in autarcy, you cannot, because of those taxes to be paid. There is no escape to that (Altought I heard there are still some parts in the US where you don't have to pay taxes on property). Then debt is the second pillar of slavery. This one you can escape it, but only after you participated a while to the system, unless you got money from a third party.

SilverRhino's picture

Don't want to pay property tax?:   Rural Alaska:  No state property tax but 25 out of 160 towns assess property taxes.   

Starting to look very appealing.  Just don't try to find a woman up there.   

Popo's picture

THIS. There is no property ownership in the USA. It is a broad system of serfdom where citizens rent from the feudal lord, and pay a tithe on their income to the same lord. They can swap properties among themselves, but at the end of the day, all property is owned by the State.

Words like "ownership" are used to provide 'feel good' effects to citizens who have been fed an endless stream of propaganda about individual rights and "land as real property". Nothing could be further from the truth. So-called property "owners" in reality just have leases from the government. Stop paying "rent" (taxes) and you will be evicted. So-called "owners" are also exposed to the whims of the government to raise their rent at any time -- much like serfs exposed to a predatory lord who would demand higher tithes whenever he saw fit.

medium giraffe's picture

'the property is NOT yours.'

"applause"

 

MisterMousePotato's picture

@autofixer ... yes, Dr. Zhivago should be required watching.

On the other hand, well, that house of yours? You didn't build that.

General Decline's picture

This is a barometer to tell if you live in a free land. Plain and simple. Property taxes are rent. My 10 year old son understands this.

DaveyJones's picture

don't "skyrockets" blow up? After a cheap pretty flash?