Real Estate: Is the Bottom In, Or Is This A Head-Fake?

Tyler Durden's picture

Submitted by Charles Hugh-Smith via Peak Prosperity,

Everyone interested in real estate is asking the same question: Is the bottom in, or is this just another “green shoots” recovery that will soon wilt?

Let’s start by reviewing the fundamental forces currently affecting real estate valuations.

Expanding the pool of potential buyers has reached the upper limit 

There are two ways to expand the pool of qualified home buyers, and they both rely on expanding leverage:  A) lower the down payment from 20% cash to 3%, and B) lower the mortgage rate to 3.5%.

Lowering the down payment increases the leverage from 4-to-1 to 33-to-1, a massive leap.

Increasing leverage increases risk. Over 90% of all mortgages are guaranteed or backed by Federal agencies such as FHA. This “socialization” of the mortgage industry means that losses ultimately flow through to the taxpayers, who are subsidizing the housing industry via these agencies.

Lowering the mortgage rate increases the leverage of income.  It now takes much less income to qualify for greatly reduced monthly payments.

With mortgage rates barely above the prime rate and Treasury bond yields negative in terms of inflation, there is simply no room left for lower rates or down payments.  The “increase home sales by expanding the pool of buyers” game plan has been run to the absolute limit.

The pool of buyers cannot be expanded any further; that boost to sales is done.

The unintended consequence of enticing marginal buyers to buy homes is that defaults are rising: 1 out of 6 FHA-insured loans are delinquent. This is the “blowback” of qualifying everyone with an income above the poverty line as a homebuyer.

The mortgage industry has escaped any consequences of “robo-signing” mortgage fraud

If the rule of law existed in more than name, this is what should have happened:

  1. MERS, the mortgage industry's placeholder of fictitious mortgage notes, would have been summarily shut down.
  2. All mortgages and derivatives based on mortgages would have been marked-to-market.
  3. All losses would be booked immediately, and any institution that was deemed insolvent would have been shuttered and its assets auctioned off in an orderly fashion.
  4. Regardless of the cost to owners of mortgages, every deed, lien, and note would be painstakingly reconstructed on every mortgage in the U.S., and the deed and note properly filed in each county as per U.S. law.

That none of this has happened is proof that the rule of law is “optional” for financial institutions in America.

The $25 billion mortgage fraud settlement turned a blind eye to the fraud, and now the banks are applying losses they have already booked to the $25 billion, mooting the supposed “benefit” of the settlement to consumers.

The Federal Reserve’s purchase of mortgages – over $1.1 trillion in 2009-10 and now another $40 billion a month – is essentially a money-laundering operation in which the Fed exchanges cash for dodgy mortgages.

Analyst Catherine Austin Fitts (QE3 – Pay Attention If You Are in the Real Estate Market) summarized what this means:

“The Fed is now where mortgages go to die.”


"Thousands of mortgages on homes that do not exist or on homes that have more than one ‘first’ mortgage are now going to the Fed to disappear. Thousands of multifamily and commercial mortgages will be bought up as well. With documents shredded, criminal liabilities extinguished and financial institutions made whole, funds can return without fear of seizure.


QE3 proves beyond any shadow of a doubt that the extent of the fraud was as bad as I said it was. You can count up the bailouts and QE1, QE2, QE3 the numbers speak for themselves. The fraud was indeed in the many trillions of dollars.”

In other words, the financial sector has gotten away with murder, and the “overhang” of systemic fraud has been erased with Fed connivance.

Banks are restricting inventory

The banks are withholding distressed properties to restrict the inventory of homes for sale.

If supply overwhelms demand, prices decline.  That would be a bad thing for banks sitting on millions of defaulted mortgages and distressed properties.  Millions of impaired properties are being held off the market so supply is lower than demand.

The strategy has costs; thousands of defaulted homeowners have been living mortgage-free for years. But the gains have been impressive: with supply dwindling, beaten-down markets have seen gains of 20+% this year as strong investor demand has pushed prices higher.

Since the strategy has paid such handsome returns, why change it?

ZIRP has attracted investment

The Fed’s ZIRP (zero interest rate policy) has pushed investors into a “search for safe yield” that has led many to buy corporate bonds, dividend stocks and everyone’s favorite “safe” fixed asset, real estate. 

In many markets, one-third or more of all sales have been to investors.

Some are buying distressed properties to “flip” in strong-demand markets, but many are buying the homes as rentals with the plan being to hold them for a few years as prices rise and then sell to reap appreciation.

Anecdotally, every investor class is getting into the act, from Mom and Pop to big players such as insurance companies and Wall Street funds.  One of my contacts in the insurance industry told me that his firm was buying large multi-unit apartment complexes, as these rentals generated a yield of 6% to 7%, far above the 1.7% yield of ten-year Treasury bonds.

In a non-ZIRP world, Treasuries and other asset classes would offer similar yields but without the risks and costs of managing rentals. But in a ZIRP world of near-zero yields for low-risk financial assets, rental real estate is a compelling investment: decent yields, relatively low risk, and strong appreciation potential if housing has indeed bottomed.

“The bottom is in” – isn't it?

Once potential buyers see prices rise and they conclude that “the bottom is in,” they jump in and buy, pushing prices higher in a positive feedback loop. The higher prices rise, the more evidence there is that the bottom is in, and the greater the incentives to jump in before prices once again rise out of reach.

Favorable rent/buy ratio

With mortgage rates well below 4%, the rent-buy ratio is favorable in many areas. It may indeed be cheaper to buy than to rent in some locales.

“Hot money” flowing into real-estate

As economies in Europe and Asia falter, “hot money” is flowing into perceived “safe havens” such as the U.S. and Canada. Some of this “hot money” ($225-$300 billion a year is leaving China alone) is flowing into real estate, a well-known phenomenon in markets such as Vancouver, B.C., Miami, and Los Angeles.


What can we conclude from this overview of fundamentals?

  • The mortgage industry escaped any real consequence from its systemic fraud
  • The Status Quo plan to reflate the housing market with super-low mortgage rates and down payments has worked to some degree
  • The financial sector’s plan to boost home prices by limiting supply has also worked
  • ZIRP has created a “crowded trade” in low-risk investments with attractive yields such as corporate bonds, dividend stocks, and real estate, which is being fueled by a self-reinforcing perception that “the bottom is in”

The question now is will these forces continue pushing prices higher? If so, the bottom may well be in. If these forces deteriorate or lose their effectiveness, then the “green shoots” of investor interest may wither as the U.S. economy joins Europe and Japan by re-entering recession.

In Part II: Forecasting the Future of Rental Housing and Home Valuations, we will examine what forces could change "the bottom is in!" to "this is just another head-fake" -- with the real bottom is still ahead.

Click here to read Part II of this report (free executive summary; enrollment required for full access).

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Landotfree's picture

Dead cat bounce, although specific areas might outgain others.    To get over the 2005-2007 high point, not only would you need the illegal aliens taking on interest only mortgages, you would need to start digging up dead people at the cemetry to start signing mortgage docs.

tsx500's picture

hey, don't give the einsteins in DC any ideas !

Landotfree's picture

After Japan went to the 100 year mortgages it was over, here it was interest free to illegal aliens or people with no job.   

It's over, although certain areas may do alright until the next leg.  

Freddie's picture

Our mullah is an islamic version of Mugabe.  Things can only get worse.

redpill's picture

As long as the Fed remains dedicated to re-inflating the housing bubble and foreign investors are pumping billions in cash into the market it is going to be hard for it to fall.  If either/both those things stop and/or we get to the end of the ZIRP era, then it's a different story, but I think it's conservative to say both those things are likely to continue for another 2-3 years at least.

NotApplicable's picture

It's gonna be a long, long zombie movie.

In other words, dead but not allowed to die.

You'll know the true bottom is in once empty house demolition actually creates a noticeable change in UE rates.

tsx500's picture

actually the true bottom will be in the day that i close on the sale of my house !  

DeadFred's picture

For me that close was today. I've heard third hand inside info that the banks will start selling this spring. Do they know of something that will make it easier to offload properties or will the new inventory kill prices?

Bay of Pigs's picture

Yes, in a braindead coma, and on life supoort.

Why? 15 million empty homes that's why.

DaveyJones's picture

my favorite is the part time teacher in detroit buying lots for 50 bucks in detroit and converting them to urban ag.

things are wacky because wacks are in control. To reverse the poet, this will end with a bang not a whimper

TheProphet's picture

What is needed is jobs and more jobs.

Everything else is just financial masturbation.

LawsofPhysics's picture

Has it bottomed, you tell me, what's the average wage again? Is purchasing power increasing or decreasing?  FAIL.

FL_Conservative's picture

Think Linda Blair.  That should help you.

francis_sawyer's picture

I'd characterize it as a 'bottomless head fake'...


OT: I like the new blonde SNORG Tees girl... She has that nerdy JOMG look about her...

MachoMan's picture

OT, I get the google banned this video girl...  who has a rather...  spectacular asset...  albeit from a decade ago (in internet years)

(second pic down)

markovchainey's picture

Thank you VERY much for that!

DeadFinks's picture

Big bubbles, no troubles.

Mr Pink's picture

You made my day! That ad has been driving me insane! lol

FL_Conservative's picture

First one has to have a JOB for one to have even an "average" wage.  Can't pay the mortgage or down with SNAP.

localsavage's picture

It will only get worse when they are forced to raise rates to chase inflation.  Then Johnny Average Wage's paycheck can only buy half of the mortgage that it does now.  Once again, the math always catches back up with the BS.

MachoMan's picture

Which is clearly bullish for housing prices...

NotApplicable's picture

You're acting as if there is a real mortgage market. Meanwhile the soon to be reformed Fannie/Freddie will eliminate the interest bearing mortgage altogether.

Nothing's as easy to spend as OPM. Especially when they don't even have to steal it directly, but instead have a friendly central bankster that will lend it to them in your name.

Odious, bitchez!

ghost trader's picture

 I just have no idea where to put my 36k and whether saving it really matters. Stocks, bonds, real estate, and other investment vehicles are risky and having the money  in the bank is pointless.  Should I just start spending it before it becomes worthless? Please advise.

Debt-Penitent's picture

You've gotta be shittin' me.
You've counted that $36K how many times now and it's worth less every time and now you're on here asking what to do with it? Come on man! Do something with it. Nothing, is foolish.
AG-to-AU ratio is wide right now. So AG bullion would be a start. That'll buy 1000oz. Tulving will please.

TN Jed's picture

FYI and IMHO, Tulving has been uncomfortably slow for months now.  What used to take days now takes weeks.  This is first, second and third person experience.  I think they are performing as a shock absorber for US Mint to deflect any supply problems.  Mint never has issues but that dang Hannes is so mean!  LOL  You will save about $150 on a $17,000 order of silver but the true cost is wondering if you will receive it tomorrow or in three weeks or....

I've directed some family to get their latest elsewhere like Provident.  Got it in 4 business days with zero bullshit for a .30 additinal premium.

LawsofPhysics's picture

Purchase anything of physical value that you and your tribe can successfully defend.  Even physical cash, preferribly coinage, will be valuable when the capital controls and banking holidays really start coming.  still have some time.

media_man's picture

I'd keep it in $20 bills hidden safely away.  When the SHTF you'll be glad you did.

DaveyJones's picture

LOP they hate math. Can you drone attack math? Oh yes, it's called CNBC

virgilcaine's picture

It's been brought back to life like Frankenstein was. Higher prices ( increased unafforadability and increased debt burden) or Lower the end result is debt default.


SheepDog-One's picture

Must. Inflate. Bubble....buybuybuy....

Seasmoke's picture

Bottom is in.......FOR FRAUD !

chunga's picture

See below Seasmoke.

I dare you to look at this and hold down lunch (link goes to ad-free Hamlet - there is no pay per click pimping going on)

chunga's picture

We've yet to hit peak fraud discovery.

This one has it all folks. A corrupt judge, a bunch of foreclosure mills, bogus assignments, REMIC flop, and a reckless house-flipping realtor. Get pitchforks ready...

This is not a conspiracy theory...everything was pulled from Land Records.


Warning...this is for serious sleuths only but has been marked up with hand-written notes to help the reader understand how fraudy these creeps are.

icanhasbailout's picture

My thesis: No actual bottom is possible until the generation that spent its first-house money on college is dead and natural levels of demand across the market are restored.


Also just as predictable are the coming claims of a nominal "bottom" at some point, which will be the result not of stable values but of devaluing the currency.

Blankenstein's picture

Property taxes are almost as much as the mortgage payment in Illinois and they will be going up, not down.  You would be an idiot to pay the current still elevated prices in my area.  The non-distressed prices aren't that much lower than the highs of 2005-2006.  Good luck with those property taxes when they switch those teacher pensions to the local school districts from the state.  

Also, many shop and businesses have closed since 2007-2008.  My theory is that all the buyers of those overpriced shit boxes don't have any extra spending money because they are feeding those huge mortages and property taxes.  

KCMLO's picture

I work for a mortgage lender and can definitely affirm this.  Depending on the county and home price it's not too crazy to see taxes exceed the mortgage payment on a house.  Off topic but I've also seen a higher hazard insurance payment than for the mortgage.  It was for an $800,000 house in the hills in CA, monthly insurance premium over $2000.  It is truly remarkable to see how people piss their money away.

MachoMan's picture

With mortgage rates well below 4%, the rent-buy ratio is favorable in many areas. It may indeed be cheaper to buy than to rent in some locales.

WHAT THE FUCK?  How is it not a virtual universal that buying is cheaper than renting (when you're clearly not factoring in the loss in home value into the "cost" of buying)?  It's been that way for a long time...  In fact, I dare say it's not even close...  most of the rent seeking class (landlords) pays a note on the rental real estate...  how is it that you can make any money competing with prospective buyers if you charge what it would cost them to make home payments (plus taxes, HOA fees, insurance, etc.)?  

At this point, renting is simply a convenience fee for middle america (and most of lower).  The only time one rents is as an "in-between" home/relocation or as a nutter who fears the further deterioration in the housing market (me) and increase in taxes.  Anyone who is planning on permanently staying in an area buys a house (for cheaper than it costs to rent)...  the only thing that can stop this is higher lending standards, which seem to only be slightly more stringent than the peak...  and, understandably so when losses don't have to be booked and perpetual bailouts are the norm.

What's going to happen eventually is that renting will be cheaper than buying, as "investors" compete against one another in a world of oversupply...  and "buyers" are locked out of the credit market

[note: if renting was cheaper than buying...  ever...  then the housing bubble couldn't have formed].

the not so mighty maximiza's picture

[note: if renting was cheaper than buying... ever... then the housing bubble couldn't have formed].

There is so much wrong with this statement I just want to drink myself into a coma.

KCMLO's picture

Interestingly enough, I lived in Las Vegas during the upshoot to the moon and renting was significantly cheaper than buying the whole time (5 years) I was there.  Hence why I refused to buy (and I wasn't intending to stay permanently).  They got it right though at one point during that rant, investors were doing two things:  1) driving the rental market to the bottom as new housing available to rent outstripped demand (people were either feverishly buying their own houses or entire parts of the city were overbuilt).  2)  Rental incomes were deemed fairly insignificant as the real prize was the flip on appreciated price.

Of course we all know the result, but to see it in person was all the more crazy.  To give an idea I was a young(er) punk back then and found that renting a 3200 sq ft house with 2 roommates for $1500 a month was a hell of a value.  The landlord never changed their forwarding address for the mortgage paperwork... they had 2 mortgages on that house totalling just shy of $500,000.  They were losing about $1200 PER MONTH renting at that level.  Unsurprisingly they defaulted on the loan.  The property management company they used (and us renters) didn't know until there was a pay or quit notice taped to the front door.  We were then GIVEN $800 to leave the property peacefully and not strip out the copper piping.  We were allowed to take all the appliances (we didn't buy them).

Fast forward another 3 months and that development was about 66% sitting empty due to foreclosure or failed resale.  The house I rented before that one was in a development that was more than 75% empty by the time I finally left Vegas.  By the way, that "$500,000" house I was talking about?  Sold this time last year for $149,000.

jomama's picture

don't forget the down payment that's well out of reach for the vast majority of what's left of the middle class...

MachoMan's picture

Comrade, report to the FHA lending station immediately.

o2sd's picture

Renting has ALWAYS been cheaper than buying in Australia, and yet we have a property bubble. Bubbles form from credit acceleration, not the rent-to-buy ratio changing.


Joebloinvestor's picture

The bottom hasn't even been approached.

The CORRUPT system refuses to clean up its' act, and the banks aren't loaning any money.

The only people buying are the ones who don't need financing.


HeatMiser's picture

Henry Kissinger  Stated that Israel would not be around in the next ten years. Let's say for the sake of argument he is right. Where do you think all the Israelis are going to go? The bankers stole all of the mortgages and they are going to give them all away to the poor refuges from Israel. So how will that fit into a housing bottom?  It will clear excess inventory.

blunderdog's picture

Well, they keep electing MAD-proponents, so I'd have to guess if Israel isn't going to be "around" in 10 years, most of the current Israelis will be DEAD.

I don't think it's true, though.  I think Israel will be around at least another 20 years.

dolph9's picture

The Jews fucked themselves.

They went "all in" on America and Israel.

In America they stole so much from the whites and gave so much to the blacks that everybody's broke.

In Israel, they are surrounding by hundreds of million of Arabs that will be really pissed when the oil wealth stops trickling down.


Latin America is a possibility, I guess.  I doubt Asia would take them.

Tommy Gunner's picture

Check out The Israeli General's Son ...


Hope you can forward that around

jim249's picture

If Israel is gone in the next 10 years, than the entire middle east will be a chunk of glass.

Cycle's picture

Bernanke does not understand  the operations of a free market, giving rise to his attempts at manipulation by "fixing" the discounted time value of money. Basically he has kicked in and destroyed one of the most important data points for making future business decisions, the real discounted time value of money  Ergo, trying to figure out how much real estate (or anything else for that matter) will be "worth" at some point in the future is futile.

As business everywhere makes decisions based on falsified data, it will induce the conflagration of even more borrowed capital as it is invested in enterprises that have business plans where interest rates stay at ridiculously low levels for extended periods of time. None of them will survive, unless taxpayers bail them out, when the falsification is finally discovered by the market.

The import-export data seems to be reasonably valid, and that shows that the US economy  has been in an unsustainable mode of overconsumption and underproduction, and no amount of Bernankization can "fix" it.