How Healthy Is The Real Estate Market?

Tyler Durden's picture

Submitted by Ramsey Su via The Acting-Man blog,

The strength of the real estate market should not be measured by price appreciation, or the number of new and existing home sales. It should be measured by the support of underlying fundamentals and whether they can help to withstand economic cycles without policy makers having to go hog wild just to avoid a total collapse.

How healthy is the real estate market today?


The Subprime Majority.   Recently, I came across a report by the Corporation for Enterprise Development (CFED) titled Assets and Opportunity Scorecard.  Some of their findings are quite interesting.  According to the CFED Scorecard, 56% of all consumers have sub-prime credit.  Sub-prime is "earned". A consumer has to miss a few payments, or default on a loan or two to earn that status.  These 56% cannot, or should not, be taking on more debt, especially a large debt like a mortgage.  They may also be struggling with a mortgage that they should not have taken out in the first place.  

Liquid Asset Poor.  CFED found that 44% of households in America are Liquid Asset Poor, defined as having saved less than three months of expenses.  As one would expect, 78% of the lowest income households are asset poor, but 25% of middle class ($56k to $91k) households also have less than three months of expenses saved.  Pertaining to real estate, the report suggests that there are little savings to buy and a small cushion for changes, such as job loss.

Income Inequality.  The Center for Household Financial Stability of the St. Louis Fed recently released a study titled Inequality, the Great Recession, and Slow Recovery.  Skip the 43 pages of academic mumbo jumbo and you will find half a dozen of very simple and informative charts, such as the two below.   I will leave the inequality debate to others.  With regard to a real estate stress test, it appears that households are not exactly well prepared to weather even minor economic setbacks. 




debt-income ratios

Debt-income ratios by income groups – click to enlarge.



Net-worth-to-disposable income

Net worth to disposable income by net worth groups – click to enlarge.


The Federal Reserve is Spent.  QE1, 2 and 3 all involved the purchase of agency MBS.  In January 2014, the FOMC announced that it will decrease debt purchases by another $10 billion, from the original $85 billion to $65 billion per month, $30 billion of which is supposed to be for agency MBS.  That appears to be all talk.  For the first 6 weeks of 2014, the Fed has already purchased $74.7 billion, or $54 billion per month.  They are not only continuing the QE3 purchases, they are still replenishing the prepaid holdings from QE1 and QE2.  Mortgage rates are not responding anymore.  Though somewhat stabilized, the current rate (30yr) is still a full percent above the low recorded before QE3 (see the table below from Mortgage News Daily).  



latest rates

Mortgage rates from MND's daily survey – click to enlarge.



Furthermore, Fed members are only kidding themselves if they think they can ever tighten monetary policy.  The national debt is at $17.3 trillion and growing at about $700 billion this year.  The cost of financing this debt, per the Treasury, was $415.7 billion in 2013, crudely estimated at an average rate of about 2.5%.  At the moment, the 3 months bill is at less than 0.2% interest, while the 10 year note is only at 2.75%.  If the cost of financing this debt were to increase by just 1%, it would cost the Treasury $173 billion more a year.  There is no way that the dovish Fed chair Yellen would even dream of doing that.

Therefore, the risk of monetary policy is not whether the Fed will tighten, but rather what it can do to repeat a 2008 style bailout. In other words, the Fed as a safety net is full of holes that re big enough for an elephant to pass through.

Exhausted Government Intervention.  The FHFA just announced that HARP has reached the three million mark.  We are no closer to reforming Freddie and Fannie than when they were put under conservatorship over five years ago.  Numerous State and Local Governments have deployed their own foreclosure prevention laws and ordinances.  The Consumer Finance Protection Bureau has created a mountain of bureaucratic red tape, adding compliance costs to the mortgage industry while providing questionable benefits to the consumer.  The  FHA is now pushing for lending to borrowers with credit scores as low as 580  only one year after major financial catastrophes such as foreclosure.

In conclusion, the reason I remain bearish on real estate is that when the noise is filtered out, the market has only survived by means of an unprecedented amount of intervention.  This dependency is not only unhealthy, its stimulating effect is now fading.  If real estate prices cease to appreciate, the market will suffer, same as it did when the sub-prime bubble burst in 2006/2007.  The Fed has already gone all in and there is little left it can do.  Washington can always create a new set of laws to further erode private property rights as we knew them.  Ironically, price appreciation is also not the answer, as it will just widen the income equality gap, turning would-be home owners into rent slaves of Wall Street's fat cats.  It may be best for the market to freeze for an extended period and let consumers catch their breath.

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unrulian's picture

Canadian Condos...get 'em while they're hot

Raymond K Hessel's picture

I get a hair across my ass when people use a salary range for middle class.  Middle class is a subculture.  What it is not is a family that makes $56-$91 thousand a year.  That's just stupid.  People making a salary in that range is not middle class.  This is working class.  


Poor class then working class, then upper class.  


Middle class is a way of life at all income spectrums.   

Oracle of Kypseli's picture

Agreed. In many European countries, clearly class has nothing to do with income but breeding, manners and way of life just like you describe. 

MisterMousePotato's picture

What do you mean, "In European countries?" Same is true in America and everywhere else.

Everyone should read the book, "Class," by Paul or Ira Fussell (I forget which). Informative and funny as hell.

Bananamerican's picture

"It may be best for the market to freeze for an extended period and let consumers catch their breath."

let it burn. (a renter)

Kirk2NCC1701's picture

Nothing wrong with them when you buy low, sell high.  Same with ANY asset, even BTC and PM.

I once bought a foreclosed condo and got 35% off.  Rented it, then sold it eventually.

AustrianJim's picture

Very good analysis. I do think that the Fed will prove creative in coming up with new ways to screw things up, though.

DavidC's picture

Unfortunately. A bunch of academic wonks who've never had proper jobs and don't understand (or don't care or are not willing to acknowledge) the effects of inflation on the average person.


johnQpublic's picture

the market is broken for sure

my home was refied by the previous owner at 389k

short sale to me 3 years later at 299500

i put 75k in upgrades and improvements over the last 6 years

i have a current offer at 310k

75 days ago i accepted an offer at 337500 but their financing fell thru

over the last 6 months the market has been re-tanking and thats a fact


a friend just purchased a forclosed home in thuis same area for less than the price of an unbuilt lot

yet smaller new homes are being built and sell at 350k+

seriously, what in the fuck


i cannot wait to sell this white elephant so i can move to the place we are building

672 sq ft plus a loft bedroom

14 acres of apple and pear trees with a stream and delicious well water

only bill will be electric and taxes, and chainsaw fuel

Bananamerican's picture

electric? get one of these and build out w extra batteries and panels...

Are you building a "Tiny House™"?

derek_vineyard's picture

zirp knows no boundries

Professorlocknload's picture

Yup, it's a closed loop. The Fed is the economy. It owns, creates and controls the medium of the worlds exchange.


Colonel Klink's picture

Funny how the whole MERS thing and broken MBS pool status were just swept under the rug.

AynRandFan's picture

Eric Holder has been getting his pound of flesh from it.  Of course, the fact that the Fed bought every MBS pretty much smoothed out the mortgage market.

LMAOLORI's picture



Fines are bribes paid to the government to stop imprisonment. That is not the kind of punishment I view as a pound of flesh. Any fines that REALLY are paid are paid by shareholders anyway. Show me some imprisonment for what this has cost the common man or woman who would and do go to jail for a lot less.


In the meantime something else the government lies about inflation....

Food prices soar as incomes stand still


max2205's picture

Housing will double in the next 10 peeps will have to buy a 1000 sq ft what

johnQpublic's picture

are you defining the doubling of housing as renting out your basement to your 36 year old son?

or turning single family homes into duplexes?

or are you saying the dollar will lose half its value over the next ten years?

or 99% of its value with a doubling in the cost of a home?

jerry_theking_lawler's picture

I think he is right on his analysis. The only problem is that food will increase by 200% and energy will go up by 100% increase in housing seems right on.

j0nx's picture

Yeah but your salary will remain flat to falling just as it has for the past decade.

Chuck Knoblauch's picture

Sell one of your organs to the smiling Chinaman living next door to keep that roof over your head. Adopt some kids, start a business.

dontknowcrapabouteconomy's picture

You're right. Housing will double. There will be twice as many new empty houses ready to be stripped away leaving nothing but a 1000 sf ghostly frame.

They'll call it a handyman special.

Professorlocknload's picture

50% + or - devaluation will hold the wolves at bay for another election cycle. It's all the two legged chair knows. It will monetize until it's objective is achieved, PERIOD!

Reset in progress, and if one is left standing when the tunes stop without at least one house to sit in, it's gonna be hard, unless one can get Section 8, the real reason institutions are gaga on RE. After all, it sets a floor under returns and is inflation adjusted with yearly rent increase allowances.

Deflation? Yeah, sure, in our dreams.

TheGoldMyth's picture

Professorlocknload, and foreclosed hoses are simply locked up like gold and taken out of circulation. Ok, maybe it is harder to do with houses due to maintenance issues, but the buyer of last resort principal being the banking system only knows the perfection of its increasingly obvious parasitism.
I wonder if they get charged an annual property tax on foreclosed houses on their books??

Panafrican Funktron Robot's picture

"I wonder if they get charged an annual property tax on foreclosed houses on their books??"

It depends on the state.  In some states, the tax is against the property.  In other states, the tax is against the owner, and if the bank doesn't pay the tax, they are essentially not acknowledging ownership of the property, and the local govts. can go after the last known owner via a tax warrant.  In some states, you can also be sued if some kids break in your foreclosed property and injure themselves, for example, and if you didn't maintain the liability insurance on the property, you are up shit creek.  And, of course, if you have a recourse loan on the house (you live in a recourse state or have a home equity loan), the bank can still go after you for the money, even if they sell the foreclosed house.

Gives new meaning to "the borrower is slave to the lender".  

Chuck Knoblauch's picture

I wonder if foreclosed properties are being used as drop sites for illegal drug trafficing? Hmmm!

Chuck Knoblauch's picture

Fine paid without having to admit any wrongdoing, i.e. an apology at the very least. An apology is not an admission of guilt.

Winston Churchill's picture

Just wait until the CMBS blow up.

Ban KKiller's picture

Great new win in New Mexico! ROMERO v. Bank of New York. New Mexico Supreme Court case THIS month. Banksters? This decision is a shot to the head of the Banksters. Find the case and pass on to other foreclosure fighters. It is huge.

Blankenstein's picture

Irresponsible buyers shouldn't be saved either.  This is just another screwing of taxpayers and those who didn't participate in the  real estate ponzi.  They can go rent like a lot of other people do.  Everyone involved in the process - bankers, mortgage brokers, realtors, underwriters, rating agencies, those who created the tranches and sold MBS - are all responsible and should face foreclosure, fines, jail time, etc. depending on their level of involvement in the whole debacle.  Curious post coming from a realtor.

LMAOLORI's picture


I agree with that so +1 from me but at the same time it really seems far more egregious to me that taxpayers are on the hook for banks who also enter into these sub-prime loans. The banks have all the expertise money can buy (and unfortunately politicians in their pockets who allow them to get away with it).

Blankenstein's picture

I didn't write it out explicitly, but the jail time was for those most deeply involved; like Mozillo (Countrywide), the squid (for designing the MBS tranches to fail, betting against them and then selling them as investments to clients), and those involved in other types of fraud. -

LMAOLORI's picture



If you read that article the keywords are for OTHER TYPES OF FRAUD what he was prosecuted for was securities fraud for fake mortgage mortgage assets or crimes against other banks that he sold them too lol.

I'm happy to see fraud punished but he wasn't punished for for the misdeeds I was talking about (against the taxpayers).

Tortuga's picture

I read the the appeals court ruling on the district courts ruling that the Romero's lost. How's that a shot to the banksters head? Seems too me the Romeros made some bad decisions and were looking to affirmative action their mistakes onto somebody else. That's my read.

Doubleguns's picture

When hell freezes over. These banker slugs can not help thier thieving ways and they would never call a cease fire on the sheeple they fleece. It shall remain game on till we do something about the corrupt bankers. 

Headbanger's picture

But first do something about corrupt politicians who allowed the banksters to fleece the sheeple by repealing Glass-Steagall !

And that something will probably be a very ugly revolt in this country that ruins it for everybody.


LMAOLORI's picture




This tells you what you need to know sbout the likelihood of that happening look where Old Yeller is now...


"Yellen served in President Bill Clinton's White House, which oversaw an aggressive period of financial industry deregulation."

AynRandFan's picture

My family and friends in Texas waited 20 years for the real estate boom, and it is happening.  The local press says 100 move to Austin every day.  I believe it.  Real estate is going up at double digit rates.  My nephew bought a home a year ago for $216k and just sold it for $260k with no improvements.  There was a bidding war.  My sister's house in the Woodlands seemed like it would never appreciate, then in a couple of years it went from about $225k to at least $325k.  Most likely, the reason is the booming oil biz, although I can say out in West Texas it hasn't hit the recreation property market yet.  One reason may be the way real estate is taxed.  If you qualify for an agricultural exemption (i.e., valuation), you pay very low taxes, but otherwise you pay very high taxes.  I have 62 acres in a fairly remote area of the hill country and my taxes were about $6k with a crappy doublewide trailer.

I have property outside of Denver and it has done fairly well, but the market seems very thin (few buyers).  No doubt the residential market is still driven by the few folks who can get financing.  There are still a lot of cash sales.

Obama_4_Dictator's picture

Austin is a nightmare.  I moved here from San Deigo.  The prices are just as high, the weather sucks there are more libs here, traffic is worse, taxes on property are higher.  Absolute nightmare. I can see why original Austintes are moving to Idaho.  

Obama_4_Dictator's picture

Not to mention the water issue.  I think the infrastructure here is going to collapse under all this influx of people.

Tortuga's picture

Water has been an issue in Texas since we moved here in 1955 and if you read a little history, way before that. It will either rain again, or not. The lawns will all die or go xeriscaping, which in some areas of Texas, ain't much difference from dying. Hey, the infrastructure in all our cities is full, even the day after it is expanded. Name me a city that can handle 10000 people a month moving there. It takes 30 days for new concrete highway to dry for crying out loud. The burbs is where you should be looking.

Obama_4_Dictator's picture

LOL, I did do my research.  I live like 30 miles in a differnet county - I almost never go to Austin.

Obama_4_Dictator's picture

I can't imagine communting into Austin from anywhere.  I'm thankful I have my own business and that my Wife works North.

Son of Loki's picture

The crime rate in Austin is out of control. the once wonderful 6th Street is now roamed by small groups of extremely violent Yutes ... the side streets a real nightmare. Turn on the radio in the morning and you now hear 1) crime report who was murdered/beaten, 2) the polltion alerts, and 3) the traffic congestion.

It was paradise before about 2002 then masses of people moved in. They can have it. I moved out a while back to much smaller town, a real paradise.

Obama_4_Dictator's picture

I hear you.  I'm thinking of moving to Taylor or something along those lines.  Even where I live it's far too busy.

Tortuga's picture

Well why the heck did you move to Austin? Didn't you do any research before you made your bed in the libtard, chooming, sanctuary city state of Austin?

And, if you haven't noticed, there are several other cities in Texas but do a little research first, cause hint hint, it's the burbs you want to head for.

j0nx's picture

As Austin goes so does Texas. Just a matter of time before the liberals in charge there start forcing their ideals into communist laws for the state. We were going to move to Austin this year from NoVa which too has already fallen to the liberals and communists and illegal mexicans but all the anecdotal research I've done is telling me the move would be like going from the pot to the pan. It's starting to get to the point where there's no place left to run.