The wealth-building potential of the US housing market was reliable and predictable for many decades following the end of World War II. But today, it’s becoming clear that this “wealth-building potential” has been hijacked. Thanks to the Federal Reserve in particular, and their accomplices at the big banks and hedge funds, the US housing market is no longer the free market enterprise that it once was.
Real estate has become a much more risky investment for the typical small investor and first time home buyer, who once were the backbone of the housing industry.
Yes one can still get rich investing in housing, but chances are, that “one” is not you. The game is now controlled by massive financial interests who have found ways to take over virtually every aspect of the single family market. The free flow of trillions of dollars, made available to big Wall Street connected players has allowed them to buy up housing to the point that they are literally manipulating housing data. There is no reliable housing data coming out of Washington or the National Association of Realtors at this point. It’s all rigged and massaged to look like business as usual, when nothing could be further from the truth.
And I’m not the only one who knows this is true. There are much bigger players than me who are also doing what they can to sound the alarm bells. Here is one example from none other than former congressman, economist and Reagan Administration budget director, David Stockman. Stockman understands the situation like few others, and is one of the few men left in Washington with the moral clarity to speak out about it.
The federal government is no small player either. Beginning with the creation of Fannie, Freddie, Ginnie and a host of other government sponsored agencies, they foist high cost loans on low income borrowers, under the guise of “affordable housing”. In fact, if you do the math for yourself, you’ll find that a typical borrower, with an FHA insured mortgage at 6% interest and a 5% down payment will pay more than $400,000 for a $150,000 home, with a 30 year mortgage. I recently wrote a piece that took a closer look at how outrageous housing finance costs really are. You can read it here.
The entrenchment of taxpayer-backed mortgage insurance has merely protected the bankers against losses at the expense of the same taxpayers who are also struggling to make those bloated mortgage payments. The 2008 crash was ample evidence of how the Fed and the banks created the problems, then ran to Hank Paulson and Tim Geithner at the Treasury Department, for financial cover when the “little guy” homeowners began to drop like flies under the weight of too much mortgage debt. Who got the real bailouts when the housing-poop hit the fan? We all know the answer to that one. The Fed and the Treasury made sure, (and are still making sure) that their banking buddies got what they needed, while leaving homeowners on main street to fend for themselves.
Oh sure, there is HARP, HAMP, and a host of other confusing lending programs designed to “help” homeowners who are struggling with mortgage debt. They have nice sounding names like “Home Affordable Refinance Program”. The idea is to supposedly reduce monthly payments so that they are more “affordable”. But this is a total crock because these loans do NOTHING to reduce debt. They only reduce monthly payments, which adds more interest costs to the loan, making the mortgage even more difficult to pay down. And the re-default rate is very high relative to historical standards.
When you do qualify to refinance under one of these programs, the fees and closing costs added to the loan balance leave the borrower with even more debt than they had to begin with. These programs are really protecting the banksters by helping to avoid an all-out foreclosure tsunami that would deflate housing prices further, rendering many of the insolvent banks even more insolvent.
Even the NAR, (who never met a government insured mortgage that they did not like), is complaining about the high costs of FHA mortgage insurance. Never mind that the NAR insisted that FHA take up the slack when the secondary mortgage market virtually collapsed in 2008. Now they are complaining about FHA insurance rates, which have reached an all time high thanks to a record default rate on FHA insured loans. This is a clear case of “the pot calling the kettle black”. The NAR says whatever they need to say, regardless of the facts on the ground. If you have forgotten this, here is a reminder.
The housing market has become like a big casino where, as usual, the games are rigged in favor of the “house”, i.e. the Fed, the big banks and the hedge funds who have now twisted the rules to favor themselves over the small investors and home buyers. If you are a typical investor or first time home buyer, you should proceed with extreme caution. Most of the housing market reports that emanate each month from the usual suspects should be taken with a big grain of salt. The NAR, the Federal Reserve, the banks and various federal housing agencies all have a vested interest in good housing news, and they find creative ways to produce that good news on a regular basis.
I’ve been in real estate for almost 20 years, with 14 of those years spent working on the investing side of the business. I’ve had rental properties of various sorts and dealt with hundreds of tenants. I can tell you that I’ve never seen the level of difficulty that tenants are having trying to stay current on rent, combined with steadily growing expenses that investors and home owners are facing. Property taxes and insurance bills are eating up a greater share of cash flow than ever before.
Investment companies are offering some of the most ridiculous “investment opportunities” that I’ve ever seen – in one common example, I regularly get pitches via email for “deals” in which the investment company-seller claims that a 1000 square foot property in anywhere, USA is worth $275K “as-is” and the After Repair Value will be $450K AFTER you complete a $150K rehab to add an entire second floor! This is the height of investment absurdity, and is well beyond “normal” investment activity from years past.
Now that the hedge-fund / investment companies have slowed their home buying activity, we’re about to have a “come to Jesus meeting” over near term housing data, which will begin to reveal just how much the Fed-funded buying spree has managed to artificially inflate home values. Of course I expect that this data will be massaged as well, in order to keep the party going just long enough to sucker the little fish in for the kill.
If I seem somewhat sarcastic or even angry about what is going on, well, I am. The Fed and big banks are killing the middle class “goose” who used to lay the golden eggs. Their accomplices are a “who’s who” of the institutional and professional housing industry lobbies. They continue to spin the happy news of a housing market recovery, when in reality they have sucked 7 trillion worth of equity out of the pockets of home owners, cost the US economy millions of housing related jobs and threatened the very existence of the US middle class. It’s a quaint notion that we could ever return to the “good old days” when home values actually DID go up every year, for all the right reasons. If there ever were a time to be cautious about buying a home to live in or an investment property, this is it. Play it smart, do your own due diligence, and don’t buy into the industry propaganda.
About the author: Donna S. Robinson is a 18 year veteran of the real estate industry and residential real estate market expert. She coaches real estate investors to improve cash flows while reducing risk. She has authored numerous books and CE courses on real estate market fundamentals and investing strategies. Follow her on twitter @donnaconsults Watch her videos here. read more articles and contact her about coaching or business consulting services on her website.