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.
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: one out of six FHA-insured loans are delinquent. This is the "blowback" of...
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