Monday, May 6, 2013

Beware The Bubble

House prices have shot up over the last year despite a shaky economy, a stagnant job market and a whole host of other economic head winds.

Might there be another bubble?

There might:

Despite the green shoots reported by the Case-Shiller index last week that home prices rose a blistering 9.3 percent in February from 12 months ago, Edward Pinto, a former executive at the government-backed mortgage business, says another crash can’t be too far behind.

Pinto faults Uncle Sam’s housing policy of guaranteeing 90 percent of new loans in the gigantic $6 trillion market through Fannie Mae.

He goes on to say the feds are providing billions in fat trading profits to Wall Street banks and artificially — but temporarily — propping up housing prices.

Sooner or later, he says, economic reality will catch up with this fairy-tale market, which will lead to another depressing housing collapse.

The fundamentals that matter most are falling behind the latest house prices. These include job and wage growth. And that’s amidst a surprise loosening in lending standards and tightened inventory because of the snail’s pace of moving foreclosed properties to market, says Pinto, a resident scholar at the American Enterprise Institute.

Astonishingly, as much as 50 percent of all mortgages today are issued with zero-down payments, which includes many refinanced homes for the banks’ better clients.

In the meantime, Wall Street powerhouses reap their windfall gains, trading these complex mortgage-backed securities.

The Street makes out like a bandit. In this game, banks accumulate nickels and dimes on each side of the trade, profiting on shifting interest rates, mortgage prepayments and other variables — but not on the “real” value of the underlying mortgages.

“The Street makes millions and millions of dollars on these securities,” Pinto told The Post.
“That’s the dirty little secret. The government guarantees repayment of principal and interest payments on a timely basis, regardless of what the borrower does on an individual mortgage level.”
Borrowers also get another lift. The Fed, scrambling to lower mortgage rates, currently near 3.5 percent, buys up $40 billion monthly in these mortgage-backed securities.

But Pinto doesn’t buy it. The trends are remarkably clear, stretching back 150 years through American real-estate history.

“When interest rates go up, which they inevitably will — and we seem to be at the bottom right now — they go up gradually but deliberately over a period of 20 to 30 years,” Pinto said, noting this long-term trend.

When that occurs, the housing market will be hammered again.

By his calculations, if mortgage rates rise from 3.5 percent to 6 percent, incomes would have to rise by 33 percent, or house prices would have to drop by 25 percent, to stave off an otherwise inevitable housing disaster.

Since personal incomes have been static since 2007, that part of the equation is hardly guaranteed. So a home price bust is not far behind, says Pinto.

 Nah - I'm sure this will all end well.

Go ahead, bid up some real estate next weekend.

The market is BACK, baby!

2 comments:

  1. Michael FiorilloMay 6, 2013 at 9:48 AM

    Yes, let's buy houses in Vegas, or Phoenix, or some other future Mad Max city dependent on an ever-shrinking Lake Mead.

    Better still, let's have our pension funds buy these zombie mortgage-backed securities, only to have Wall Street types attack Greedy Teachers and their pensions when the inevitable bust happens.

    It's a perpetual motion machine. Until it isn't.

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    1. Its amazing how fast the media hype machine goes back into action too. That crap at CNN Money that I linked to is barely better than paid advertising for the bubblicious folks.

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