Michael Olenick: Rentals Gone Wild

By Michael Olenick, creator of FindtheFraud, a crowd sourced foreclosure document review system (still in alpha). You can follow him on Twitter at @michael_olenick or read his blog, Seeing Through Data

… as Winston well knew, it was only four years since Oceania had been at war with Eastasia and in alliance with Eurasia. But that was merely a piece of furtive knowledge, which he happened to possess because his memory was not satisfactorily under control. Officially the change of partners had never happened. Oceania was at war with Eurasia: therefore Oceania had always been at war with Eurasia. The enemy of the moment always represented absolute evil, and it followed that any past or future agreement with him was impossible.

George Orwell, 1984

Situated on one side of one hole of the McDowell Mountain Golf Club, on a cul-de-sac, is a 3BR, 2 bath, 2,000 square foot home for rent for the price of $2,150/mo. On the other side of the hole, on a different cul-de-sac, is a 3BR, 2 bath, 2,005 square foot house for sale with an asking price of $310,000.

Our rental, which doesn’t have a pool, is across the street from a house that sits on the golf course: it seems to have a small back yard that backs up to another house. Our house for sale sits on the golf course and seems to have a very nice pool. Public records indicate the house for sale was last sold to its current owners for $696,000 in February, 2006 whereas the house for rent was last sold for $250,749 in Dec., 1999. I’ve never been to Scottsdale but a quick check of other houses suggests both prices are reasonable.

Some quick math shows that with a 30-year loan at 4% interest the nicer house, on the golf course, would yield a monthly P&I payment of $1,183.99 after a $62,000 down-payment plus closing costs. If a buyer qualifies for a 3-percent down-payment they’d have to raise $9,300 plus closing costs which would yield a monthly payment of $1,435.59.

There’s no ambiguity: even with taxes and insurance taken into account it costs much more to rent a mediocre home in the same neighborhood than to purchase a really nice house.

Though it isn’t marked as such the home for sale screams short-sale; it’s price has been reduced and it’s being sold “As-Is.” There’s a fine chance some servicer, after a dozen rounds of “lost documents” and chain-yanking, will seize and auction it to an investor with a bundle of cash for less than the $310,000 asking price. That’s less than half the price it fetched at the height of the bubble, who will then rent it for a tidy profit while waiting for prices to increase.

News articles have been appearing all over about investors paying cash for properties in bubble-states. Phoenix-area homebuyers squeezed out by investors, reads a piece in the Arizona Republic which notes that “cash is king.” In my own backyard, here in Florida, Miami condos have apparently appreciated 49% in the last year alone according to Bloomberg, which points out about 2/3rds of all buyers pay cash.

Irrational exuberance seems to be back in vogue in the bubble states, never mind shadow inventory figures so high that nobody can grasp exactly what they are. People, probably those kicked out of these same houses, are “willing” to pay a premium for rentals, which may make sense when one considers that even inflated rental prices are still less than their bubble-era mortgage payments.

One theme we hear repeatedly is a lack of “inventory,” homes for sale, which is predictably driving up prices. Remember all that talk about foreclosures driving up home prices? Apparently the foreclosure slowdown caused by Robogate instead seems to have done exactly what Adam Smith said it would leaving bankers, economists, and investors shocked — shocked! — at the recent gains in real-estate prices. Infamous Robosigner Linda Green appears to have done more to increase home prices than every government program combined leaving investors and home flippers, reckless villains in the meltdown narrative just last year, as this year’s heroes.

It’s not only private bankers doing this: government-owned but still “private” Fannie Mae and Freddie Mac are selling properties in bulk to investors. Brazenly ignoring their Congressional mandate to minimize losses by selling to the highest bidder (rather than the friendliest), while working to promote affordable housing, they instead work to empower and subsidize high-volume property flippers and land sharks.

These artificial increases are, of course, unsustainable. I have a friend who works for one of the local towns near me here in South Florida. He’s a city employee but with budget cuts worries about his job, part of which includes boarding up empty houses. Lately, however, the empties often aren’t empty.

It’s not uncommon, he says, to board up a needle-strewn empty one month only to be called back by police to board it up again a month or two later. Except that the new occupants aren’t crack dealers: they’ve often done the servicer’s work and cleaned it up. It’s not unusual, he says, to find that they’ve done basic repairs, and one even installed new appliances. OK – that was unusual; it seems the appliance installer rented the house from a random scam artist, paying a security deposit plus first and last month’s rent. Police, of course, will do nothing.

Banks are obviously manipulating the housing supply in an attempt to reignite a bubble to hide their losses, a strategy that’s temporarily working.

Book publishers were recently sued by the Dept. of Justice for price fixing, using similar practices. But I guess they’re not too big to fail. Indeed, I’m half surprised government hasn’t labeled book publishers a national security threat given the problems we’d face if people read and educated themselves about basic economics.

So here we go again. Backyard investors will soon be saying “it’s different this time,” arguing that those rents will never fall as they sink their retirement savings into the same houses that wiped out the retirement accounts of the previous occupants. But Mr. Smith’s invisible hand always wins in the end, sometimes with a gentle nudge and sometimes with a violent smack. There are too many houses for too few people and no private funding anywhere on the horizon. As long as those basic fundamentals hold true it’s not a question of if, but only when, the rental bubble bursts and how much damage it will inflict on everybody else.

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  1. CB

    I know the law in America is fast declining to whatever you can pay for but is Florida leading the way? The Somalia of America, so to speak? The (current) American capital of lawlessness. It already has a reputation as a repository of online scamsters.

    I have a friend who wants to buy a house there. I think she’s crazy, but she believes her upper middle class shield will hold.

    1. Observer

      My theory: criminals tend to pile up here because Florida is literally the end of the road (I75).

      1. Observer

        Plus, we have a storied history of real estate scams. Wanna buy some swampland? Seriously, you can’t get sinkhole coverage here.

        1. Dmc

          Haa…! So true, just like New Orleans is the catch basin of all that floats downstream. Here in Sarasota we’re getting the low inventory meme, think it’s time to sell this place…. Shame, ’cause it’s damn beautiful here. Siesta beach is as nice as any in the whole world.
          REO is moving at 80% off, but single fam is supposedly tight.

        2. CB

          “Oh, boy, can you get stucco!” One of Groucho’s funniest lines. Perfectly delivered, of course.

          1. Literary Critic

            Plus you and your Chico have a Harpo’s chance in Hell with the legal system all Gummo.

            Makes you wanna take a Zeppo lighter to it all and go for the FIRE insurance.

          2. KnotRP

            The capital risked to rent?

            The capital risked to buy clouded/unknown chain of title?

            Whenever you think prices are out of whack,
            you need to realize they aren’t — the unexplained
            difference is *risk*, as perceived by those who
            choose to pay more to rent house #1 than buy house #2.

      2. rotter

        THE U.S. is and for long has been, the prefered destination of the sociopathic refuse of other nations, scammers, con men,speculators, flim flammers, snake oilers, and other species of would-be capitalists, since the first boat arrived. They have never stopped arriving since.

    2. Stephen Richardson

      Does your home payment figure include property tax? Just curious to get us a good idea what the margin would be for that initial 60K investment.

      As far as opportunity costs are concerned what would be the returns on alternative investments with an increasingly opaque and flagging demand for business goods and services.

      1. Michael Olenick

        Nope – property taxes aren’t included. Property taxes vary so much by region I wasn’t comfortable guessing from afar. I assumed property tax would be washed out by savings from the mortgage interest deduction; the buyer may even come out ahead. One note is there’s obviously capital risk w/ buying when there isn’t with renting and I still think even these rock-bottom prices still have plenty of downside until shadow inventory and foreclosures are brought under control.

        On opportunity costs w/ other investments it obviously depends on how an alternate investment performs. Until there’s adequate sunshine into shadow inventory that we’re not guessing anymore buying does remain risky.

        1. bulfinch

          “Nope – property taxes aren’t included. ”

          Here in Austin, that would tack a nice 7-8K annual premium onto the price. Like you there in Florida, we have no income tax, (which is what all the real estate bulls here are quick to whip out) but unlike you, our property tax rates are close to 3% in some areas.

  2. chitown2020

    This is all being committed by yet more criminal fraud and deception. The FED are swindlers, liars and dirty thieves who are themselves buying our homes and all of our properties back via so called investors. WE THE PEOPLE funded and paid for everything they are stealing. These FED crooks don’t hold legal title unless the can swindle you into signing off on your property by short sale or other fraud. We The People hold legal title and have since the FED crooks committed the Origination Fraud and they never lent us any money. Wake Up America! The FED is stealing everything from us under the guise of money lending when they never lent us a dime. The FED are the insolvent debtors who owe the U.S. TAXPAYERS hundreds of trillions in fraud! Don’t sign or agree to anything they offer. They are criminals running criminal institutions who need to be shut down and they need to go to prison.

    1. CaitlinO

      Collusion between banks, politicians and at times (yes, Florida, I’m looking at you) the courts is both infuriating and tragic.

      But, really, the Fed owes taxpayers HUNDREDS of trillions? The entire annual global GDP is less than 70 trillion.

      I think this is a case where the truth is terrible enough and exaggeration actually weakens the argument.

  3. Foreclosureblues

    i believe when you say they are trying “to hide their losses” i think that is incorrect…i don’t believe they care too much about the balance sheet, they don’t need to be solvent…they only care about cash generation…and by stealing the homes from the investors they have already busted out…it’s free cash when liquidated…now they do care about trying to maximize their cash flow from the stolen property…

    i think it is their intention to ultimately gain title to every property on the planet eventually…and they have already made a giant step in that direction…

    and they don’t mind selling to their crony LLC’s for what amounts to property management….

    also fannie and freddie need to maximize cash flow the same way too…every judge and govt employee’s pension depends on it…

    they only view our revelations and illumination of the truth as an inconvenience…and they intend to march on…they are very good at what they are doing…debt enforcement…and they do not intend to squander the opportunity the fraud induced bubble has created for them…

  4. Will the landlord

    In most large markets, the rent curve is inverse to the sales curve. So when the rent bubble pops, I sell into the forming sales bubble. When the sales bubble pops….

  5. rjs

    still cant understand who’s gonna buy (or rent) these things…kids are graduating with a mountain of debt & more than half are underemployed, flipping burgers or emptying bedpans being the only jobs out there…

  6. Literary Critic

    I question whether we really have a rent bubble. Sure many would rather rent a house than an apartment – for some with a larger family it’s almost necessary – because people building apartments never considered this a market to serve, so the apartments we have are functionally inadequate.

    But if you dig into our new housing construction data, which is heralded with overblown trumpet, of course, you find the majority of new construction is multi-family.

    So its hard to imagine any sustained general rental price level. Except in local areas where other things drive prices – like no new construction in a crowded city.

    But from my own single person perspective, my perfectly suitable apartment has increased in rent a cumulative 8% over 6 years. And I have a better view than anyone in Scottsdale.

    1. skippy

      I thought Tim Burton’s Edward Scissorhands nailed it.

      Skippy… Have nice Senorita Limonita for me.

  7. Aaron Layman

    It’s hard to disagree that the low inventory is a mirage. The real estate market has been so manipulated that it’s impossible to know how much shadow inventory there really is.

    One thing that’s really frustrating working in this market is dealing with these bailout-out banks and their policies for REO property. When they do finally get around to listing a home on the market, the value of the home is unnecessarily depressed because buyers are forced to qualify with a bailed-out bank branch before their offer will even be considered. This is an issue which should have been addressed in the mortgage settlement. Why should buyers have to qualify through a too-big-to fail bank that wouldn’t even pass a real stress test? Buyers should be able to submit offers on REO property with any bona-fide lender approval. These banks should have lost the ability to dictate terms the minute they asked for a government/taxpayer bailout.


    1. CB

      Shoulda, coulda, woulda. We’re not in the land of the law, any more. We’re in Banksterville.

  8. ambrit

    Looks like a good case for State Banks. Charter them to focus on ‘stabilizing’ housing, and use the states power to enforce compliance. Being in the Deep South, a States’ Rights’ arguement should gain traction easily. Out flank Wall Street if you will.

    1. different clue

      Maybe there’s a way that argument and/or stated goal could gain traction in the non-South as well. Start speaking of Blue States Rights and defining and describing what that would mean to Blue Minded people. And then get Blue States people to think in terms of Blue States Rights to drop out of the Red State Race to the Red State Bottom.

  9. Stuart

    This really makes no sense. The claim is that lenders are artificially raising prices by withholding inventory from the market. Yet the evidence says the opposite. The buy/rent ratio in the big bubble states sharply favors buyers. So prices aren’t artificially high. The logical conclusion there is that buy price is still very low.

    Too much credit is being given to lender’s wherewithal to manipulate the market. It require forethought. Lenders have never been any good at managing distressed assets. Bubble after bubble they do it wrong, and investors make all the profits. And like the naive buyer, who believes it will be different this time, the “smart” bank critics think this time will be different with the lenders. This time they have a plan and know what they’re doing. They don’t. They still can’t manage distressed assets. At very best, occasionally their incompetence proves to be the right move.

    1. Michael Olenick

      Buying prices are low, especially compared to rentals, but they’d be lower still if banks would sell their empties. One good example is the comment above where a person noted that their rent has only increased 8% in the past eight years. But the price of real-estate during the same time has decreased dramatically; rents should have followed.

      I’m don’t think banks did this on purpose: I think they stopped foreclosing thanks to Robogate (forget being bad at maintaining only non-performing assets: servicers are lousy lately at maintaining any asset). But after the fraud-inspired foreclosure moratorium they noticed some price stability, especially in bubble-states, and realized the laws of supply and demand are still in effect. Only then did they start a push to keep empties empty.

      1. Stuart

        I think you’re right, prices would be lower. But I think there’s an implication that the lenders are intentionally manipulating the market. The results may be the same, but attributing that kind of competence to bankers is a stretch. They didn’t plan the multiple foreclosure moratoriums. They didn’t plan the incredibly misguided, badly designed and poorly implemented federal programs. They didn’t plan the cluster-fcuk that robo-signing became.

        But these, and other factors, including lender’s own inability to efficiently deal with REO over the last 3 years have served to maintain an equilibrium in the market. The slow trickle of foreclosure to market properties has not been in their best interest. The snails pace that exists in the short-sale market is not in their best interest. All more evidence that their failures in past RE bubbles have taught them nothing about managing distressed assets. On the bright side, their incompetence has been good for the market.

        I’ve seen little evidence that highly efficient distressed asset managment would have served any purpose other than a steeper drop in prices, and an identical recovery. Prices wouldn’t be any higher now if banks had done a better job. Success has been a function of their incompetence.

      2. Small.Business.Guy.1

        Been our experience locally (across multiple counties) that the rental market isn’t improving, which one would expect if the banks were actively (or otherwise) withholding housing off the market.

        The market for rentals (existing rental units pre 2008) actually looks to be slightly weaker than back in beginning 2008. This shouldn’t make sense if the banks are pulling housing availability off the market, because if supply goes down and demand stays steady, then prices should logically increase.

        Isn’t happening, and I’m talking both central IL all the way through northern IL out in the far western suburbs.

        Btw, our experiences have been that the banks are hopelessly inept at managing their current property inventory. The concept of increased bank owned property inventory is a frightening thought.

      3. R Foreman

        Could be that as people were pushed out of homes, some of these entered the rental market (the other ones moved in with relatives), and the rental prices were sustained or pushed up.

        I think getting interest rates low to get people back into performing loans (and stealing houses via illegal foreclosures) was definitely one of the Fed’s goals, but rental prices staying high was probably an inadvertent side effect.

        1. Literary Critic

          My guess is that has something to do with it.

          I’m in a 400 unit apartment complex and over the last 2-3 years I’ve noticed a big increase in renters with K12 age kids.

          My guess is many may be displaced homeowners.

          I don’t doubt this purgatory of empty houses has effect on both rental and home prices, until they start coming on the market finally, and sold to either homeowners or landlords.

          To Michael:

          I neglected to mention that my 1 br. rent is around half of what you think a FL condo HOA fee is. That’s why I’m not too perturbed about my 8% over 6 year increase.

          But I’m in a unusually low rental price city. Housing prices are well below the national average too, tho in 2005 they went up 30% in one year and have been slow to fall.

          1. Literary Critic

            Which, BTW, if you want to look at something like price/rent ratios in a sensible way, and realize that we did have years where housing increased 15-30% in one year and no rental property manager would do that with rents, then you would need to smooth prices and rents over multiple years.

            Schiller does that with stock P/E ratios, and everyone (except greenspan) says the real estate analog is price/rent ratios.

            The time frame for smoothing RE may be 10 years or so I would guess.

      4. hjablome

        One good example is the comment above where a person noted that their rent has only increased 8% in the past eight years. But the price of real-estate during the same time has decreased dramatically; rents should have followed.

        What? The Case-Shiller in dec is the sale place is was eight years ago. And rents walking lock-step with prices? Come on. Isn’t there a huge difference between market that are driven by signing a 1-year rental agreement and those that take cash down, a 30-year obligation, and a real credit history?

        Your rent/price correlation assertions don’t seem to hold up to even arm-chair questioning. What am I missing?

  10. Little voice in texas

    I live in Austin, Texas where the high rise condo market is booming. I know of sales managers in these buildings who say most purchases are done in cash and most buyers are from the southern border with Mexico. The only money to be made down there is in the drug trade. The exact process of how the cash is funneled into the condo market I am not sure of. We have junkies who are dependent on the drugs, law enforcement and prison industry dependent on criminalizing drugs and now banks and real estate sectors dependent on the drug money. I guess local govt is also dependent on property taxes on these units as well.

  11. Lambert Strether

    Interesting that this thread is all about cash, and this other thread today is all about abolishing cash with digital money.

    Since the 1% are looters and thieves, presumably they intend to continue that practice with digital money. Since this seems to be the scam artist thread (the other thread is the local currency thread) does anybody have any idea what happens when a kleptocracy implements digital money?

    1. Nathanael

      What happens is, people stop using the digital money.

      It’s way too easy to steal money if your marks don’t have a paper record of the money they’re supposed to have.

      If they start defrauding people who kept their paper bank statements, it won’t be long before a large fraction of *wealthy* people refuse to use anything but cash, and that blows up the kleptocracy quite fast.

      This is just another example of “kleptocracy destroys itself”. It’s kind of boring to me at this point; the question is what comes AFTER the kleptocracy is destroyed, which is why the local currency thread is interesting. :-)

  12. Nathanael

    So the big question in housing is: how long do you have to live in a house to claim it under “adverse possession” under each state’s laws?

    This is going to be the determining factor for land ownership for the next decade or so. Have no doubt about that. Remember that possession is 9/10 of the law….

  13. mutt50

    @Little voice in Texas;
    Lots of drug money (billions) sloshing around in the economy, but no one knows were it all is. Have any of the econ shamans done a study on where it might be?
    It might embarrass some people. but the war on drugs, as you pointed out is a business.

  14. steelhead23

    Although the unsustainable must come to an end, it has flat stunned me how long the unsustainable can be sustained. The dynamics involved are massive. One would have thought that given the unbelievable whacking the dollar is taking from the Fed that it would be worthless by now – but it is not. Why? Hell, I can only guess. In part it is due to the fact that all global currencies are fiat, so one unpayable IOU is worth as much as the next unpayable IOU. And it is important to keep in mind that Americans will buy anything – and everything. We may not BE the market, but we are darn close. Meaning that if China wishes to continue generating revenue, it must keep prices low (in dollars) to maintain sales. And of course rents are rising. After all, the housing market is dead from the homebuying public’s perception as the “housing only goes up” mantra has proved wrong, once againg. Think about it. Why take on the risk of buying a home when prices are soft and the economy on the ropes? Why not let those with the risk appetite take the risk?. Sure, renting is not a long-term solution to one’s housing needs, but, like you said, that which cannot be sustained won’t be. Most of us kids have learned not to juggle with knives – the others soon will.

  15. Dan

    Please, stop misusing “The Invisible Hand”. The Invisible Hand isn’t the free-market self-adjusting, it was the non-market based feedback to “Buy American” or “Buy Local”, or even “Buy from companies that pay their workers a livable wage” which of course is invisible because it doesn’t exist.

  16. Dan Munro

    Easy analysis – perhaps too easy. There are several key points missing to this.

    1) People can’t qualify for the loans – having nothing to do with the interest rate – and everything to do with LTV (Loan-To-Value). Unless you’re putting down 20% (financing the 80% balance) – lenders are rejecting new loans – even to existing borrowers (ie: existing customers). This is the full effect of the pendulum swing – from NO real qualifying (NINJA loans) – to NO lending.

    2) In this climate – assessing Loan-To-Value is complicated by appraisals that are still happening in a down-market. Remember too – many of the appraisers/appraisals – were done on the same property – by the same people – who once said a property was worth $600K when today it’s worth $200k (maybe less). That’s reflective of the market (not the appraiser) but who’s to say how much of each? Remember – as a lender – you’ve gotten badly burned here – so now the sentiment is to be overly cautious.

    3) We’re not out of the woods yet. Lending are still holding tons of REO/Foreclosure’s on their books – and until that inventory is resolved – the overall pressure is DOWN.

    1. Walter Wit Man

      Good point. My longish post on this subject doesn’t appear to be showing up below, but lots of people don’t have the 20% down and the new requirements for mortgage insurance on FHA loans is a huge burden (for questionable benefit). This will predominantly effect those with less wealth.

      Especially if one is going to only live in a home only for 5 to 10 years, and housing goes sideways and/or slightly down during that time, some people can be paying an extra 125 points annually for 5-10 years, not to mention 1.75% up front. This can be a huge difference for a family making $80K, let’s say. The payments I saw on Zillow for the family with 3% down was $256/mo. for mortgage insurance.

      1. Walter Wit Man

        To be clear, the $256 mortgage insurance payments were based on the purchase of the $310,000 home. Zillow has a decent mortgage calculator that includes the new rules on FHA mortgage insurance. That’s where I get the numbers below. Btw, Zillow assumes a 3.7% mortgage rate which may be a bit optimistic.

  17. Tom Lawler

    And now a serious note. Prices in many bubble areas got so high relative to rents, that it seemed “bubblish.” Now prices in maany areas have fallen back to or even in some cases below “historical” relationships to rents. Most analysts would say “oh, prices have fallen back to where they should be, or maybe a bit below.” But uber-bears who would benefit from a continued plunge in the market say that “oh no, now the rents are a bubble.” No evidence; just folks focusing on their own revenue regardless of how it might impact “real” people.
    Very disturbing, self-serving, and not at all professional.

  18. Walter Wit Man

    shoot. My longish post going through the actual costs is not showing up.

    The TL;DR version:

    The typical family buying the $310,000 will actually pay over $2,107 a month, out of pocket, to live here (because they are putting less than 20% down). If they have a HOA or more than average maintenance it will be closer to $2,500 a month. After taxes, they will probably pay a minimum of $1,950 month (but the actual cost of ownership may be lower–like $1,700 after factoring in equity gains).

    The wild factor is of course appreciation/depreciation. If the house goes down 10% to 15% in 5 or 10 years then the family putting 3.5% down is screwed. Say they sell at a 10% loss in 8 years. They would probably be paying over $2,500 mo to live there in that case–so they paid more than if renting. If it goes up it gets cheaper to have lived there and then they will have gambled appropriately.

    So someone buying at this price is pretty much gambling on price increases. I only see a few hundred dollar benefit. If housing goes down 10% this is not a good deal at all. In fact it can be a trap!

    1. Walter Wit Man

      Business Insider picked up this post and someone in comments points out the HOA is likely $100.


      They claim property taxes on $310K are $220/mo. So Zillow assumed $310/mo on property taxes but I didn’t include HOA so the net result is another $10 added to cost of owning (with possibility of greater HOA fees to come). So I’m guessing the typical family putting 3.5% down pays $2,117/mo. out of pocket, and pays roughly $1,975 after taxes.

      A family of more means, with the over $75,000 needed for the down payment, closing, and moving/furnishing, will pay only $1,720 a month out of pocket, which is around $1,575 after taxes. Of course, the true cost of ownership may be closer to $1,400 assuming no appreciation/depreciation/transaction costs.

      It’s still a big gamble and hard thing to do to put $75,000 down on the table. It’s tough because this is the only way a family can save money, by taking this gamble, and in this case the family saving and buying may save around $600/month if they gambled correctly and say sold in 10 years at a price that is say 10% higher than they bought. If prices go down by 10% or even 20% then they have locked up $75,000 for 5 to 10 years and they will have paid over $2,000/month to live there, maybe even more than renting. They will not have paid the $2,500 a month a family that only put 3.5% down would, but it’s a huge effort to come out even.

      1. Tom Lawler

        Just confused. Actual, realizable rents are higher than what some (but not all) would have to pay to purchases the home with a “momal” mortgage. During the housing bubble, the opposite was the case. What is the point here?

        1. Walter Wit Man

          Well. I’m just pointing out that the home price bubble isn’t as popped as it seems. They are hiding fees and suckering people to pay more to service their mortgages.

          And my point is also that “normal” may have been putting 20% down in the good ol days, but it’s not so normal now. There are lots of people that can only buy with 3.5% down. And now these people are are going to be suckered into paying even more in mortgage insurance, etc.

          So it does seem like a rental bubble, because rents are much higher than 10 years ago (which was a rental bubble too), but wages are about the same, while housing prices are coming back down to where they were 10 years ago.

        2. Walter Wit Man

          To further clear up the confusion.

          The monthly nut is only one factor (and it’s hard to figure b/c of such things like mortgage interest deduction, hoa, maintenance, etc.). This is the cost of living in the home.

          But the real cost will only be determined when the house is sold. Again, assuming 8 years before this family moves, it will make a huge difference if the house has gone up to $341,000, or if it has fallen to $279,000. I won’t do the calculations but you can see that it can result in final cost of ownership of plus or minus over $645 month (and then the transaction costs would have to be added as well).

          I use the pre tax and after tax numbers to demonstrate that the typical family won’t see the lower monthly payment until they file their tax return. But that is probably the best “out of pocket” number to use because most families in this situation are stable enough where they can swing the increased payments for most of the year as long as they get money “back” at tax time.

          I may be making all this more complicated than needed but I think it helps to think about it this way.

  19. Tom Lawler

    One last post before feeding the chickens. In the bubble, prices were just ridiculous relative to rents. Now prices are low relative to rents. That would suggest that the “bubble” has been popped. Now someone says rents are a boubble? Gosh, does such a person just like a bubble? Or does that person’s revenues increaee the more prices fall?

    Someone needs to look into the inherent coflicts of interest of these stange, disturbing, and inconsistent Olenick posts

    1. Jim Haygood

      ‘These artificial increases are, of course, unsustainable.’

      With the Fed having tripled its balance sheet in five years, I wouldn’t be so sure about that. The housing component of CPI has been quite firm recently.

      It’s the absurd ballooning of the monetary base that’s “artificial.” Print enough money, and price increases are very sustainable.

    2. Michael Olenick

      Tom – you’ve come back!

      What kind of conflict of interest are you talking about? In this field a conflict of interest would be, say, an executive at one of the GSE’s annoyed about sub-prime lenders taking his business coming out w/ scathing reports about them .. while putting his own business in a position to do the same thing. Maybe even talking to a hedge fund manager placing massive CDS short bets for some potential “consulting.”

      Prices aren’t too low; rents are too high. According to the listing the HOA fee on the house for sale is $33/mo. (seems low but that’s what it says).

      1. Tom Lawler

        You alway shift to a personal attack when folks don’t agree with you. It’s very disturbing. Can’t/won’t comment on “Yves”, as posters with names that don’t reflect who they are should, in all cases, always, be ignored.

      2. Tom Lawler

        Just a reminder: I left Fannie in January 2006; I was an economist on the advisory board of a Paulson fund presenting data and forecasts but having no say in what the fund did or didn’t do, and I was paid a fixed (and not very large) fee for being a consulting economist. And since the early part of last year, I have been posting analysis of the housing market but not receiving any income, as my previous consulting income was based on the ability to write a daily commentary, and my diagnosis of colon cancer last year, that resultsx in two surgeries and has still left me not “normal,” ended my consulting revenue business because obviously I could not write a daily any more.

    3. Yves Smith Post author

      To be less polite than Olenick, you comment about conflict of interest looks like a classic case of projection.

  20. mtnplover

    While looking for a house to buy a hard hit part of California where home prices are down 40-60% from 2006/07, a few real esate agents have mentioned they believe government agencies and banks are stalling on additional foreclosures until after the November election in order to try to keep current house prices somewhat stable. If the houses were foreclosed and released for sale, prices might fall another 15-25% and many voters will feel less well-off financially and may vote against incumbents.

    I’ve also heard that close to 80% of all new mortgages are being funded directly or indirectly by Fannie and Freedie, often with 3% downpayments. These sales will remain at risk of foreclosure if – or when – another 10-20% price deflation occurs and/or if the job market doesn’t continue to improve.

    The housing market in the US – and many places around the world – is completely flawed since landlords and speculators receive billions of tax loophole subsidies AND can make huge gains from their real estate investments. It’s a tax game and a potential road to fortune for them, but just housing for the rest of us. Of course most lower and middle income families can’t compete in this rigged game.

    If US salaries and wages continue to decline to equalize more closely with the rest of the world, then either housing prices will have to decline to match the lower family income or the “real economy” will shrink as people spend a higher percent of their annual income on housing costs and less on other goods and services that create jobs. Either way it’s not a good outlook for the future US economy.

    Welcome to the US.

    You’re born.

    You pay 35-45% of your total lifetime income for dozens of taxes to a myriad of government agencies.

    You pay 35-50% of your total lifetime income as either rent to landlords or expensive mortgage payments to bankers.

    At the end hopefully most people will have saved a few dollars for a decent funeral after enduring this flawed economic system. The governments, landlords and bankers thank you for your visit and hard work.

  21. ac

    Wow just the sentiment in the comments section, aside from lawler and a few others should give one some pause. Do people really believe that we are in a real estate bubble in the usa NOW.

    Realize that while re will always be local we live in a global world where money moves easily. If u want to see a real estate bubble go to Canada, brazil, Australia, hk, Singapore, Dubai etc. Foreigners come to the USA with cash and see a great bargain. Too bad Americans can’t see the same thing.

  22. Will the landlord

    Aside from the emotional impact of losing one’s home, forclosures are great for homeowners and bad for banks. The homeowner walks away debt free with a 7 year credit hit, which doesn’t mean much in today’s environment. The lender takes a huge hit to their balance sheet. Of course I guess this doesn’t mean much for the too big to fail banks backstopped by Uncle Sam.

    1. LucyLulu

      If the bank is the lender, this is true. Most often though the bank has sold the mortgage and is now only the servicer. In that case, foreclosure is good for the balance sheet of the bank. Servicers make their money off foreclosures. I don’t know that I would agree that the homeowner gets off scot-free though. They not only lose any down payment, closing costs, and money spent on improvements, they also invested years of monthly payments relative to rent with no buildup of equity to compensate for the excess costs. Those who have gone through foreclosure in the last few years would have a tidy little sum saved up had they rented and saved the difference. Ditto for most of us who haven’t gone through foreclosure for that matter.

      1. chitown2020


  23. LucyLulu

    “i believe when you say they are trying “to hide their losses” i think that is incorrect…i don’t believe they care too much about the balance sheet, they don’t need to be solvent…they only care about cash generation…

    If I’m not mistaken, as long as the banks hold onto the homes, they can continue to assess them at inflated values on their books. Once they sell, the banks must post their losses. This affects their capitalization rate, how they score on the periodic stress tests, whether they get permission to pay out dividends to shareholders or buyback stock, and thus share prices. Thus it indirectly affects executive compensation. And this the banks, or more precisely, those in bank management, very much care about. Those stock options can be very valuable indeed. Ask Warren.

  24. Steve Roberts

    Prices drop so low that people would rather rent than own and we call that a rent bubble?

    I’ve been running the numbers on condos in my area. Assuming 1% growth in pricing over the next 20 years, I’m seeing a 17% return on equity. If it doesn’t go up at all, I’m at 10%. Hard to beat that in today’s market.

  25. kw

    Stop maintaining and ongoing renovating so your property doesn’t fall into disrepair and become unsaleable – then you are comparable with a rental. A house always needs love and that figure is sizable and an ongoing commitment which makes your rent/buy argument faulty. The monthly operating costs of a house are much greater than principal, interest, taxes and insurance and your analysis doesn’t even include taxes.

  26. Paul Meleng

    If you buy for $3000 a month vs rent for $2000 a month you pay say $12,000 more plus owners costs but if value goes up say $30,000 you seem to win. = pre bubble sums.

    If you buy for $2000 a month payments (as part of a 20 year committment) vs rent for $3000 a month you are in front by $12,000 a year LESS owning costs and transfer costs and you are stuck with it and if it goes DOWN $30,000 you are down say $20,000 or so and still stuck with it.

    From over here in Australia it looks to me like you are seeing what you might call a risk discount.

    In a tough job market and with old industries folding and new ones booming somewhere else there can be a value too in being free to follow the work and money.

    Sometimes dumb aint so dumb.

  27. Al Caramba

    How long will mortgages continue to be free? At 3-4% interest, which is the same as inflation, is is basically the same as borrowing for FREE. That can only go up. And so will rent, that’s for sure.

  28. JP Merzetti

    So the eternal rent versus purchase crystal ball continues (that ball resembles a bubble nicely…)
    But strongly suspecting that “investors” represent yet another timeless shift in wealth transferral of the prime sort – the rentier class is shifting into gear niceley to gouge the feudal population who can’t and will not be able to afford to buy for love or money (especially money.)
    If money can’t be made largely due to home flipping, the next best thing obviously, is rent-flipping.
    What the market will bear looks like a new improved Gone with the Wind. Multi-family takes on a whole new look and meaning. The McJobbed, McUnderemployed, McPerma-Temped, and otherwise income-disenfranchised peons of the future will slum it in whatever their thin wallets will bear.
    The illusion that real estate on any mass scale known in past history as real value…needs sustainable income – all franchised out, re-emptied by Big Oil, and otherwise hallucinated jobless wealth fantasies checkerboarded across the planetary playing board…while nationalistic notions move south, permanently.
    Wiley Coyote teeters on the canyon brink one more time (yet we know he’ll be back again – for the sheer sake of cartoon continuity.)
    Big Money (what’s left of it) still needs to find a playground for further adventures. When no adoring audience shows up, what then?
    We’re up to our eyeballs in housing. Like water everywhere, and none drinkable…we slosh around in leaky lifeboats, furiously bailing, running up white flags, dialling SOS, dreaming of solid land….
    while every captain and first mate discusses their own personal philosophy of financialized wet dreamed psychosis -and wherever people actually wind up living looks like a holocausted refugee camp.
    Meanwhile back on Capitol Hill the jugglers grow nervous – all hands busy and that itch demands scratching………

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