An Individual Home Buyer's Perspective of the Real Estate Market
The past year especially has made us pay closer attention, especially with the unusual rise in housing prices that have occurred in our local market and in other markets in the country. What caused this? Was it the economy recovering, jobs returning, prosperity returning, and hence driving increased housing demand and higher prices? Or was it something else?
Generally speaking prosperity in an economy occurs, when there are more jobs, and people are making more money. But what my husband and I have noticed anecdotally, in our local market, was not supportive of a growing economy and real organic housing growth. We still saw vacant houses owned by financial companies, we saw people losing their jobs and moving home to live with family, we saw several families moving into our neighborhood and living in a single family home; we saw, at the macro level, a continued to drop in the overall national labor force participation rate. I could mentioned that there we're and still are record people on food stamps and disability, and growing monthly. Disability seems to have become a new program for hiding the unemployed in the market today, and it has drastically skewed how most people view the economy. The fact of the matter is the economy is not growing, less people are working than ever before, and the only entities that seem to be benefiting from the cheap money policies of the Federal Reserve and the US government are the very banks that helped caused much of the mortgage mess that we have today.
After reading very various articles at the Wall Street Journal, Forbes, Counterpunch, and a couple of well-informed financial blogs that pulled insights and data from these and other sources, we have come to the conclusion that this is a very poor investment environment for the homeowner and for a small real estate investor.
Hedge funds and other special purpose investment entities have been given unusually cheap money and access to the myriad of mortgage inventories on bank balance sheets. This stacks the deck against the average smaller retail investor, or any mom and pop type operation that would want to start collecting their own rental assets. The cheap money funded by the FED and the government has essentially allowed preferred cash buyers and investors to come to market, flush with cheap money, and that do not have to qualify for conventional mortgages as small investors do.
These funds and other financial entities then collect these properties and turn them into baskets of rental income properties, some became becoming real estate investment trusts, sold to foreigners. The problem with this is that this does not solve any of the fundamental problems in the mortgage industry, and has not corrected the abuses of many banks, but merely moved under-performing or nonperforming assets off of their balance sheets, at inflated prices, and into the hands of investors that might not realize The questionable quality of the investment vehicles in the funds they would invest. This also locks up the inventory that banks refused to sell normal people at a larger loss in a normal market. The bottom line here is that when financial Giants, hedge funds, REITs, and other banks are stomping around in the real estate markets, and moving massive amounts of assets from balance sheet balance sheet without regard to the long-term supply and demand effects in the market, and without a fundamental recovery in economy, employment, or wages earned, there can be very few sound investments in the industry. This is unfortunately a very expensive and dangerous game of musical chairs with real estate assets. We think small investors like us are best positioned staying on the sidelines. At some point the bottom will basically drop out of the market, and any small investors will essentially be wiped out. But hopefully, after a few years, the housing market will return to some semblance of normal, after the mortgage and foreclosure backlog has properly cleared, and a new pricing level has established itself in markets.
As best we can tell, that is what we think is going on. The government is still supporting the banks, not letting the markets clear and correct, and hopping in now is no more intelligent than playing a game of financial Russian roulette. It's not a matter of if a further downturn in the housing market will happen, but only a question of when. Since this is all tied to the Fed 'Quantitative Easing' Policy, and other policies that support bank liquidity and cheap money, which we think will be ending in the coming months. Now is definitely not the time for us to be putting our hard-earned cash and assets into a market that will quickly lose value, and put investors like ourselves quickly underwater.
That is why my husband and I have chosen to sit things out, pursue more conservative investments, perhaps in foreign currency and commodity markets. Maybe we'll build a custom house from scratch, one with a really big kitchen. It won't be an investment, but it will be a permanent home.
Brennan, M. (2013, 3 18). Wall street institutions behind home price surges in markets like phoenix Retrieved from http://www.forbes.com/sites/morganbrennan/2013/03/18/wall-street-institutions-behind-home-price-surges-in-markets-like-phoenix/
Diaz III, Julian and J. Andrew Hansz. Real Estate Analysis: Environments and Activities. Dubuque, IA: Kendall Hunt, 2010.
Olenick, M. (2012, 8 21). Still looking for a housing bottom [Online forum comment]. Retrieved from http://www.nakedcapitalism.com/2012/08/michael-olenick-looking-for-a-housing-bottom.html
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Swiatek, J. (2013, 9 3). As investor groups buy thousands of indianapolis area homes, worries - and prices - rise ]. Retrieved from http://www.indystar.com/article
The real reason housing prices have skyrocketed (2013, June 5). [Web log comment]. Retrieved from http://www.washingtonsblog.com/2013/06/the-real-reasons-housing-prices-have-skyrocketed.html