Could today’s housing market be a false market?
Between 2006 and the end of 2008, the market in the Washington, DC metro area and most of the US was horrible. But then 2009 rolled around and the market did an abrupt 180. Rates and points started falling. Inventory started plummeting. Buyer demand increased. And prices started rising.
Today, the market is insane. Buyers are fighting 5, 10, 15+ other offers when bidding on properties. Even being the highest offer doesn’t mean anything anymore because people are submitting all cash/non-contingent offers – even on properties priced above $700K. Prices in the Washington, DC area (and others) have risen 5, 10 even 20+ percent.
This makes little sense to me. The general economy is crap. Banks are still going belly up left and right. Foreclosure filings are hitting new records monthly. Unemployment is at a 26 year high. Hyper inflation is just dying to come out of the bag. All the signs still point to a troubled economy and market.
So what’s behind such market conditions?
Supply
Inventory plummeted for a variety of reasons – one of the biggest being that banks are not putting the homes they have on their books up for sale on the open market. Rumors have it that over 70 percent of the properties that have been foreclosed on are not on the market (yet) and that it’s being done on purpose. I thought that a while back and had and off-the-record conversation about this with someone who confirmed my suspicions.
What’s a possible reason for banks holding on to these properties and not selling them on the open market?
Here’s one…if they keep them off the market, they help inventory stay down and prices go up (as we’ve already seen in 2009). If prices go up in general, so do all the properties they have on their books. Voila! Instant money/profit for the banks!
Another possible reason…banks getting into the real estate business. Based on conventional thinking, those who hold the listings hold the power (and money). I don’t necessarily agree with this notion, but we all know that banks typically base their decisions on conventional thinking so it probably makes sense to them.
If banks end up holding the majority of real estate inventory in the country, imagine how much power they think they will have. In an economy based on profits and earnings, the idea of that much power and money is pretty attractive and makes you go, “hmm…”
Demand
Yes, prices being low has gotten a lot of buyers off the fence and into the market thanks to greater affordability. And yes, low rates have helped. But there have been a lot of artificial factors such as the $8000 first-time home buyer federal tax credit.
So what happens when these programs go away one day?
The artificial demand that the programs created will go away as well. And we all know what a drop in demand does to the housing market and values.
Mortgage Rates
Speaking of low rates, can anyone give me a good (and real) reason that rates are this low? Rates are supposed to a reflection of the level of risk in the marketplace. Not sure about you, but “risk” is a word synonymous with today’s market and economy on almost every level.
IMHO, one main reason that rates are still low is because the government has been buying up MBS’s left and right and bailing out banks. But the money they’ve been using was borrowed from you and I and the money will eventually run out (or the dollar will be worth 5 cents). Btw…don’t forget that we have to pay all that money back – with interest 🙂
The government has effectively kept rates artificially low by placing the risk on them, but the risk they’ve taken on will ultimately come out and be passed on to consumers. Isn’t that just delaying the inevitable? Or is there some grand-master plan that passes the risk on to some really cool aliens that we’re playing Hold ‘Em with at Area 51 right now?
What’s the “real” deal?!
Am I totally off base (aside from the alien comment) or is there a legitimate reason the market is the way it is? Is it sustainable? Is it just a temporary blip up before prices plateau or go back down as some are predicting? Are banks trying to get into the real estate business?
So many questions yet, so few “real” answers that go beyond the first layer of the onion.
