I read an article recently about the 19% YOY increase of inner city Portland home prices. Portland has become cool for the first time in its history and people are paying through the roof to live close-in the city.
Off the top of my head, here are some of the reasons behind today’s run-up in home prices:
- Federal Reserve zero interest rate policy (ZIRP) (historically low rates)
- Quantitative Easing 1, 2, & 3 (The Fed buying trillions of dollars of mortgage bonds at historically low rates which drove down rates even further in 2013).
- FASB 166 & 167 (accounting trick that allowed Too Big To Fail banks to carry defaulted mortgage bonds at full price over their duration (ie. 30 year mortgages) rather than actual market price (ie. 60 cents on the dollar)). This is what people talk about in “Shadow Inventory”.
- HAMP (Govt loan modification program that former US Treasury Secretary said was designed to “foam the runway for the banks” (ie. delayed distressed properties from hitting the market) rather than help homeowners stay in homes). More Shadow Inventory.
- Millions of underwater homeowners (bought in 2006-2007) who are current on their mortgage but cannot sell. They were the natural move-up buyer who is locked out of the market, thus limiting supply further.
- Banks slowly letting distressed real estate onto the market (FASB 166 & 167 loans) from 2008-2020 creating limited supply. Releasing the Shadow Inventory.
Rising home prices of today make the Housing Bubble 1.0 legacy mortgage assets look a lot more valuable than they were at the bottom of the market back in 2009-2010.
Based on the reading I do about the housing market, which is a lot, I expect that this limited supply housing market will be the norm for years to come. And possibly through the end of the decade, taking us out to 2020.
Why? Because it’s working for the banking system as it was designed to do. Bailouts are no longer politically feasible. Therefore, we see a concerted process of slowly nursing the banks back to full health with several monetary gimmicks spread out over a decade or more.
By that time, in 2020, the TBTF banks will have liquidated all the Housing Bubble 1.0 mortgage and real estate assets from their books, spreading out the losses over a 14-15 year period. Performing loan balances from Housing Bubble 1.0 will be paid down to around 50% LTV or lower. And all the credit risk from today’s mortgages (2009-2020) will be put on the backs of the taxpayer through Fannie, Freddie, FHA, VA, and USDA. (Interest rate risk will still be the responsibility of the private investors of Mortgage Backed Securities).
So when the next wave of defaults come, the taxpayer will take the hit via their ownership of Fannie and Freddie or their guarantee of FHA, VA, and USDA. A bailout of the banking system will not be necessary.
In the meantime, if you’re buying in the city of Portland, make sure to have a lot of extra cash to pay over the asking price. Homes in my neighborhood (Alameda), go pending within five days of a For Sale sign going up.
And that’s my two cents about some of the unmentioned drivers of this housing cycle.