Monday, September 28, 2015

I wouldn't hold your breath for an echo bubble in housing popping.

A few weeks ago I started reading that people were buying brand new houses for rentals. In my sarcastic way I rolled my eyes and said that was just about the stupidest thing ever. New houses are the most expensive way to go. But Whatever. That can't be happening that often I said to myself. Nobody buys a new house to rent it out. That is your back up plan. Not your first plan.

Then, this weekend I was checking out the rental prices in my area, (because I have a rental) and what did I find? A house for rent in a brand spanking new development in town. The paint hasn't even dried on those places yet. I can't even find out what the unit sold for yet. I mean, I could if I wanted to ask one of the many agents that haunt me. But, it will come out in a couple of weeks.

This of course spun me out for about two hours because I was trying to figure out the math on that. I mean, I was trapped in the whole mortgage meltdown - so based on where I am in the real estate world, I can actually figure out a lot of stuff. There is almost no one who followed everything real estate more than I did.

There was honestly no way I could get that math to work. I know what the places across from the new development cost, and I know what the interest rates are right now. There is just no way I could get that to work. Even if he bought it as his primary and immediately made it a rental. Houses you don't live in are a full point higher for interest rates to acquire a loan.


Now because real estate prices are crazy. And rental prices are crazy - everyone and their brother is calling for the "bubble" to pop. I'm sort of saying - not so fast and I will tell you why in two charts.

These are the housing starts since 1969. Source.  As you can see we have just now gotten barely above the low end line at 1.1 million units roughly. I would call 1.5 million starts the mid-line, and at 2 million units the economy is going gangbusters. This lack of building has been going on for SEVEN years. The previous normal is three years. You notice how most of the other down ticks are V or W shaped?

Are prices going to go down? Probably. Prices go up, and prices go down. I think my house is back in Neg equity again by a little. But there is a vast reserve for people needing housing. Be it rentals or owners.  The population keeps expanding even in recessions. And they are not building enough to satisfy those needs. That is going to place a bottom under the so called "echo bubble".

And honestly, I doubt housing will ever be like 2009 in my lifetime. A few days ago I read an article titled: Turns Out the Housing Crisis Wasn't All About Subprime.

"When we talk about the past decade's housing crisis, it's natural to talk about subprime loans. Subprime loans give us a convenient, conventional story: predatory lenders charging people unconscionable interest rates, forcing innocent people into foreclosure and the rest of us into the worst financial crisis since the Great Depression.

There is only one small problem with this story, which is that lots of prime borrowers defaulted too. In fact, according to a new paper by Fernando Ferreira and Joseph Gyourko, subprime loans accounted for only a bare majority of defaults at the beginning of the housing crisis. Between the third quarter of 2006 and the third quarter of 2012, twice as many prime borrowers lost their homes as subprime borrowers."

I had a front row seat to the meltdown barely making it out alive myself and this is what I saw of the world. Most of the people I saw jingle mailing their houses back to the bank could afford them. I knew tons of people who did this. For years I sat in shocked amazement thinking - where are these people going to live?! Well, it took a lot of years, but I guess we know now what the answer is.

It used to piss me off so hard when the media tried to convince people that owning a house was a suckers game. And maybe it is. But in San Fransisco I just saw a girl who got a 130% rent increase. Who is the sucker now? The rental increases these days make the housing bust look like child's play. It's actually less expensive now to buy than rent. If people had the money for a down payment and a job. And of course there were any units to buy.

Also I see a lot of people saying that rents are going to fall apart. I can tell you - during the last recession it was unbelievable how stable the rents were. I looked every single week at the comps because I was sure that I would have to lower the rent on my place. I never ever once had to. Not even close. Which was good because I was already taking a loss at the time.

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