The media is once against trumpeting real estate and claiming that rising real estate prices are a sign of recovery. Are the commentators correct, or is the so-called increase in real estate prices simply hype designed to make a terrible economy look better?
The frightening answer is that the real estate recovery looks like a bubble designed to create an illusion of recovery. Worse, speculators are manipulating it in order to line their own pockets at average people’s expenses again.
Is the Real Estate Recovery a Fraud?
Some recent news stories indicate that the rise in real estate prices might be artificial and that the economy doesn’t justify the rising prices for property. A lot of the rise in real estate prices is based not on real people buying homes or investment property, but in investment in real estate by hedge funds, real estate investment trusts (REITs), and other speculators.
Many foreclosed homes are being bought by REITs, which are publicly traded invested companies. One REIT, the Blackstone Group (a front for hedge-fund operators), has spent over $2.5 billion to buy 16,000 foreclosed homes. Another, Colony Financial, plans to spend $1.5 billion to buy 1,000 foreclosed homes in California from the bankrupt federally owned mortgage company Fannie Mae.
So a lot of the real estate and housing sales that the news media has been touting are really investments by hedge funds and speculators. What’s going on is that Wall Street is moving to take control of single-family residential housing, not that average people are buying homes again.
Hedge Funds in Your Neighborhood
The purchase of foreclosed houses has become so lucrative that one REIT, Two Harbors Investment, has even set up a front company called Silver Bay to purchase foreclosures. Silver Bay had an IPO of $245 million and now has over $800 million to invest.
Hedge funds and investment bankers use shell company REITs to cover up questionable transactions. They try to pass the cost of their shenanigans onto suckers that buy the stock in the ventures. The scam often works for a while because many REITs, including Two Harbors, are paying dividends of 18 percent or higher. If that sounds too good to be true to you, you’re right.
Get the picture, folks? The so-called recovery in housing and real estate is nothing but hype. The federal government and Wall Street are pumping money into foreclosed properties to make it look like home values are going up. In fact, Fannie Mae is now planning another massive selloff of foreclosures in California. In other words, Uncle Sam is trying to artificially boost property sales and prices in California.
A Government Created Bubble
Average people aren’t buying houses, so who’s going to buy all those homes that the speculators are buying up? The answer is obvious. Nobody will buy those homes, and sooner or later, the house of cards will collapse. When it collapses, real estate values will fall faster, and the result will be more devastating. This is a bubble, and a very dangerous one.
So why is the government doing this? The most likely answer is that the earlier attempt to artificially bolster real estate sales by having the Federal Reserve deliberately keep mortgage interest rates at unrealistic lows didn’t work. Even with mortgage rates of 3 percent, people didn’t buy because they didn’t have any money. Since Main Street didn’t want to go along with the scam, the brains in Washington turned to their friends on Wall Street.
The Wall Streeters happily go along because they can invest money from pension funds and other retirement plans in the REITs. They get fat paychecks and bonuses, and the middle class ends up taking a bath again.
What they’ve done is create another real estate bubble that’s even more fragile than the one that blew up in 2007. Worse, they’ve created an illusion of a real estate recovery to try and fool the public into thinking that the economy is working when it isn’t. The frightening thing is that the media is falling for the scam.
Why is This Happening, and is a Real Recovery Possible?
The truth is that a true real estate or housing recovery will not occur until real estate prices are allowed to fall to realistic levels. Most real estate in the United States today is overpriced. The values have been artificially inflated because it benefits realtors (who can charge higher commissions), mortgage companies, and local governments, which can collect more property taxes, or worse, borrow money on imaginary tax revenues in the form of bonds.
It also helps rich people because they can write off mortgage interest under the current tax code. Even though there’s a limit on the mortgage interest tax deduction, a wealthy person who takes out a mortgage to buy a house worth $1.5 million on paper gets a huge tax write-off.
The only way for a true recovery in the real would be to let the market work and allow property values to collapse. That way, property could become realistically priced and people could start buying again. The powers that be don’t want that to occur because they’d lose a lot of money.
One way to do this would be to sell off all those foreclosed homes directly to the public through auctions. Average people would then buy them for cash, which would get the real estate market working again. Such auctions would enable families to buy homes at a reasonable price and average people to purchase properties they could turn into rentals to generate income.
That won’t happen because the buyers would pay a fraction of the supposed value of the homes. The auctions would get reported in the media, and the public would realize how little a lot of the real estate is worth. It would also lower the property tax base in many areas, which would limit the spending of local government. To make matters worse, it would destroy the value of mortgage-backed investments.
The scary truth is that the government, the real estate industry, and Wall Street don’t want a true real estate recovery or a free market in property or housing. They would lose all the money invested in mortgage-backed investments, which are still around because mortgages would otherwise be worthless. It would also destroy the value of so-called municipal bonds, which are supposed to be paid off with future property tax revenues.
They’re working hard to keep the market from working in real estate and creating a real estate bubble. But like we mentioned earlier, the scary thing is that the bubble is even more fragile and artificial than the one that burst in 2007. It’ll implode, probably sooner rather than later, and take the stock and real estate markets down with it.
What Should Average People Do?
So what should average people do? The best solution is to wait and see. If you don’t own a home right now, don’t buy one. Prices might be a lot lower real soon, so keep renting and start saving because people with cash might be able to pick up some great bargains for pennies on the dollar.
If you have a mortgage right now, do everything in your power to get rid of it or reduce it. If possible, pay it off, and if not, refinance because mortgage interest rates are incredibly low. You should reduce or eliminate your mortgage debt because many more homeowners will soon find themselves underwater. In real estate slang, that means the amount they owe on their mortgages greatly exceeds their home’s value.
So don’t believe the hype and stay as far away from real estate as you can right now. It’s about to implode again, and when it does, we’ll be in for a bigger and more destructive foreclosure crisis.