Is this a Back to the Future moment for the U.S. housing market?
It certainly feels that way. It’s as if Marty McFly took Doc Brown’s DeLorean, fired up the flux capacitor and punched 2007 (instead of 1955) into the dashboard control panel.
I mean, we’d all like to forget what 2008 and 2009 felt like, right? But 2006 and 2007? Ah, we can all remember the good times…
- When Mom and Pop could get rich just by flipping a house or two…
- When houses sold in days, not months…
- When regular Joes could get a NINJA (no income, no job or assets) loan…
Well, the good times are rolling again, baby! All three of the above trends are back in play, as if – what did we used to call it? Oh, yeah – the financial crisis never happened.
Let’s talk about house flipping first. Last month, the folks at RealtyTrac, a respected data analysis leader in the industry, issued their quarterly U.S. Home Flipping Report. (I’m serious, that’s what it’s called.) When they ran the numbers, they found that 6.6% of all single family home and condo sales were “flips” (defined as an arm’s length sale of a property for the second time within a 12-month period.)
That’s not quite back to the “good old days” of 2006, when 9% of all such real estate transactions were flips, but it’s getting there – fast.
According to RealtyTrac, flipping activity in the first three months this year rose by 20%, compared to 2015’s fourth quarter. It’s running at a pace that’s 55% above the third quarter of 2014.
Then there’s the pace of home-purchasing activity. According to Redfin, a national brokerage and research firm, June marked “the fastest, most competitive housing market” since 2009, when the housing bust finally brought in a massive flurry of bargain hunters.
The average U.S. home found a buyer in just 41 days. In Denver right now – one of the hottest real estate markets in the country – if you put your home up for sale, you’re fairly certain to find a buyer within six days.
Liar Housing Loans Redux?
If there’s one thing that we have tried to keep everyone’s focus on, it’s this: ultra-low interest rates, kept in place for years at a time by the Federal Reserve, are going to result in distortions in capital markets.
In other words, when money is practically free, we’re going to get speculative bubbles. It’s inevitable. And that’s what brings us to the revival of the business in easy-to-get mortgages.
Not long ago, a New York community bank picked up some publicity as it began offering “lite doc” loans. Get familiar with the term, because I think we’re going to see many more “low documentation” products from lenders if the real estate market keeps ripping along.
In theory, the Consumer Protection Financial Bureau and the Dodd-Frank laws heavily regulate the residential mortgage market, and require volumes of documentation from the borrower.
“Lite doc” loans exploit a loophole in the legislation. If your financial institution can qualify as a “community development financial institution,” aiming its business at a low- and moderate-income customer base (which could be just about anyone – nurses, police, you name it) then the mortgages your bank writes do not have to strictly comply with the “ability to repay” rules in the Dodd-Frank legislation.
Nor have the too-big-to-fail banks such as JPMorgan Chase, Bank of America and Wells Fargo stood idly by. All three started rolling out “3% down” mortgage programs earlier this year. You have to laugh a little about this development – wasn’t Chase CEO Jamie Dimon just telling us quite recently that mortgages are bad business for an institution like his?
Proponents will tell you that “it’s different this time.” The down payments are much bigger, a borrower’s credit scores have to be at certain levels, and on and on.
But we’ve heard it all before, right?
When there’s money to be made, well, smart lenders find loopholes. The less ethical kind are more than happy to bend rules, flaunt laws and look the other way.
For them and other easy-money enablers, it’s “hear no evil, see no evil”… and make lots of money. The rest of us will be left to clean up the mess (again) at a later date.