Sunday, January 27, 2013

Housing As a Store of Wealth: Real Estate Is Too Risky!

Adjustable mortgages are marketed to the masses as a benefit to them. Alan Greenspan said you could get a "better deal" with an adjustable, in February of 2004.

That was just at the start of the housing bubble. Not only was he in on the housing bubble, but he was advocating that the borrower like and prosper from the adjustable.

But who really profits from adjustables? On Business Insider at this article by Rob Wile I shared a message and an unknown fellow named Brian M responded. This exchange tells us a lot about adjustable mortgages.

I said:

"When you have fiat money you can still stop speculation and easy money lending. You can ban it like in Germany. But the bankers say they can't price a mortgage and need adjustable mortgages or they may lose their shirts. Well, that places the risk directly upon the buyer.

Who needs that?? Rob, who needs it?"

Perviously, I had written this at Henry's interview with Robert Shiller:

"Henry, nice post. Ignorance of probabilities. What a phrase. Probabilities don't capture reality, so when they assumed all mortgages would not fail at once that was one ignorant probability! On purpose too.

Thanks for interviewing him. He neglected to mention that the housing market is forever ruined by the demise of the 20 percent down fixed mortgage. IMO, cash from Wall Street plus easy money loans could prove that you are just throwing your money down a rat hole.

And the question, are we Japan or not means massive risk for a 30 year mortgage at any time. Rent and save the rest. Boycott mortgages.

And it is not just fiat money. You can stop speculation with fiat money. You can ban easy money loans with fiat money. Bankers say they cannot price a loan under these circumstances but if that is true why would you want one???"


In the Shiller article and my response, the concept of probabilities being ignorant of real world risk is a whole other subject. But the point of the above comment is that the housing market is forever destabilized by toxic loans.


Brian M responded to my post. Excuse the language:

"This is the fault of the fiat system, not the bankers. You are an old fart, so I am sure you remember why so many savings and loans went belly up under Volcker. They were holding tons of mortgages in the 5-7% range, and all of a sudden deposit rates went through the roof. So now you are a banker paying 12-15% on deposits, and only getting 5-7%. on loans. Maybe you can get through your thick skull why bankers don't want to hold long term fixed debt...it has nothing to do with making money, it has everything to do with covering your ass..."

I then responded that he made my case. Americans must either boycott all housing loans or subject themselves to massive risk that the lenders do not want. Joe Weisenthal has appeared to make a case for low interest rates as far as the eye can see, but 30 years is a long time.

As it is, we have low interest rates, cash purchases of homes by Wall Street for the first time, and many loans being FHA fixed, so that the government and taxpayer is doomed to losses if interest rates rise. A housing bubble brewed with little or no money down in a low interest rate environment is risky to the banks. The bank with the most risk is Wells Fargo.

Going forward, FHA loans are risky because the buyer is underwater immediately. Most of these loans are fixed, which is good, but with high loan to income ratios, which is very bad. Higher interest rates and PMI make the monthly payments difficult for many.

In trying to escape that prison of an FHA loan, people find themselves getting adjustables as interest rates go up. It appears the Fed wants this because you cannot blow a housing bubble without interest rates rising. And I have no doubt that the Fed wants to blow another housing bubble. 

[Update: I am convinced that big jumps in interest rates will be unlikely and if they occur they will be for a short duration of time. See my Seeking Alph article about Japan.]

No matter what, I assure you that in this age of house price instability, if Wall Street can beat you, and weaken you, and get its houses back, through foreclosure or whatever, the Street will find you easy prey if you subject yourself to a long term mortgage.
Of course, if the Fed goes away, like the libertarians want, you will be subject to risk every five years. That will surely drop the value of houses if that loan model comes to pass.

Now, regarding inflation/deflation, if we are Japan, the Fed would be in a box, and Joe Weisenthal would be right, that interest rates are almost permanently depressed, at least for a good chunk of years. 
So, if we are Japan people could wait for interest rates to just crash more. Why buy now? And if we are not Japan, but expect interest rates to rise, why buy now when house prices will go down again, either with or without a bubble and crash?

So then, there are, apparently, very few good times to buy a home on credit. That is, if you are the borrower and if you are seeking a store of value in the house. There are times when house payments are less than rent. In those times, you may want to buy but it is risky if you have to sell into a rising interest rate environment. The house may be good for your budget but may not be good as a store of value for your money going forward. 

With all this information about instability, now, and/or going forward in time, if you want to hang on to your money, you may have a better chance of doing so by simply boycotting mortgages, by living multigenerationally, and by renting and saving the rest. 
It may well turn out that money is the best store of value over time, because it is liquid, meaning it is always useful in immediate trade for goods and services, and because other stores of value are more risky. Even the Chinese are saying that there are few good stores of value left, and focus on gold. 
Yet gold is not liquid under certain circumstances. You can find instances in history where it was difficult to turn gold into cash quickly, which is the definition of a liquid investment. In the housing bubble, houses became almost liquid, but that is a very dangerous circumstance, as we all found out. 
Gold stocks or ETF's are more liquid than storing gold bullion, because selling the stocks can be transferable to cash quickly. Yet the store of value, the price of the gold and silver stocks, may fluctuate wildly.

Housing was once a great store of wealth, when the 20 percent down payment and fixed loan was the norm. But as Brian M says above, the banks are fearful of holding the bag on those most stable of mortgages, and are willing to place risk to your financial balance sheet and risk to your house as a store of value by pushing adjustable and toxic loans.
So then, money, cash, is both the most liquid investment with potentially the best store of value in an age of financial volatility. Cash is king. 

This article does not constitute investment advice. It is opinion of the author only regarding broad investment concepts.


Gary Anderson
Las Vegas, NV

2 comments:

  1. I highly profited, my adjustable started in 2004 at 5.5% (when 30 year fixed was 6.5%) and came all the way down now to 3.00%. Have it now for 9 years and saved tons of money in interest!

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  2. You were very fortunate that the Fed had reason to tank interest rates. It was manipulated at the time. Now, interest rates for treasury bonds will likely remain low while mortgage rates go up. That is all about making money for the banks, and that is part of Bernanke's job, no matter what it does to the real economy.

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