It's Not Different This Time

Housing speculation is far more rampant than you probably think according to this article by Peter Schiff of Euro Pacific Capital:

It's not different this time.

"One of the main arguments (more wishful thinking than reasoned perspective) against a precipitous drop is that homeowners will not quickly unload houses in the same manner stock investors bailed out of losing equity positions..."

"One reason few expect housing prices to collapse is the mentality that homeowners need to live somewhere and as such will be reluctant to sell their residences. This argument ignores that fact that so many of today’s homebuyers do not occupy their properties as primary residences, and that relatively attractive rentals provide homeowners with viable, none-ownership alternatives for shelter. However, a more in-depth analysis revels that contrary to prevailing rhetoric, housing speculation is not only rampant, but also far more pervasive than the data suggests, perhaps even more widespread than was the case with tech stocks during the NASDAQ bubble..."

Today, the house is not a home, it is an investment like a stock.

"According to a recent study by the National Association of Realtors, 23% of homebuyers specifically identified their purchases as investments. Another 13% identified their purchases as vacation properties. Since rental yields are so low, those buying properties as investments are by definition speculating..."

The reason for IO loans and ARMs is to speculate, not to own. So the stability in real estate pricing that characterized the past is history.

"However, the mere fact that owners occupy their houses as principle residences does not necessarily remove such properties from the category of speculative investments. For example, 58% of recent California homebuyers financed their purchases using ARMs (with percentages in pricier counties exceeding 80% [blogger's note: e.g., Marin County]). The primary reason given to justify such mortgages was owners’ intentions to resell the properties in relatively short periods of time. Such buying is clearly speculative, regardless of the speculator’s intention to occupy the property..."

"Also, the fact that so many buyers are using interest-only, or negative-amortization mortgages, suggests even greater degrees of speculation. Since none of the monthly payments on such loans reduce the principal of the mortgages, buyers utilizing them are no better off than renters. However, since they must also pay property taxes and maintenance, interest only buyers actually get the worst of both worlds..."

Not to mention the folks who do cash out refis, increasing their debt load so that they "can have it now, now, now, I want it NOW."

"Given such incentives, is it any wonder that housing speculation is so rampant? Should we be amazed that when reckless lenders offer buyers can’t lose bets, with huge expected payoffs, that so many want a piece of the action? The fact that the majority of today’s homebuyers are actually speculators in disguise, suggests that when the trend turns, prices will drop precipitously. Far from holding on to their homes, as even most housing bears suggest, owner/speculators will sell in droves, or worse, simply walk away from their bets, leaving lenders and tax payers to cover their losses."