The REAL Reason Housing Prices Have Skyrocketed


Preface: In Part 1, we showed that mortgage applications are down, and it is really institutional investors driving the housing boom. Part 2 explains why.

Housing prices have boomed because:

(1) Lenders are artificially keeping vacant houses off of the market


(2) The Obama administration has thrown all sorts of artificial incentives at institutional investors to pump up prices

Artificially Suppressed Housing Inventory

Naked Capitalism reported last August:

Two trends are apparent. One is that banks are delaying foreclosures, or not foreclosing at all despite long-term delinquencies. The other is that private equity firms – flush with cash thanks to Tim Geithner’s religious devotion to trickle-down economics and the resulting cascade of corporate welfare – have been bidding up and holding foreclosed houses off the market. These two factors have artificially limited supply and, combined with cheap mortgages rates, driven up prices. While we can debate whether these strategies represent the best public policy, these policies are obviously not long-term sustainable.


Lenders argue the drop in foreclosures is caused by delays in the court system. However, Judge Jennifer D. Bailey, lead foreclosure judge in Miami-Dade County – epicenter of the foreclosure crisis – solidly rebuts that argument. “Here in Miami-Dade County’s Eleventh Circuit, there has been no delay in foreclosure case hearings for nearly two years,” Judge Bailey said in an Aug. 19, 2012 interview with the Miami Herald. “If you want to see a judge to hear your trial or summary judgment, you get a prompt court date.” This coincides with my own observations in foreclosure court, where judges rail at bank lawyers for repeatedly delaying their cases, even when borrowers are in no way contesting their foreclosures.

Holding back inventory means that the houses that are put on offer sell faster and at higher prices. That creates an incentive to delay foreclosures or not foreclose at all even when a home is delinquent.

Indeed – in the real world -  12.6 million houses are vacant1.5 million more home than are underwater. In other words, without artificial scarcity created by banks, there would be more available houses than there are underwater homeowners having problems paying their mortgage.  There would – in a word – be a glut.

Government Is Secretly Helping Financial Companies to Snap Up Housing

There are realistic ways to help the economy. For example:

But instead, the government’s entire strategy is to try to paper over all of the real problems with the economy by artificially propping up asset prices  in an attempt to hide the fact (which has been obvious for years) that the big banks are insolvent.

Stocks, for example, are largely being driven by insiders and government policy.

Indeed, we’ve pointed out for years that all of the Obama administration’s “homeowner relief” programs are really just back-door bailouts to the big financial companies … and are not even intended to help homeowners.

Mike Whitney explained last September:

Private Equity firms are piling in to the housing market to take advantage of bargain basement prices on distressed inventory. The Obama administration is stealthily selling homes to big investors who are required to sign non-disclosure agreements to ensure that the public remains in the dark as to the magnitude of the giveaway. Aside from the steep discounts on the homes themselves, the government is also providing “synthetic financing to reduce the up-front capital required if they agree to form a joint venture with Fannie Mae and share proceeds from the rental or sale of properties.” (Businessweek)

In other words, US-taxpayers are providing extravagant financing for deep-pocket speculators who want to reduce their risk while maximizing their profits via additional leverage. The plan resembles Treasury Secretary Timothy Geithner’s Public-Private Partnership Investment Program …. Speculators are getting lavish incentives (gov financing, low rates, and severe discounts) in secret deals to buy distressed inventory which should be available to the public at market prices. If that’s not a ripoff, then what is?


Obama’s preferred customers are getting discounts of up-to 60 percent of the home’s peak value and generous gov-backed financing to boot!


As the article above indicates, there’s no shortage of delinquent homes that will eventually be foreclosed. That means the process is being dragged out so the banks don’t have to fess-up to the losses on their fetid pile of nonperforming loans Here’s a little more background from an article in Businessweek

“About 6 million U.S. borrowers will lose their homes in the next five years because of inability to pay their mortgages, creating demand for as many as 4 million new rental households, according to Scott Simon, head of mortgage bonds at Pacific Investment Management Co. in Newport Beach, California….

Single-family rentals are priced to deliver unlevered total returns in the range of 7.5 percent to 8 percent, or about 0.5 percentage point to 1 percentage point higher than institutional-quality apartments, according to a June 8 report by Ray Huang, senior associate at Green Street Advisors in Newport Beach, California.  (“Colony Said to Win Foreclosed Homes Sold by Fannie Mae”, Businessweek)[Link.]

If “6 million homeowners” will lose their homes in the next five years, then why are clownshoes media dupes touting a “bottom” in prices and a “market rebound”?

It’s all hype. And look at how calculatingly fiendish Obama’s foreclosure-to-rental program really is. The big boys have figured out the nearest penny how much they can make by throwing people out of their homes. (7.5 percent to 8 percent) Talk about heartless. And, of course, this whole process is being orchestrated by President Fairydust and his Wall Street Pranksters to keep prices artificially high and preserve the illusion that the banks are solvent.

It’s infuriating!

And if that isn’t hard-hitting enough for you, Jim Quinn writes:

The contrived elevation of home sales and home prices has been engineered by the very same culprits who crashed our financial system in the first place. This has been planned, coordinated and implemented by a conspiracy of the ruling oligarchy – the Federal Reserve, Wall Street, U.S. Treasury, NAR, and the corporate media conglomerates. Ben’s job was to screw senior citizens and drive interest rates low enough that everyone in the country could refinance, attract investors & flippers into the market, and propel home prices higher. Wall Street has been the linchpin to the whole sordid plan. They were tasked with drastically limiting the foreclosure pipeline, therefore creating a fake shortage of inventory. Next, JP Morgan, Blackrock, Citi, Bank of America, and dozens of other private equity firms have partnered with Fannie Mae and Freddie Mac, using free money provided by Ben Bernanke, to create investment funds to buy up millions of distressed properties and convert them into rental properties, further reducing the inventory of homes for sale and driving prices higher. Only the connected crony capitalists on Wall Street are getting a piece of this action. The Wall Street big hanging d[!@#*] have screwed the American middle class coming and going. The NAR and media are tasked with what they do best – spew propaganda, misinform, lie, cheerlead and attempt to create a buying frenzy among the willfully ignorant masses. The chart below reveals the truth about the strong sustainable housing recovery. It doesn’t exist. Mortgage applications by real people who want to live in a home are no higher than they were in 2010 when home sales were 33% lower than today. Mortgage applications are lower than they were in 1997 when 4 million existing homes were sold versus the 5 million pace today. The housing recovery is just another Wall Street scam designed to bilk the American middle class of what remains of their net worth.

Of course, economist Michael Hudson would put it a little differently: banks are trying to roll back all modern laws and make us all into serfs.

In other words, the giant financial service companies are attempting to privatize public resources, socialize losses, scam people out of their homes and other private property … and then rent back to us what we used to own for a hefty price.

Do you understand the game now?

Category: Credit, Real Estate, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

22 Responses to “How Another Housing Bubble Was Blown … And Why”

  1. Pantmaker says:

    Barry you’ve got balls bigger than Texas posting stuff like this…3/4 of your readership won’t know whether to shit or go blind. Respectfully, I stand in front of my computer and salute you Sir. Outstanding.

  2. Willy2 says:

    According to my info, some 90% of all new mortgages are backed/insured/guaranteed by the FHA. Excellent way to make a buck on the back of the US taxpayer, right ?

    • No, its that the private insurers withdrew/blew up/crashed after 2005-06 housing peak and collapse

      • Willy2 says:

        1. I wrote “new” & “are”. I didn’t write “old” & “were”. I should have added “after 2008″.
        2. It’s NOT the FHA only who has guaranteed those mortgages. Other government departments have mortgage guarantee programs as well. But the FHA holds the bulk of those guarantees. And the FHA is backed by the US taxpayer. So, WHEN the rental market blows up then the taxpayer is on the hook (AGAIN).
        3. The US government (predominantly the FHA) was forced to step in after foreigners (i.e. non US investors) “threw in the towel” “(sell their Agency paper) starting in the 2nd half of 2008.
        4. Due to changing US financial dynamics AFTER june 2008, foreign investors were ABLE, ALLOWED them to “throw in the towel”. Think “Current Account Deficits”, “Rising USD”, “Commodity prices” & “US Budget Deficits”.

        How long does Jim Quinn keep trotting out the myth that Benny Bernanke has driven (short term) rates down to zero ? Mr. Market dictates rates and then the FED is FORCED to follow.

  3. Richard W. Kline says:

    I’ve never believed the ‘housing recovery [sic] meme.’ The reasons are simple: income hasn’t recovered, nor has consumer debt gotten to recovery levels. Housing prices have a forced bounce off their lows, but only in the most severely distressed markets, and even there prices haven’t come up to where the many who’d love to re-fi are above water—so the conditions for even a re-fi boomlet don’t exist. As we see now as concerned individuals peel the stats, the housing recovery is _speculative froth_ perpetrated entirely by a handful of large actors levering from Wall Street with Federal assistance.

    There is no jobs recovery. Walmart and Starbucks are hiring, at no benefits and bad numbers. Who can even live on that. Long-term unemployment has hardly budged a sliver. Under-30 employment is at numbers that would be catastrophic in a real world political scenario. Even a good month of labor numbers doesn’t keep up with population entering the workforce.

    Manufacturing, as we now see, has no real recovery. Occasional inventory pulls don’t last since end demand just isn’t there. Low sales, lower demand = NO recovery, outside of propaganda. Bonds up the rest . . . no, wait, commodities up, the rest—no, wait again, EQUITIES and rat-dropping bonds up, the rest down. Yeah, that smells like speculation to me, and not by the little joe but by the Wide Guys High in Glass Boxes.

    What we have here is the epitome of socialism for the rich, with public moneies in massive volume and regulatory support to prop up asset prices (principally of assets owned by the ultra-rich) going to a handful of corporate fascistic financial speculators connected to the political system at the top. The rest are left to rot and buy lottery tickets. If we were pogroming a few select minorities and setting up an all pervasive state security apparatus, Mussolini would have tears in his eyes if he were still around.. . . . Oh wait. Guess those perpetrating these policies read _that_ page ouf of the corporate facsism primer too. Meaningless elections will go on as scheduled because nothing of any importance to the power structure ever comes up for oval-blackening there. And as long as the forms of things are still observed, the bourgeoisie don’t see anything different than ever except their spending money doesn’t go as far as it used to . . . .

    • Anonymous Jones says:

      Richard! Haven’t read a comment of yours since I stopped frequenting the Echo Chamber of Epistemic Closure that is Naked Capitalism. But listen, that notwithstanding, I agree with much of your final paragraph.

      And it’s not that I disagree with the general facts of your first three paragraphs, but please answer one question (and it’s for everybody!): If all those facts are *so* relevant…WHY ARE RENTS UP?

      I know GW and YS and you put so much stock in your predictions of housing doom (seriously, she once went after a commenter who said he thought his small town in Colorado was seeing some upward price movement…it was like heresy in front of a Spanish Inquisitor!) that you are unable to process the alternative scenario without bizarre governmental conspiracies.

      [BONUS QUESTION: if you all knew about the "kleptocractic government", why didn't you all (i) predict these conspiracies and (ii) proclaim you knew housing prices were going to rise because of the conspiracies you knew were going to happen? I don't get it, but whatever. I would think you could make a lot of money on the certainty with which you know the future actions on our kleptocracy.]

      At least we have good old Bertrand to the rescue: “If a man is offered a fact which goes against his instincts, he will scrutinize it closely, and unless the evidence is overwhelming, he will refuse to believe it. If, on the other hand, he is offered something which affords a reason for acting in accordance to his instincts, he will accept it even on the slightest evidence.” See, Bertrand even works on “polymaths”!

  4. KFSalisbury says:

    Banks writing down bad debt/being forced to recognize the impaired mortgages will only lead to further NPL pool sales to buy-side firms. Right now, these firms are incentivized to refi or short sale the assets (right now, approximately 5% of all outcomes are covered by deed-for-lease transactions). Leasing the refurbished property can have some attractive cash flows, but it’s also a drag on IRR, given that these funds are charging management fees on the committed capital. Moving the asset allows them to realize their gains.

    There is no question that this is a major issue, and you have PE/HFs that are piling into the NPL space, buying at 60 on the dollar and getting out at between 75-90 on average. But this particular point is procyclical.

  5. Gonzop says:

    where is Michael Moore when we need him?

    Brooksley Born for president !

  6. Petey Wheatstraw says:

    The most appalling aspect of this whole criminal enterprise is that even when the scam is explained to people, they don’t get it.

    They don’t want to get it.

    They would rather not look behind the curtain and see the Great Oz as a patent-medicine huckster that he truly is.

    We ignore those offering us a harsh dose of realism (Bernie Sanders/Ralph Nader, as it turns out), for empty platitudes and the wisdom of crowds.

    As it turns out, Barack Obama is George W. Bush is Bill Clinton is Mitt Romney.

    The Great Oz has spoken.

    Disclosure: I bought Obama’s medicine, the first time, because I believed he offered “hope and change.” I bought his medicine the second time, because Romney barely concealed the fact that his brand of snake oil was actually worse poison.

    What did I learn?

    If you’re going to drink poison, fast-acting, is probably better than timed-release.

  7. winstongator says:

    60% off peak value is not an unreasonable level for a foreclosure. The steepest discount I’ve seen, from the darkest depths of 2008, was 90% – 20k for an apt-to-condo failed conversion that sold for 200k at the time of conversion. Prices on many properties are still 50% down from peak, and there is usually a little extra savings on foreclosures.

    Are these Obama programs classified? Can’t a FOIA request get the info?

    There was a house by my parents (in the town of BR’s South FL office) that was for all intents and purposes foreclosed 1-2 years ago. Was empty since then. Local investor bought it for 60% off through a short-sale 3 months ago. There were extenuating circumstances for the delay, but it was actually 3 years from final judgement to short-sale. Some in-foreclosure properties may be headed towards short-sales instead.

    Original loan was 100% financing (80-20). Total loss to lender, including 3 years of lost interest, and fees to handle the case is approaching 90%. New purchase had no mortgage recorded. We’ll see how the flip goes.

  8. BennyProfane says:

    Fine, I agree with most points, but, let’s look at it from another angle. Suppose the market was left to implode naturally. Where would we be today? I’m guessing homes prices down at least another 20%, maybe 30-40%, and still heading south. Millions and millions more homes empty and abandoned, although, who knows, the banks can barely service present foreclosure processes, so, maybe all of those homes would be occupied by middle and upper middle class squatters, with neighborhoods in some markets starting to look like most urban areas in the 70s, crumbling from neglect. State and municipal finances would be much much worse off than they are today, which is saying a lot, considering the issues they are having with pensions and health insurance alone right now. Of course the banks would be even more insolvent (is that even possible?), with the domino effects that would spread worldwide as, say, J.P. Morgan falls off it’s high horse and disappears into the ether. UE would be stuck in the mid teens, if we were lucky. Probably 20% and above. Then, of course, there’s all of the political turmoil that may ensue from all that. Rick Perry as President? Don’t laugh.

    Hey, at this point, I thought I’d be living in a nice three bedroom condo with an attached garage a few miles from a ski area in Colorado for real cheap, but, that ain’t happening. I haven’t given up hope, yet, though. I believe that we are passing through a stage that just can’t last, and the bubble will finally deflate, eventually. No way that Greenwich hedgies are going to be section 8 landlords for hundreds of thousands of homes scattered about the country for very long. It makes absolutely no sense on paper. Talk to any small landlord. They will tell you that hiring a manager is the first step to failure. Besides, where will the rent increases come from? Rising wages? Rapid increases in the Boomer’s SS accounts or feeble retirement holdings? Forgiving all student debt on a massive scale? I don’t think so.

  9. 873450 says:

    Rather than TBTF and their captured governments scheming to revert their nation’s population back to pre-industrial feudalism, they conspire globally, purposefully transitioning whole blocks of nations into a type of post-modern industrial feudalism with slight geographic and cultural variations. Serfs in America get to drive cars equipped with electric windows and air conditioning.

    U.S. feudalism will resemble that of Saudi Arabia, wherein subject to geographic and cultural variation, a tiny percentage of incredibly wealthy plutocrats will lord over a highly educated population buried in student debt, earning $9/hr, delaying family formation, residing with unemployed or under-employed parents in the same formerly middle class home in the same formerly middle class neighborhood they were born and raised in. Two generations, all employed, barely able to afford paying rent to Blackstone Group.

  10. lburgler says:

    Barry, since you are a macro thinker, maybe you can answer this for me:

    Isn’t all of this just the logical & real consequence of the outsourcing that started in the 50′s and 60′s?

    All of the above complaints seem valid to me, but when I try to point to the source, I’m always barricaded by the service-economy-transition and globalization-good-protectionism-bad folks.

    It has always seemed obvious to me, even though I am only 29, that outsourcing would boost corporate profit margins, and after an initial increase in service sectors, would become concentrated at the top. The result is our own lower and middle classes would go into a long phase of reaching price and income parity with our most ‘competitive’ trading partners, and a new middle class would be born overseas.

    Isn’t that just what is happening? And if so, how can any one force–Fed, Wall St, etc.–stop it? Isn’t it just way too late?

  11. BuildingCom says:

    Remember…. there are 25 MILLION excess empty houses and this is growing as we continue building more inventory.

    • 25 million?!? That number seems enormous & shocking!

      I am not sure I buy that — Can you give us a source that quantifies how and where those 25M empty homes are? Its huge!

  12. victor says:

    Decimal point error and then some; total excess inventory stood at some 2.16 million as of April 2013,

    • BuildingCom says:

      WRONG again “Victor”.

      In BR’s own post we see there are over 14 million excess, empty and defaulted properties out there.

      If you don’t believe that housing prices are massively inflated and that there are 50-60% price declines ahead of us, you’re in for the shock of your life.

      And trust me on this one…… us constructors will make sure it happens.

      • victor says:

        Before accusing me that I’m WRONG again(??) I suggest you:
        1) get your definitions straight reg. excess inventory, vacancies, etc, see US Census Bureau for a set of comprehensive definitions
        2) then go to this comprehensive table published by the same US Census Bureau:
        3) then answer BR’s question, I wont do it for you, my comment pertained to US excess inventory of new homes since you used the word excess.
        4) tip: your 25 million (now reduced to 18 million?) number is meaningless unless you qualify it according to the US Census Bureau Definitions that I gave you the link for.

      • BuildingCom says:

        You are wrong. You’re quoting NAR.

        Do you need a primer on NAR?

  13. Anonomoose says:

    It is amazing to me that people can’t see it.

    There are 2/3 of the companies on Wall Street reporting less earnings.
    A refi counts as a sale of a home. According to how the gov counts…
    It makes me mad that the 401k plans are investing at elevated stock prices.

    We are getting ripped off

    • BuildingCom says:

      “We are getting ripped off”

      You certainly will if you buy a house at current grossly inflated asking prices.