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Posted by on Sep 17, 2012 in Bailout, Real Estate Investing | 8 comments | Print Print

QE3 To Facilitate Next Bubble?

From David D. at FDL:

Analysts have tried to parcel out whether QE3 will really help the economy.

The way almost everyone looks at this is about the impact on housing, specifically mortgage prices. But mortgage rates haven’t changed at all since the announcement of QE3, and if the Fed was trying to influence the expectations channel, the impact really should have been that immediate.

Then again, rates didn’t rise, either. It could be that QE3 arrested a trend toward increasing mortgage financing costs. But more likely, banks are taking the profits out of the eased cost of mortgage financing for themselves:

The banks are choosing not to reduce mortgage rates further. One reason: By keeping the rates elevated, they are able to earn much larger profits when they sell the mortgages into the bond market. If the level of profits on those sales stayed at recent average levels, borrowers might, for instance, pay $30,000 less in interest payments on a $300,000 mortgage, according to a recent New York Times analysis.

The fact that banks haven’t prepped for a backlog of mortgage applications, meaning that the benefits of QE3 cannot possibly get to customers in a reasonable amount of time, leads us more toward this conclusion. Banks have no problem securing cheap backstopping of mortgages, but they don’t have to channel those savings into the mortgages they sell. It’s a form of collusion, because nobody else has dropped their rates to gather the lion’s share of the business. And nobody can actually get a loan to move, either, because that would require hiring staff. This way, banks can benefit from lower rates for themselves on one side and higher rates for customers on the other. The arbitrage between those two prices equals massive profits.

Let me add another postulate to all this. When you have this delay in financing, the beneficiaries are those who have the working capital to purchase in cash. Furthermore, the cheap market for foreclosures invites groups who can accumulate capital to come in and scoop up the housing stock. This is what we’re seeing all over the country – institutional investors buying up foreclosed properties to rent out in the short term and sell at a profit in the longer term. They are securing very large amounts of capital to pull this off.

This is the next bubble, happening right here, and QE3 facilitates it.

Investment firms can scoop up cheap housing stock and flip it into rentals. There’s also talk of securitizing the rental income streams, which really reinflates the bubble machine. Meanwhile the character of neighborhoods completely changes, homeowners get nudged out for properties by the investors, the phenomenon of absentee slumlord-ism takes hold, and power relationships change when one company owns a substantial amount of the housing stock in a city.

What’s happening in housing right now should absolutely terrify people. The forces that are being coordinated to show positive statistics at the macro level are also creating a dangerous environment for the future.

8 Comments

  1. The ability to manipulate a market ensures bubbles will happen. That will never go away, so bubbles will always happen. We should therefore, aim to control and regulate bubbles. This means we need an active legislature with strong anti-corruption statutes in place. This can all be supported by an educated citizenry.

    Instead, we have a captive government and a polarized society. Noone cares what reality is anymore, just how can I get “my” team to win. From American Idol to American President. What we really need is a real-life Fight Club.

    Chuck

  2. I feel like there’s too much hype related to QE3. The new bubble isn’t going to show up in the same place as the old bubble although that’s where people want it to show up. I’m also not buying the investment firms are going to buy up all the real estate and control rent prices fear this guy is selling either.

    The huge banks that have way deeper pockets already don’t know how to monetize their SFH assets. The yields after expenses on SFHs just aren’t that good right now and everyone seems to expect rising rents to be the savior. There’s bound to plenty of failures in this space and then we get to see how you liquidate a ton of rental properties at the same time.

  3. Being a landlord is everything it’s cracked up to be, and yes, they will find out the hard way. The 3-5 year hold could easily turn into 5-15!

  4. New term: Slum-lord Billionaire?

  5. As a landlord myself I agree, as long as you do the work yourself and don’t slumlord. It’s when you outsource the work it becomes difficult.
    Landlording is also a good way to invest in real estate which in Dollar terms has to go up due to the printing presses running “full speed ahead and damn the inflations” again.

  6. Does anyone expect the investment groups to care at all about the quality of work that will go into a home that they are cleaning up to rent. Talk about lowering the value of your neighborhood.
    “Slum-lord Billionaire” is right on and “the phenomenon of absentee slumlord-ism takes hold”

  7. To Chuck –

    If you get rid of the Fed, it limites the gooberment’s ability to manipulate markets. Therefore you prevent bubbles for the most part. Right now you’ve got a bond bubble, courtesy of a government near you. Yet, they’ll never learn and history will repeat itself. The sooner we can get rid of the fed the better of society will be.

    You are dead right on your second paragraph, but we’ll never have an educated citizenry. Our culture no longer permits that. Unfortunately, our society wears a dunce cap and I don’t see a way to EVER take that off. Double whammy is that these idiots get to vote and thats why we have a two party system which really isn’t all that disimilar when you look closely.

  8. Could not agree more chuck ! I am having a hard time seeing who that 47% really is.