Fannie, Freddie pump up the bubble again, 3% down is back

7 Replies

http://www.latimes.com/business/la-fi-fannie-mae-freddie-mac-mortgage-downpayment-20141208-story.html

3% down government loans will be back for first time home buyers. This should increase the cost of American's #1 expense.

We're seeing the housing bubble that led to the Great Depression play out all over again. This time we already have the highest housing to GDP ratio with the exception of the run up before the previous crash.

It doesn't help that the average wage have dropped dramatically since the last crash too. 

http://upload.wikimedia.org/wikipedia/commons/5/5c...

This is likely a bad sign for investors hoping for appreciation, but how do you think this will affect cash flow investors? I am planning to jump into my first deal, but if it's the height of the market, should I hold off or will I be unaffected if I still get a deal where the numbers work right now? I may have to spend some time underwater if there is a crash, but if I buy and hold, that doesn't matter so much, right?

The GDP number is interesting.  Coincidently I was just reading an article on Bloomberg about ownership rate for older households (80% which is 2x other groups).  It's worth nothing that ownership rates for all other groups peaked in the 80s.  

Not to derail the thread, but here's the bloomberg article.

And not to belabor this... But a few more relevant points to consider:

1. Availability: Fannie Mae will allow borrowers who haven’t owned a primary residence within the last three years to qualify. Freddie Mac’s program will be limited to people who’ve never owned a home, those with moderate incomes or buyers in under-served areas.

2. Past Risk: The study concluded that allowing loans with down payments between 3 percent and 5 percent is likely to have a negligible effect on mortgage risk. These loans made up only about 1 percent of Fannie Mae originations when they were previously allowed.

We will see... :)

Originally posted by @Matt Gehrls :

This is likely a bad sign for investors hoping for appreciation, but how do you think this will affect cash flow investors? I am planning to jump into my first deal, but if it's the height of the market, should I hold off or will I be unaffected if I still get a deal where the numbers work right now? I may have to spend some time underwater if there is a crash, but if I buy and hold, that doesn't matter so much, right?

Take my advice with a grain of salt. My crystal ball is just as foggy as anyone else's. We're in an environment now where for five years everyone has been screaming about how hyper inflation is coming. 

The Fed did everything it could to create Inflation, yet it wasn't able to. The Fed gave the money to the banks, but the banks couldn't loan it. The Fed even bought mortgage backed securities to try to prop up the market. Now it is trying to lower lending standards again.

The bottom line is, no matter what the government tries, there simply is not enough demand for debt by people with credit. Some are scared by the Great Recession, some are already drowning in government student loan debt, some are simply too old to want to move. If something is coming that will reverse those trends, I haven't seen it yet.

This tells me that deflation is probably more likely in the future than inflation. I believe that the trend of low inflation/deflation and decreasing wages will continue.  5-10 years from now I see advances in automation that will increase deflation even more.

Most people on this site will tell you to shoot for at least $100 door in cashflow and the deal will work. Many will point to increased values over time and increased rents over time. Inflation both in increased values and rents certainly made many people rich in the 80's and 90's. I think you now need to consider decreased rents over time and decreased value over time in your calculations. 

@Greg P.  @Eric L.  How do you guys see the baby boomer generation affecting real estate in the next 10-15 years? Will it have an affect of over supply for sfr's?

 Just curious on your thoughts or info. Have you seen any recent study's?

I found this interesting article after my post.

http://www.forbes.com/sites/marymeehan/2014/02/21/the-baby-boomer-housing-bust/

Originally posted by @Jared K. :

@Greg P.  @Eric L. How do you guys see the baby boomer generation affecting real estate in the next 10-15 years? Will it have an affect of over supply for sfr's?

 Just curious on your thoughts or info. Have you seen any recent study's?

 The article that Greg posted was pretty good. My parents are boomers and they retired over the last couple months. They aren't moving and will likely stay with the house until the end. They have an old school pension and won't need to sell. I believe the majority of boomers will stay in their homes as well. Many will stay in the same city for family and many don't want to sell for tax reasons. 

The neighborhood that I live in is 75% 60+ and will likely stay that way for 50 years. How is that possible? Lifespans for humans, (especially those who aren't obese) is increasing.

I honestly believe that the first person to live to 200 is walking around right now. This sounds crazy, but I know a bit about Google X and Google's Calico. If you look at their nano bot project and Ray Kurzweil's predictions, you will see that we are roughly 10 years away from curing cancer/old age with nano bots.

Overall, I believe that the boomers are already causing a shortage of supply which is already a large driver in the market. I don't see this trend changing, but most boomers will soon leave the workforce. They will slow their spending even more. This means more deflation and that leaves a workforce with decreasing wages left to set the price for the homes that are for sale.