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If You Thought Your Mortgage Was Upside Down Before …
December 3, 2015
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Now let me talk about another case study of how upside-down and backward things are as a result of government intervention.  I’m talking about the residential real estate market.

Logically, it would seem appropriate that for home prices to rise, income would also have to rise for Americans.

However, according to the Case Shiller 20 City Home Price Index, over the past 15 years, (2000 to 2015), home prices rose 70% while real median household incomes declined by 8.5%. In real numbers, that means that median incomes have fallen from $56,800 to $51,939 over those years.

Logically, housing prices are supposed to trend in sync with household income, but that is not what we are seeing. The reason for this inverted disparity is government interference.  Here’s how it works.

Mortgage rates, which are essentially controlled by the Federal Reserve, have fallen from 8.3% in 2000 to roughly 4% today. Every 1% decline in mortgage rates increases a home buyer’s purchasing power by 10.76%.  (Trust me on this math.)

This means that home buyers have 50% more buying power than they did in 2000. More buying power means they are willing to spend more money for the home of their dreams, so prices rise to accommodate those fatter wallets.

The point I am making is that it is not a strong economy or a strong job market that is powering the Real Estate Market; it is governmental manipulation of mortgage rates. These buyers are actually earning less money on average that they were 15 years ago, but their buying power has increased several fold. They have more money to spend, so sellers raise their prices.

It’s crazy. The “real” in real estate has disappeared. These homes are not more valuable; they are simply being marked-up to meet demand. This is the result of manipulating interest rates.

One outside influence however is China.   Chinese money, much of it illegally acquired is finding its way into American Real Estate. I have spoken on this subject at length at numerous club meetings and a great example is San Francisco where the tech boom only tells part of the story of huge price appreciation.   Little is discussed with respect to massive Chinese dollars piling into San Francisco.

The demographic is America will change where over time I believe our largest minority will be Chinese.   Members must understand the implications of such a demographic shift which Vancouver in Canada where I lived is a great case study.   High end buildings in Vancouver remain 30% plus empty which were purchased by Chinese buyers desperate to get funds out of China as a result of a government crackdown on corruption and ill gotten gains.   The local population is completely priced out of the market and in addition to many high end condos many pricey mansions also sit empty as Chinese funds needed a safe haven of protection.

Anyway this is definitely a factor that is not often discussed that is also driving real estate prices in cities all across America. I wrote a long letter to Harry Reid but his forum letter response addressed none of the concerns I had.

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Michael Lathigee

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