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Nashville's housing market is due for a correction. Ask any local agent and they will tell you, we have never seen times like this before. My point is, our local market is completely and utterly operating outside of its balanced, healthy parameters. The only time in our history that we saw markets like this, was back in 2006 / 2007. The local housing market correction will be preceded by a national market correction which I do believe will happen towards the end of 2016....if not sooner. So, what's happening?
All of the measures used to prevent the total collapse of our economy in 2007 during the bubble burst, has done nothing more than further weakened our economic foundation. Sure, you may think I am sounding a bit like the sky is falling but, I have to tell you, I really do believe the Nashville housing market is overly blotted by speculation, lack of inventory, cheap money and greed.
As a homeowner or a potential buyer you need to be aware of this pending correction but, prepare for it as well.
#1: The stock market wipe out: Margin Debt - This measures the amount of money being borrowed to invest. What this reveals is that banks and wall street firms are leveraging their money at record levels. The last time we were this high, was in 2007. Essentially the stock market is going up because people are gambling with debt….not cash. They are borrowing money on credit to invest in the stock market.
#2: Participation Rate: This simply measures the volume of the stock market. Right now we are selling at extremely high evaluations but, astonishing low volumes. So, in other words, even though the stock market is selling at all time highs, very few people are actually investing. The biggest factor for this is because of stock buybacks. Essentially companies are borrowing money to buy their stocks back to increase their share prices even though their profit margins are falling. To make their business look healthier than it really is, they borrow cheap money, to buy their stocks back on debt and increase their share prices. For many companies on the stock market, their high share price has NOTHING to do with them increasing sales or making profit but, how much stocks they can buy back. VERY DANGEROUS.
#3: Price to earnings ratio: The measure of the stock of a company vs. how long it takes to actually a return on the investment. The Shiller PE Ratio is historically 16, right now it’s 27. The last time we saw this was in 2007.
NOTE: if the stock market drops 70%.....that will put us back to our 2009 levels. That will collapse real estate world-wide. Let me explain.
#4: Home Equity Slaughter: On average, prices are up about $40,000 per home. Some areas, are up much greater….100k+. The problem is, homeownership rate is at its lowest level since 1965, nationwide. So…how is real estate so strong? Over 10 million people lost homes in 2007. This was s huge buying opportunity for private equity funds. In other words, big investment companies swooped in and bought billions of undervalued / distressed nonperforming assets to drive up prices. We saw Fannie sell HUGE portfolios, worth BILLIONS, to these funds, like Blackstone or “NBS’s” aka Non-Bank Servicers, like OCWEN. They were tasked by this administration to “Save people from foreclosure” or “Preserve homeownership” and that’s exactly what they did but, by doing so, we created a nightmare of a situation where a select few companies own so much real estate, if they flood the market, they can collapse the housing market in a city, over night. Now, you would think that would never happen but, let me just leave you with one, spine chilling thought.
Mortgage rates are at historical lows. In fact, the prime rate can’t get any lower….it’s virtually zero. It’s a fair and valid argument to say, fast, easy, cheap money is causing buyers to come out of the wood work and that’s why housing is booming. With that being said, what happens when those interest rates go up to 6-8%, which is historically what we consider a balanced healthy market? You see, many, many people are getting 30 year fixed rate mortgages and because the money is so cheap, they can buy a bigger, more expensive home because their money goes further. When interest rates go up, that same money becomes more expensive and buyers who could once afford a 200k home, now can only buys a 150K home…..as such, this will account for nearly a 20-40% loss in home values.
Let me put it this way, the fact is, interest rates rise, buyers evaporate. The fewer buyers in the market, home prices have only one direction to go. When those prices start falling, all those private equity firms will begin off loading properties at unbelievable rates to cut their losses. Don’t think it can happen…..well, HUD is already doing it, RIGHT NOW! That’s right folks, HUD has announced it’s MM3.7 winners and will be releasing hundreds, of foreclosed properties into the markets that are “booming” so they themselves can recoup their losses while the getting is good. Once it gets out that HUD is about to start driving down prices in “over heated” markets…..watch these equity firms start off loading as well. When this occurs, combined by the drop in the stock market this year…..2007 will look like a cake walk. We may be talking 2nd Great Depression.