Many, dare I say most, people believe that real estate investors caused the real estate bubble. At the risk of upsetting the entire mainstream and non-real estate investing crowds, I don’t believe this is the case.

Why?

Because few people seem to be realize is that the real estate bubble was actually a result of the credit bubble, which much like the spike in debt to GDP prior to the Great Depression, allowed far too many people and businesses (from Mom & Pop small businesses to multinational corporations) to take on debts they couldn’t repay 15 to 30 years later, much less a creative financing loan of the stated income, no doc verification, interest only for 5 years, variety.

The Credit Bubble

These non-traditional, qualify the buyer at any cost loans, were in large part the type of loans that financed the lower one-third value homes (see ginormous image above – particularly Miami and Los Angeles) and are the major reason why so much of middle America are living in homes that are worth less than the note attached to the property.

Not surprisingly, once the bottom fell out of the economy, the banks stopped financing this real life game of Greater Fool theory, home values had no place to go — but down.

It also appears that the only entity that can get things moving again is none other than good ol’ Uncle Sam through tax credits, down payment incentives, interfering in the bond market, etc.

Government Stimulus for All, Excluding Real Estate Investors

With the government handing out billions (trillions?) in stimulus funds to investment banks to stave off receivership and/or bankruptcy, plus the tax credits given to Everyday Joe home buyers via the “First Time Home Buyer Tax Credit”, one has to wonder: when will real estate investors get a taste of Uncle Sam’s stimulus funds.

Experienced real estate investors know the real money is in, boringly enough, buy and hold real estate investments where positive cash flow is the name of the game. Granted, there is very good money to be made in other specialized areas (like fix and flip), but buy and hold real estate investments are one of the few ways real wealth can reliably be created using rental income to service your loans/fees, allowing your property to appreciate in value over the long term, and letting an ever inflating dollar work in your favor using a fixed rate loan.

But no one in the government seems to be interested in, or even promoting this type of well established practices even though old school real estate investors: 1) know it works well, 2) begins to clear the huge backlog of excess inventory, and 3) generates property tax revenues that local and state governments need desperately.

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As Diana Olick mentions in this video clip, Fannie Mae and Freddie Mac are considering increasing the numbers of mortgages an investor can own for the simple, yet seemingly overlooked, reason of clearing off all that excess (shadow) inventory.

Not to talk my own book here, but if the government really wanted to stimulate home buying and stimulate the purchases of bank owned/REO/foreclosure properties, perhaps they should give the same incentives to investors they’re currently giving to home buyers who intend to occupy the property themselves. I understand they’re trying to prevent flippers from making a quick profit, but a few codicils could be easily incorporated into the contracts that require the investor to hold the property a minimum of 5 to 10 years, or any number of other anti-flipping penalties.

Regardless of the impression it sets, and not like politicians are high on the popularity scale anyway these days, but if DC really wanted to reduce excess home inventories, they would begin targeting those with the cash reserves, credit scores and expertise to get it done.

Image Source
New York Times
Floyd Norris
Value Sinking Fastest on Homes Priced Low to Start