America’s unique style of capitalism works not because we have a world full of willing customers, but rather because we have learned how to get our 300m or so citizens (and resident aliens) to buy like there’s no tomorrow. Lately, we’ve been importing about $40bn more than we export each month. And we import a lot, because Americans buy a lot.
It’s not that we’re stupid, necessarily, just trained from childhood to consume. We grow up spending money like it came out of a Monopoly game box because that’s what we’ve been trained to do with many innovative tools, like spot advertisements, celebrity endorsements, peer pressure and, well, games like Monopoly. The basic rule of the game is to buy as much as you can before the next person buys it. Prices are pre-determined and the house next door was built in order for us to compete with whomever lives there.
Perhaps because we’ve been brought up paying whatever the game manufacturer says the real estate is worth, Americans love to buy when they feel like they’re getting a deal. That’s why Wal-Mart can reduce a price on some crappy Chinese product and people will line up at the checkout with their carts full of it.
After nearly three years of recession, Americans are tired of not consuming. And so, while unemployment might still be hovering around 10%, new health care legislation might be sending business owners into convulsions, consumers are heading back to the mall. Bloomberg Businessweek
reported this week that consumer spending rose in February for the fifth straight month, up 3.4% from a year earlier, according to data from the Bureau of Economic Analysis
. As Paul Jackson wrote yesterday, consumers will shop and shop, until the mortgage drops.
For its part, mortgage loan volume followed a pattern similar to other US consumption, growing slowly but steadily from the 1950s to the late 90s, when things got a little weird. Until the late 90s, the average person couldn’t just walk into a mortgage money store and sign for a new home. Bankers would have laughed themselves off the fairway at the thought. Then someone on Wall Street figured out that if you price the risk right, you can sell it and make loans to anything that breathes. And they did, and laughed all the way to their yachts. Then option ARMS allowed mortgage originators to offer US home buyers great deals on real estate loans (for a limited time).
Of course, that bubble (which wasn’t technically a real estate bubble so much as a bubble of America sales genius) burst, just like we knew it would.
Those buyers, and the investors that enabled them, are out of the market now, so the government is banking on some old standbys to help bring the US housing industry back to life—flippers.
I know, I know. All my mortgage fraud-conscious friends are wishing they’d called to tell me to abandon this column before I sent it to my editor. Flipping is bad. We know this. Most of us know this. The government doesn’t know this. Or maybe they know something we don’t know.
Flipping is a type of mortgage fraud perpetrated by undervaluing a property, purchasing it and then selling it at market price or above (if your appraisal co-conspirator is good enough) and absconding with the profit. Even the government knows this is bad. But that didn’t keep the FHA from issuing a one-year waiver of its anti-flipping rules, allowing borrowers to get FHA financing to buy homes that have been held by the seller for 90 days or less. As expected, investors hot to invest in foreclosures, to realize a quick profit, have been moving back into the market.
Will this work? Who better than investors to take a bite out of the millions of homes currently on the market, not to mention the shadow inventory waiting in the wings? They are trained to add value intelligently and market it effectively to people who need shelter and still believe in the American dream?
It all depends upon the price, or more appropriately, the valuation. Americans will buy anything if the price is right, which could help the industry unload a lot of REO. But if we don’t kill valuation fraud dead, investors will pocket a lot of recovery money and we’ll end up right back in the same situation 18 months from now. Too bad they don’t teach us Americans how to haggle.
For more on the impact of valuations on the housing market, see the HousingWire supplement, HWfocus.