Glinkonomics, life this week on WSB radio, Ilyce talks about the latest economic news and how the housing market is doing. 

Hey everybody, welcome back to the Ilyce Glink Show live on Sundays here on news talk WSB. We are rebuilding America one house at a time, starting with yours.

I’m going to get started talking about the economy, Glinkonomics is what my team at home has been calling it, which is sort of hilarious. But what I do each week is take a bit of a deep dive into what’s going on in the world, and I have to say this is sort of an interesting week.

We saw that the FHA is going to take a $1.7 billion draw from the treasury because they’re losing money hand over fist. The numbers are absolutely astronomical. It’s interesting because a lot of the loans that are failing now, the FHA loans that are failing, are loans that were made during the housing crisis… when nobody else would lend money to anybody, and borrowers were truly at a loss so they went to FHA. The FHA did a lot of these loans, a much bigger percentage than normal, and now a lot of those loans are failing and they’re failing at a large rate. And for the first time in FHA history, the FHA is going to take a draw from the government just to keep the required amount in its bank accounts, essentially. And what’s interesting about this is, to me anyway, is that it points to a real discrepancy because we want the government to take less risk and yet the real estate industry lobbying efforts… so the realtors, the home builders, the National Association of the Remodeling Industry… there’s all kinds of people whose livelihood comes from building new homes, selling new homes, selling existing homes, financing all kinds of purchases and refinancing, and they don’t really want the government to step out. And yet there are all kinds of people who seem to want the government to step in. So it’s an interesting push-pull that’s going on in the housing industry.

And against that back drop, we see that home prices have been rising rapidly. Robert Shiller, in today’s New York Times in the economic view of the business section, talks about how he thinks it’s likely possible that the housing market has really been bubbling up, not just heating up. And one of the things he says is that during the housing bubble that preceded the 2008 financial crisis, so he’s talking 2003 to 2008. In that time, the largest 16 month increase in home prices was 22.7 percent for the period and that ended in July of 2004. So 16 months, roughly a year and a half, would have taken you from January or February or March of 2003 to July of 2004. That, in his mind, seems to have been the pinnacle of the housing crisis. And in that period of time the increase of home prices was 22.7 percent. Now think about that… home prices increasing at 22 percent, almost 23 percent, in a 16 month period. It’s kind of astronomical when you look in the rearview mirror. And yet home prices were up, in real inflation corrected terms… In the 16 months that ended in July of 2013, right? So go back, its 2012 to 2013, home prices were up 18.4 percent. So the only time that housing prices bubbled up bigger and faster than that was in the 16 months that ended in July of 2004. For Shiller’s money, the very heart of the housing crisis.

So Shiller asks is it possible that we’re lapsing into what he calls a “bubble mentality,” a self-reinforcing cycle of popular belief that prices can only go higher. And that’s the question that he’s asking. Do we get to a place, where do we get to a place, how do we get to the place, mentally, where we basically forget everything that’s come before? So how much amnesia, how much housing amnesia or economic amnesia do we need to have in order to believe that this time housing prices are never going down again?

Now, I got this email from somebody last week saying, “Well in my neck of the woods nothing really much is happening.” Where was he writing from? He was writing from Portland. Over the last year or so, Portland’s home prices have gone up on a year-over-year bases, 15 something percent. Home prices are definitely rising in Portland, Oregon. They’re rising in Atlanta, they’re raising everywhere in the greater metropolitan areas. I mean, there might be some places in California that aren’t and certainly blocks are not increasing, but there are definitely communities in Chicago, Atlanta, and Portland where you’re not seeing that kind of an increase, right? So maybe on his doorstep, he steps out and looks around and surveys all the other houses that are for sale and a lot of foreclosures and he doesn’t see the moving. Well, that just means that the big money, which is run by hedge funds and private equity groups that have been coming into real estate, haven’t discovered his neck of the woods, I guess? That’s all you can really say about that. So if they haven’t discovered his neck of the woods, they’re coming. And they’re coming because the big money in real estate hasn’t figured out that it is all a shell game, right? That the moment they stop pumping money in, there aren’t really enough home buyers right now to keep things going.

So I’ve been getting emails from homebuyers out there saying homes are just going so fast. I answered a letter this weekend that wanted to know how clean a contract I felt that they could do in order to compete with the all-cash, clean offers that are out there. Private equity money, hedge funds, all that kind of money, they don’t really care what kind of condition the house is in. They’re scooping up these houses for cash at a lower price, they’re winning them and then they’re putting money into them to renovate… and then they’re either flipping them, selling them for a higher profit, or they’re just renting them out for now. So they can’t compete, the first time buyers can’t get in there because they have financing contingencies. So now there are some agents saying, “Well don’t put a financing contingency in, don’t put a home inspection contingency in, don’t put any contingencies in just make an offer.” Really? So in my mind, a homebuyer who plans to live in the property, an owner occupied property… strikes me that that is an undue risk that you need to reevaluate. If you’re going to go in there without any sort of contingency you’re taking on a really risky thing. Because you’re not a hedge fund and you’re not buying 10 thousand houses… when you buy 10 thousand houses and one needs to be taken down because it has mold that can’t be remediated and you didn’t see because you didn’t send an inspector in, you don’t really care because it’s one of 10 thousand houses. But when it’s the one house and you’re going to live in that house and the house has to come down because there’s mold in it that you didn’t catch because you didn’t have a home inspection… that’s financially devastating. That’s too much risk.

So what I said back to the letter was… you have to really think about how much risk you as an individual are willing to take. Are you willing to put everything on the line just to buy a house? That doesn’t make economic sense. There have to be controls. There has to be a way to protect yourself and all of the financial stuff you’ve built up. And when those controls go away, when you’re willing to cast them all aside, that is a bubble mentality. Because you must believe deep in your soul that one, either home prices are going up forever, which Robert Shiller says is a bubble mentality, or two, you believe you can outlast, in the house, the ups and downs of the market, which means you aren’t really thinking about the cost to own and maintain the house over the next 25 years. One or the other is probably true, or both.

But in the meantime, throwing all caution in the wind and not having any protections is not the right way to buy a house. I don’t think you should buy a house that way. I think that when you get into bidding wars with hedge funds and you toss all caution to the wind, you’re asking for trouble… economic trouble, mental trouble, marital trouble, there’s no end to the troubles that could get piled on when you throw all caution to the wind and say, “I don’t care what it costs, I have to buy a house.” You know what, you don’t. You do not have to buy a house when everything is on the line. It’s just too dangerous.

WSB Radio’s Ilyce Glink Show – September 29, 2013

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