If Rates go Up Housing Will Implode-Fabian Calvo

bubbleReal estate expert Fabian Calvo says, “There’s a lot of manipulation from government agencies and the Fed that is creating this rise in asset prices . . . but it is all an illusion.” Calvo’s company, TheNoteHouse.us, buys and sells $100 million in distressed debt a year. Calvo says, “The Fed thinks this will work. I don’t believe it. I think we’re going to end up in some kind of currency crisis or come kind of bond crisis.” Nevertheless, the Fed policy of suppressing interest rates is working–for now.

Calvo says, “The Fed realizes there needs to be a low rate environment for housing to recover or it’s a huge implosion. They have thrown underwriting guidelines out the window. They are going to continue with no money down loans or very little equity.” The Fed also knows that many big banks are technically insolvent. Calvo contends, “You have a lot of these zombie banks. If you mark-to-market their assets, they would be bankrupt.” So, the Fed and the government will continue to print money to keep housing prices and the big banks from collapsing. Join Greg Hunter as he goes One-on-One with Fabian Calvo.

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  1. Since it is the Feds goal to reinflate the housing bubble the chances of intrest rates going up is probably the same as the rate, almost zero.

    • With the Fed now in control of both the long and short end of interest rates, there is no chance of rates going anywhere but where the Fed wants them.  This is a terrible situation because there are no brakes on federal spending whatsoever.  We are rocketing downhill at an increasing rate… and there are curves ahead that we cannot successfully navigate at our current velocity.

  2. The Feds control 70% plus of the housing loan market.  Subprime rates of 2.5% and 3% down are doing to do the same thing as the 1% teaser rate subprime BS that seduced John Q Citizen into this morass the last time.  The economy is declining, wages are dropping, taxes are rising, businesses are not hiring (or laying off), and someone thinks this housing bubble is sustainable.  The individual buyers are coming in thinking its safe to buy and large profits are in store for those who buy now.  NOT!  When the price of everything ramps up again and gas costs $7.00 a gallon, that home in burbs wont seem such a good idea.
    A large percentage of  the homes are being bought by hedge funds or offshore money from China, Canada, Japan. The prices are bumped through offers of 10-20% over market to secure tranches of 10, 100 or 1,000 midpriced homes from the TBTF banks or private sellers who bought 2 years ago.  Inventory is as low as it has been in 10 years so the appearance of price increases seduces the unwary
    The problem is pretty clear. 
    A home has embedded costs that many wont be able to afford, and that includes the hedgies and off shore buyers. If these purchases bring us, as a nation, down to 50% home ownership, the renters won’t be able to pay enough to maintain the cost of the homes owned by the landlords.  Cost factors will go up but rents can’t since the average person is going backwards in their incomes today.
     This means the homes will be dumped on to the market once again.  Homes are not an economical investment today despite the fact that the prices are going up. When the cost factor reality sets in then prices will drop.  These large block buyers will find this out soon enough. Their only recourse will be to flip the homes before the price drops or suffer with the price declines.

    • Or, in other words, the housing collapse of 2008 was never actually repaired, so not only can happen again but must happen again?  ;-)

    • Ag land is where I would sink money, we are on the verge of a world food crisis and rising prices.

    • @AGXIIK
      Great post.

      I just wanted to posit that the increased cost of energy is going to kill the average person who doesn’t have an energy efficient home. Energy costs are going to go through the roof in the next couple years. 
      Inflation can kickstart like a burning pinecone and find itself in every commodity when the banks start unloading their excess reserves into the market from the Fed’s MBS purchases.
      Once inflation rears its ugly head in a unsustainable manner, the bond market, municipal market, student loan market, mortgage market, and anything tied to a fix rate is going to collapse in value as rates rise. The Fed’s hand will be forced and just as it was in the 1930s landlords will allow tenets to stay “rent free” just for the cost of maintenance. There are some stories I have read about landlords that let their tenets stay rent free to keep the maintenance of the home stable and then when the economy came back, so did the rents. 
      Of course everyone says that that time was different, “it was deflationary”, but what matters is not if its inflation or deflation because now just like then, everyone was overleveraged and on margin. We will most likely experience deflation in “select” sectors like housing that were not allowed to honestly bottom, in addition to consumer debt, and failing banks. While the real commodities find inflation through the increased money supply that will eventually find its way into real things once the banks start spending their excess reserves. So the answer isn’t one way or the other, we could in fact experience both inflation and deflation at the same time just in different sectors and industries. However, the food, energy, and commodity inflation is what will be painful, while the value of peoples homes could come back down. I think it will be something we have never seen before. 
      There are numerous scenarios that can play out but one has to remember that we are essentially sitting on a powder keg of dynamite; all it takes is one spark.

  3. I am eagerly awaiting the canadian market to shit the bed. I sold out in october and am renting for a year. I hope to rent longer, it all depends on how deafening the arguing from my wife becomes. I hope things skid before they do.

  4. I bought a short sale in Fall ’11 in the San Francisco Bay Area, and my mortgage payment was barely higher than my rent so I don’t see how that could be a bad investment.  However, it is blatantly obvious to me that we are entering a new bubble, as similar homes to what I purchased are now selling for 30% more than what I paid 2 years ago (California tends to have more extreme swings in the real estate market).  

    People looking to get into RE now have already missed the bottom and we are likely 75% of the way to the top (2001-2007 is now 2008-2014).   You now hear talk on the news and radio of how great the housing recovery is.  Once you hear everyone talking about it you know it is time to get out.  (side note: no one I talk to in casual conversation ever mentions gold or silver, so I figure we are no where near what is possible for PMs). 

    So, I figure sometime between now and 2014 you have to get out to time the top, and spring/summer is typically a seasonal high for real estate.  We will likely see price increases accelerate significantly this summer as we near the peak before collapsing sometime in 2014. I’m considering selling and walking away with a $200k profit (not bad for 2 years), but good luck convincing the wife to move out after we just got settled. 

    So instead, I’m stocking up on food stuffs, setting up a large vegetable garden/aquaponics system, and stacking with every penny left over so i can weather the collapse when it happens. 

    • “…and my mortgage payment was barely higher than my rent so I don’t see how that could be a bad investment.”
      If the roof leaks or the heating / AC system fails, will that make it clearer?  Ownership is usually a very good thing but it does have its costs.  Could be that you bought at a very good time and will do fine.  On the other hand, Calif. has been circling the financial drain for a while now and I would prefer not to own anything in that state… or any other state that is in debt up to its eyeballs.
      “Once you hear everyone talking about it you know it is time to get out.  (side note: no one I talk to in casual conversation ever mentions gold or silver, so I figure we are no where near what is possible for PMs).”
      Agree on both counts.  When everyone is talking about something, it is a near certainty that it is over-bought and near a market top.  Gold and silver ownership are a LONG way from that.  Other than some jewelry or perhaps silverware, the average American doesn’t own ANY gold or silver.  We have a beautiful set of silverware but, unfortunately, it is plated… heavily plated to look nice but because it is plated it is not especially valuable.
      “I’m considering selling and walking away with a $200k profit (not bad for 2 years), but good luck convincing the wife to move out after we just got settled.”
      There is no way to sell a house fast enough to avoid a market collapse.  IMHO, you should find some reason for selling and book that profit ASAP.  As a husband with 43 years of experience at it, I understand the low odds of convincing one’s wife of anything of which they do not wish to be convinced.  Been there, done that, and have the scars.  ;-)
      “So instead, I’m stocking up on food stuffs, setting up a large vegetable garden/aquaponics system, and stacking with every penny left over so i can weather the collapse when it happens.”
      Excellent ideas too but don’t forget the security aspects of all this.  Having a lot of desirable goodies when others are suffering because they do not only makes us targets for theft… or worse.

    • Ed B, that’s what my Mossberg is for :)

  5. I’m in the business and we haven’t seen the bottom yet. As Fabian say’s there are millions of homes sitting to be foreclosed on and the banks are making it difficult to even get a loan, especially in my area.
    I do a lot of Short Sales which are a pain in the butt, so the figures you see that the housing market put out and even the Realtors Assoc are bogus and does not tell you the real truth. Makes me puke. I also feel for the Buyers getting in right now, sure it is cheaper than rent but the property taxes are going to go up and up and up.

    • “… there are millions of homes sitting to be foreclosed on and the banks are making it difficult to even get a loan…”
      I just do not get this.  One would think that the banks would be falling all over themselves to get as much real estate off of their books as possible.  Instead, they are foot dragging as if they expect the House Fairy to come along, wave her wand, and turn all that dead money into fat profits with no effort on their part.  Not gonna happen, guys, so un@ss those cushy leather chairs and get busy making loans to anyone who can afford to buy a home.  I am not suggesting repeating past errors here by making liar loans to everyone and anyone but surely there are people out there who can afford moderately priced homes and who want to do so.

  6. One thing I worry about is the Fed buying up MBS, essentially laundering this garbage off the balance sheets of banks, making them unaccountable and further distorting the markets.

    • Distortion is their game and Bernanke is their name.

    • Agreed… When I see the Fed buying all these MBS’s, my suspicion is that they’re buying up the debt of all of this real estate, and when things collapse, they are left holding all of these bankrupt properties, and left with no other choice but to….. NATIONALIZE HOUSING! How convenient. I’m not well versed in this area, so tell me if that is way off base, but that would seem to be one of the primary directives they would have coming out of this collapse (further solidify one more plank of the Commie Manifesto). 

  7. Last Straw Congratulations on your successful purchase. The idea of moving, with your wife nesting in, is a tough one. The idea of the Bay area having a bubble is probably accurate. If the tax laws still allow you to take $250-500,000 in gains in a personal home still apply that would be a good chunk of change to rotate into another home. If the opportunity presents itself a move to Nevada might be the cards. We have 0 income and cap gain taxes. If relocating to NV is possible with job or business concerns that could be a good move. I heard that with the CA legislature 75% Democratic supermajority, there are rumblings about repealing the Jarvis Gann Proposition 13 that has helped keep bug tax hikes down to dull roar. As broke as CA is, these politicians owuld love to boost the property taxes. Property taxes in NV are about 2/3% of the CA rates. Some homes in Carson, Minden and Gadnerville can be had for $300,000 or less, with some acreage. Snow and cold temps are a factor but would not leave you without the gardening aspects you noted. Good luck with all your ventures.

    • AGXIIK, the property tax concern is very real here in CA.  How else is our legislature going to fund $100 billion projects like the idiot bullet train?  Unfortunately a move to Nevada is not in the cards, but when the market crashes I will definitely be looking for rental properties in Reno. 
      My state has gone so far left I once believed it beyond repair.  I have actually heard friends and neighbors/community members discuss the virtues of communism and how evil our capitalist society is.  However, the definition for “millionaire” keeps creeping lower and lower in regards to the tax base, with the old top tax bracket in CA now pushed down to $250k for 10.3% state income tax, and new “super rich” tax brackets with the top rate of 13.3% for anyone making over $1 million.
      Not to mention the tax brackets are never adjusted up for inflation, so more and more of the people around here are waking up to find themselves classified as “the rich”.  
      Our latest tax hikes will never fix the problems, as it will just drive the wealthiest Californians out of the state (see Phil Mickelson) resulting in lower overall tax revenues.  This will lead to ever increasing taxes on the middle class. This tax time will be a huge wakeup call for a lot of people in my state, which will hopefully swing some voters back toward fiscal conservatism.  

    • Anyone who starts yapping about the wonders of communism has not only never lived under that most damnable form of government ever invented but has also never seen the crushing effects it has on people and nations.  Those of us who have are FAR less impressed by it.  I am, however, reminded of Winston S. Churchills’ comment on the matter:
      “The main vice of capitalism is the uneven distribution of prosperity.  The main vice of socialism is the even distribution of misery.”  Winston Churchill
      “However, the definition for “millionaire” keeps creeping lower and lower in regards to the tax base…”
      If the left could ever be honest about this, they would finally admit that their real definition of “millionaire” is anyone who has $1 more than they do… and they MUST be punished for that excess!
      “Our latest tax hikes will never fix the problems, as it will just drive the wealthiest Californians out of the state (see Phil Mickelson) resulting in lower overall tax revenues.”
      Indeed.  Worse yet, this sort of thing will also drive out those who work hard and are the most productive, further eroding the tax base.  Money is incredibly mobile these days and it WILL seek the level at which it is best treated.  The good news is that other states with more realistic views on these matters will be more than glad to take all of those nasty wealthy and productive people off of Calif’s hands.

  8. lol the “Chinese Yen”

  9. Ron PaulLib  Feds owning our mortgages? My fear too!  Nothing good will come of that
    ich1baN   On another channel someone started calling the coming monetary era as hyperstagflation. Exceptionally high inflation with exceptionally low economic rates. It’s happening elsewhere but has not hit in the US yet.
      As one who struggled through the stagflation of the 1970, living just about $20 ahead of each paycheck and hoping ends met, I know what it feels like to see wages and business slipe backwards, loan rates triple to 15% and all consumables, rent and services double. Paychecks did not double in nearly 10 years.  I started the 1970′s making about $4 an hour. When the 1970′s ended that $4 an hour had oozed up to maybe $6 an hour. 
    Many moons ago Doc posted a set of essays that talk about what happens when inflation takes off as the average person loses onfidence in the FIAT and tries to front run prices on  those needed items before they go up in value by 50-100%. If there is any type of scarcity, real or perceived, the inflation takes hold. Those trillions of dollars sloshing around the globe, looking for home, will find one when businesses and consumers realize the jig is up with value of their dollars. It’s tough enough to make ends meet or just wave as they go by today, but the really harsh inflation has yet to hit. 
    Whether one owns residential or commercial property, the costs of maintenance, utilities, water and mostly importantly, the cost of money,  races up, the values of income properties drop.  It seems counterintuitive but the prices can drop hard and have in the past.  The cap rate of a property is the expect return on the invested funds.  The rate of return is smashed when costs exceed the income.  No tenant can pay exponentially rising rents just because the landlord needs to cover his costs. Owing property with a fixed rate mortgage is all good and well but prices can drop around the owner despite their low rates.  The property may still have good economics nonetheless. Property sales velocity stalls in those cases, creating a market with few comparables, thus making that market a big unknown.  When construction and real estate sales stop, the entire economy takes abig hit.
    The value of a property actually goes down and sometimes precipitously if interest rates and costs shoot up.  No investor willingly overpays on a property where the cap rate drops to near zero or even less. The property price must be adjusted downwards to compensate for the higher costs.The higher the rate, the lower the cost. Anyone with the capital to buy investment properties is not going to sign a suicide pact by borrowing to buy an property like this.
     Many years ago when interest rates were quite high and rental rates low, the properties prices were sometimes 80% less than peak years when interest rates dropped. Rates that were once 12% dropped to 4%. I had the experience of financing the same building at $40 per square foot.  In later years with lower rates, the building went for $160-200 per q ft.
      Values shot up 100-200% over a 10-15 year period. Notwithstanding the economic activity (low rates were also tied to stronger economic time) these hard costs were capped and drove cap rates up and prices along with them.  When rates eventually shoot up despite the Fed’s mightly ZIRP hammer, the prices for properties could drop. Hyper inflation just makes a bad situation worse.  Renters will be allowed to stay on at reasonable rates, as you say, just to keep the property in good condition but no one benefits.  Despite what we think of landlords, they have to eat too. Without them being able to acquire properties and rent them out, many would be without shelter.

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