What people say these days about increasing house prices is that it is “different this time” because lenders aren’t making bad loans to people who can’t afford them. Everyone assumes that is what caused the housing crisis last time around.
But recent research says that is not what caused the housing crisis. Instead, flippers, investors, and people with good credit who kept pulling out cash from their properties as prices went up to buy new properties were the ones that caused the problem. What they were doing was buying homes as an “investment” or to “flip,” and not to live in. This artificially made inventory low (because how can you buy a house for your lower middle class family if all the rich or upper class good-credit investors are snatching everything up with their cash?) and made prices go up into outer space. The investors blew up prices and buried themselves in debt. Then when things got sour they dumped their investment properties to save their personal homes, creating the crash in the real estate market.
This time around we are seeing the same thing. You hear the “how to flip houses” ads on the radio. You hear the non-stop ads about refinancing, pulling out cash, doing anything you can to turn your home equity into cash for you to invest or spend on new toys. You see the “house flipper” shows featuring the same idiots who have returned to the business after going bankrupt the last time around. You hear all the reports about the “low inventory” and “high demand” in housing just like we did in 2005. As interest rates go up, people continue to scramble to buy and lock in the lower rate before it is too late. Listen to any pod cast about real estate investing and they will tell you they are doing exactly the same thing they did last time: pulling out cash and buying new property, then pulling out cash from that property and buying something else, over and over again.
Meanwhile, the number of refinances are going down because why would any sane person (who is only refinancing to lower their mortgage or maybe get rid of PMI) refinance now at 5% when they could have done it a year ago at 4%? If you’re an investor though and just need the cash, you would do the refi anyway. And it turns out that is exactly what is happening. As the number of refis go down, the share of refinances that are just about cashing out on the equity is going up to the same huge levels it was at before the housing bubble burst in 2008.
As of the fourth quarter of last year, the share of all refinances that were cash-outs rose to the highest since 2008, according to Freddie Mac data. Rates have churned higher since the presidential election in late 2016, though they spent much of 2017 reversing the immediate post-election surge.
If it’s different this time because lenders aren’t making bad loans to poor people, but that isn’t even what caused the bubble in the first place, then how exactly is this bubble different than the last one? On the other hand, if we assume that the bubble last time was built by investors and people with “good credit” who were pulling cash out of their real estate left and right, they are doing it again this time. All it will take is a little recession, which has to come sooner or later, to shake things up.