“As a Realtor, I recognized that these low interest rates represented the single largest transfer of wealth to America’s Middle Class – in decades, if not history. It was worth trillions and was more than just a ‘paper’ gain. That transfer was taken from the banks and handed over into the homeowner’s equity and higher property values. This was not market hype, but a real monetary value had from these lowered interest rates.”
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- Overstated Market Bubble: It was interest transfers
Critics of the real estate boom dismissed the Bush years as nothing more than another housing bubble. They claimed it was built upon little more than hype and easy credit. My Realtors eye found something significantly different about this market then past housing run-ups. That difference was the dropping interest rates on housing loans.
My Mother’s house for example was refinanced from something like an 8.5% interest rate down to a 4% loan. This reduced her payments by about a half. She in turn refinanced the house against its new equity that had jumped from $110,000 to about $190,000. She was not richer. The refinancing allowed her to pay off $50,000 in debts. Her monthly payments were much the same. Her loan may have been larger, but the interest was so much lower that the monthly payment was much the same. Simply stated, the new found equity in the house was really nothing more than these reduced interest rates.
Many buyers study the price of the home while overlooking interest rates on the loan. The interest rate can make up 50% of your monthly payment or more. Every 4% in added interest double your cost over 30 years. Dropping interest rates by this same 4% reduces it by half. The bulk of the housing run was not hype, but the affordability transfer of these falling interest rates.
A refrain of political conspiracy is that banks raise interest rates and oil prices on Democrats such as Bill Clinton and Jimmy Carter while dropping them for Republicans such as the Bush’s. Whether this is by design, conspiracy or simply a matter of perception, it allowed me to take note of it once Bush took office. As a Realtor, I recognized that these low interest rates represented the single largest transfer of wealth to America’s Middle Class – in decades, if not history. It was worth trillions and was more than just a ‘paper’ gain. That transfer was taken from the banks and handed over into the homeowner’s equity and higher property values. This was not market hype, but a real monetary value had from these lowered interest rates.
This transfer of wealth between banks and homeowners filled the first 100% to 200% of the homes appreciation. The monthly mortgage cost was the same to buy a $100,000 home at 8.5% interest rate as it is to buy a $250,000 home at a rate of 4%. That $150,000 difference is the bank handing over its interest rate profits to the homeowner. The homeowner who sold their home for this profit was able to monetize that transfer of wealth from the bank to themselves. (I need to confirm the exact numbers once I get more time for editing, but these are about right.)
This was the dyslexic mind viewing the evils of banking interest in reverse. While high interest rates are the bane of any decent conspiracy group, they somehow missed the value of dropping rates. It is amusing that conspiracy complain bitterly about inflationary dangers of cheap money. The complaints about inflation endorse the justification of the higher rates used by the fed. I love conspiracies for they lead to a greater view often missed by the experts. This massive transfer of wealth from banks to homeowners is one example. I came to recognize this banking give away because of these banking conspiracies. Interestingly, the conspiracy groups miss the positive turns of conspiracy theories. None of them noticed the ramifications of this massive transfer to home owners via low rates. Conspiracies are often geared to attack the status quo rather than finding solutions. This leaves them overlooking ‘positive’ developments as we do here.
These falling interest rates were the big difference over the 1980’s housing run up. The 80’s interest rates were quite high. Their rates were running at 8% and higher. The prices on homes than rose higher than this. There was no actual added value given to these properties besides market perception and ‘hype.’ That was not the case of the housing boom of the Bush years.
The Bush housing had real and substantial value added. These interest payment transfers from the bank to the homeowner was one value. Republicans are pegged as gifting the rich, but other dynamics can also come into play. Economics is rarely a zero sum game and so to take from one place often creates a vacuum in another. Finding these inversions comes naturally to a dyslexic brain.
Housing appreciation found an additional value in the tax advantages offered by the Bush tax cuts. A couple would pay no taxes on the first $500,000 in profits against the sale of their ‘primary’ residence. Profits above that were charged at a reduced rate of 15% versus a tax rate of 35%. These tax benefits presented housing with another layer of real monetary value.
The rising values left neighbors to borrow and upgrade their homes providing additional value to the property and neighborhood. Higher end buyers often replaced lower end sellers again providing further economic upgrades. Contractors put in better quality housing and larger homes. Again, this added even more value. A Realtor can follow these kinds of developments for it’s the basis of our sales pitch.
Most economists seemed to have missed these nuanced values to the market place and so many were confined to see rising prices as pure hype. I gathered that the first 100% to 200% of the housing appreciation was based upon all these added values to our American home.
The price escalation above this represented the housing bubble. Let’s take my Mother’s home as an example. It went from $120,000 to about $300,000. The first $200,000 (to $230,000) represented real value from the lowered interest rate, improved homes and neighbors and the tax benefits of owning a home. The last $70,000 to $100,000 represented the ‘market bubble.’ In other words, the market needed a 15% to 30% market correction. Critics called for 35% to as much as 75%.
Housing critics felt that the entire $200,000 price escalation (of my Mothers home) was nothing more than pure hype. They felt markets needed to fall by this same 75% in order to find market parity. This was a miscalculation on their part. It became the official index to the markets ‘fair’ value and the precursor to finding a market bottom. Prospective buyers were scared off if properties had not fallen to this lower price. Our experts had once again grossly overestimated the liabilities and seemed blind to the host of other added values. While the other 4 accounting mistakes added to the economy’s fall, this last one slowed the markets recovery – considerably.
In short, American did not ‘lose’ trillions in value, it was artificially hyped far beyond a ‘true’ market ‘correction. Hopefully, this humble effort will allow the country to correct some if not all of these accounting mistakes in the future.
(Editors note: have to check the numbers here.)
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