We may not be in the midst of another housing bubble but it’s not for lack of effort on the part of the homebuilders. In the attached clip EuroPacific Capital head Peter Schiff says the inducements being thrown in for potential buyers are evidence of desperation, at best, and excess that could endanger the economy at worst.
“If you remember, during the housing bubble instead of dropping prices, which would have been a sign of trouble, the builders started throwing in freebies,” Schiff explains. “Some of the developers were even throwing in brand new cars so they didn’t have to acknowledge prices were falling. Now they’re doing it all over again. Builders are loading up on incentives because they’re having a hard time selling their homes. This is really a precursor to falling prices.”
We may not be back to the bad old days of house flipping but there are no shortage of offers out there. In New Jersey you can get table tops, built out living rooms and all manner of customer-friendly perks to encourage buyers to close the deal.
Still, if the attempt is to divert investors’ attention from the falling levels of demand it’s not working very well. The SPDR S&P Homebuilders ETF (XLB) has been worse than dead money all year. In part that’s because the banks find themselves in the awkward position of being asked to make affordable loans even as the government raises lending standards.
Regardless of why demand is flagging Schiff says the Fed is out of suckers to “lure” into getting involved in real estate with relatively cheap money. Among the big funds that were pushing demand there seems to be a limited appetite as well. After spending more than $8 billion buying up housing in 2012 and 2013 Blackstone (BX) stopped purchases in March of this year.
Basic supply and demand says that fewer organic buyers will lead to lower prices. How low can they go? No one can say for sure, but based on recent history housing has a way of getting much worse than anyone thinks.
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