Although gold dust is precious, when it gets in your eyes it obstructs your vision.
Economists stated that main trigger for the financial crisis of 2008 was the issuance of mortgages that did not require down payments. The ease at which one could get mortgages in the past is what drove housing prices to unsustainable levels. Post-crisis all banks vowed to end the practice forever, or that is what they wanted everyone to believe. When the credit markets froze, we openly stated that the 1st sign that banks were getting ready to lower the bar again would come in the form of Zero percent balance transfer offers that had all but vanished after 2008. A few years after 2008, banks started to mail these offers out, and now everywhere you look you can find 0 % balance transfer offers ranging from 12 months to 18 months. The next step after that would be for banks to lower the 20% down payment required to something much lower. Currently, Bank of America and a few other banks are offering 3% down mortgages.
Now Barclays Bank has become the first British bank to turn back the hands of time; it has started to issue 0% down Mortgages under a program called “family springboard”. There is, however, one small difference. In this instance, a parent would put 10% of the down payment into an account. If payments are made in a timely fashion, this amount is returned in three years with interest.
In the US we like to do things bigger and better than everyone so, it is just a matter of time before this type of mortgage debuts here. As we have stated many times in the past, every bull market ends on a Euphoric note; to get to this level the small player also needs to have easy access to hot money. So far this access has been restricted to the large corporations and the very rich. However, we feel that it is just a matter of time before the spigots will be opened to the small players. The 1st sign of this will be the debut of the 0% mortgage.
The supply of housing is already quite tight in the in U.S. U.S existing home inventory stands at 2.12 million, down from 2.14 Million last month and down almost 130K year over year. At the current sales pace, there is roughly a five-month supply of homes on the market. A 6 month supply is viewed as a healthy balance between demand and supply. Home prices have been slowly rising over the past few years, and the average home price is projected to rise by 5% in 2016%.
Home prices are already rising without the debut of the Zero percent down mortgage, so one can only imagine how much more they will rise when these mortgages become available in the US. Higher home prices have the tendency to make home owners feel better off as they view the paper profits as real money. This leads them to take on more risk, and one of the best places to do this is the stock market.
We believe that lending standards for mortgages and personal loans will be lowered significantly in the months and years to come, setting up the bedrock for the next stock market bubble. Until the masses embrace this bull market, it is going to run a lot higher than the most ardent of naysayers could ever dream off. Over the course of the next few years, we expect both housing and the stock market to trend higher. This bull will run into a brick wall one day but that day is not here yet.
Our main point here is to illustrate that the hot money spigots will be opened even more and that the supply of hot money is not going to end anytime soon. In fact, the Fed is already looking at ways to increase it significantly, after all, that is the only thing that has been powering this economy; end that and the illusion comes to a grinding halt. For now, it is the big corporations and the very wealthy that have had access to this cheap money. When the small guy finally gets his hands on this cheap money, he will do what he always does, start to speculate and hope he strikes it big. Furthermore, rising home prices will create the illusion of wealth, and when people feel they have money, they tend to take on more risk. After all, that’s what they did before the markets collapsed in 2008.
While we spent most of the time on talking about the housing market, the point to keep in mind is that this bull market will probably run a lot higher, because it is still one of the most hated bull markets in history. No bull market has ever ended on a negative note, and the cards are lining up to provide this market with the ingredients it needs to take it to the bubble level. The masses will embrace this market just as the corporate world has done for the past eight years once and they do this market is going to soar even higher.
Lastly, remember that Mortgage in latin means Death Grip. You never own the house until you have paid every last cent to the bank. Until that point, you are nothing but a glorified renter.
Hasten slowly and ye shall soon arrive.