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Michael Hudson: The How and Why of Housing and Education Bubbles

michael-hudson.com  ( Original )
MAY 25, 2017

Economist Michael Hudson Professor of Economics at the University of Missouri, Kansas City explains that even though housing prices are back up at 2008 levels homeownership is at a much lower level and banks have their loans guaranteed by the US government.



Many of the indicators may be the same, but the character of the crisis is very different now from what it was in 2008. You mentioned, for instance, that real estate prices now exceed their early 2008 levels. All that’s true, but as you just pointed out, 10,000,000 people have already lost their homes. That’s what economists call housing moving from weak hands into strong, and they applaud that because instead of poor families, minorities, African-Americans and Hispanics buying homes that are way beyond their ability to pay the mortgage on, these houses have already been lost or foreclosed and Blackstone bought them, and other hedge funds bought them. They bought them with cash.

The reason they did that (instead of by the debt leveraging – the basic real estate strategy since World War I), is that interest rates available on bonds are so low. More money can be made as landlords than by writing mortgages. The Fed was plunging its zero interest rate policy (ZIRP) in order to try to re-inflate a bubble. But with these low interest rates, Blackstone and other hedge funds in Wall Street could make more money renting out these properties than they could by actually selling them or speculating In fact, these were better returns than they could make in the bond market. 

The effect is very interesting. Leading up to 2008, rents were actually going down. The more real estate prices were going up, the lower rents were falling, because 17% of the market was by flippers, by speculators who borrowed to buy a home or apartment. They thought okay, we’re going to buy a condo, buy a house, we’re going to wait for the price to be inflated. They all were desperate to find somebody to live in these apartments, to at least help cover the interest expense of buying these things. 

The result was that rents fell. Right now it’s the opposite. Rents are going way up because there’s much less property available either to buy or to rent. People can’t afford to qualify for the bank loan, so they can’t afford to buy housing, and they can’t find rental apartments because these have been monopolized, maybe 20% in some areas by the hedge funds, Blackstone and other people. 

My friend Gary Null, for instance, had Blackstone buy his building, smashed the furnace, wouldn’t turn on the heat, and forced him to move out so it could empty out the property and try to raise the price. That’s on commercial real estate. So these guys are really putting the class war back in business. 

Housing prices are going up in Canada and Australia, but again it’s not so much a bubble like it was before. The financial structure has shifted, largely because it’s being bought by very wealthy absentee owners instead of by the population as a whole. So the rate of home ownership in America has fallen by about six percentage points. That’s about 10% of the housing population, so you’re having housing way beyond the ability of most Americans to afford and beyond what banks are going to lend to buy a house.