CELESTE HEADLEE, HOST:
Let's focus on the state of the housing market next, where there have been mixed signals lately. It's been reported that we've had a rip-roaring recovery in real estate accompanied by a long stretch of record-low mortgage interest rates. Housing prices are up and new home supply seems tight across the map. But on the other hand, analysts say this isn't all good news for would-be homeowners. Joining us to talk about what's going on in housing Roben Farzad, contributor to Bloomsburg BusinessWeek. Welcome, Roben.
ROBEN FARZAD: Thank you for having me. Who loves you?
HEADLEE: Who loves you, baby? Not housing, I guess. Let's talk about Potemkin Real Estate Recovery. What exactly does this mean, this Potemkin Real Estate Recovery?
FARZAD: The conventional wisdom is that real estate has staged a rip-roaring resurgence after being ground zero for the economic collapse. With all of the foreclosures and banks that failed after having binged on bad mortgages, the Federal Reserve, in keeping rates at zero, has succeeded in getting people to dive back into the mortgage market. And we saw builders and real estate companies have a monster 2012. And this has kind of spilled over into 2013, where you're hearing about all sorts of shortages of new and existing homes and real estate agents suddenly have their voicemail boxes full. And yet, you have to reconcile that with the latest U.S. homeownership rate clocked in at 65 percent, which is the lowest since 1995. So what gives?
HEADLEE: You're talking about a universal rate, right? That's the average for the whole country. So that includes both housing markets - maybe in Florida or Las Vegas - that are slower to come back because they fell so far, in addition to the places where houses beginning to booming? Is this sounding right?
FARZAD: That's a good point, but to my mind it also - it flicks at something else. The fact that maybe a lot of this is opportunistic or speculative investing in housing. And when you dig a little deeper, you see that big private equity firms are involved, hedge funds, Wall Street is getting its housing groove back in order to make a buck, not to live the ownership dream and extend the American dream to individual families necessarily. And similarly, you're seeing all sorts of investors from Latin America - places like Argentina and Venezuela and Brazil - with their currencies coming to the United States and trying to buy hard real estate assets. So is it really - in the end I talk about a Potemkin Real Estate Recovery - is the real estate recovery here really reflecting the organic return of the U.S. consumer and the jobless rate? I posit that isn't.
HEADLEE: That kind of worries me because, as I understand it, it was the problem with housing speculation that caused the collapse in the beginning, wasn't it?
FARZAD: That's right. But let's not forget that housing speculation, if we rewind this now 15 years ago and the Internet bubble - we talk about Twitter...
HEADLEE: Oh, right, right, right.
FARZAD: And all the things happening right now, Alan Greenspan kept rates at really low rates for a long in the late '90s. And when the Internet bubble exploded and 9/11 happened, the Fed slashed interest rates again and kept them at lows well into 2004. And that we know, in 20/20 hindsight, swelled this epic real estate and credit bubble.
HEADLEE: Oh.
FARZAD: And Wall Street got involved and all sorts of people who thought they'd be renting for life were suddenly homeowners, no questions asked on lyre loans. And then so that epic bubble...
HEADLEE: So yeah, you're mentioning that because actually the Fed still has our rates - they can't cut them anymore. I mean, our rates are still really low. That's why you're talking about this, right?
FARZAD: Not just rates being at 0 percent since December 2008, but the Fed coming back with three different rounds of quantitative easing. The most recent one where they're buying $85 billion a month in treasury and mortgage security. So they are smacking down mortgage rates whenever they can. And it turns out that this has had intended consequences for people who are credit worthy and can get mortgages, but somewhat unintended consequences - Wall Street and private equity shops are lapping this up. Suddenly, big buyout shops that are not poor, are not derelict, that are otherwise loving life, are out there becoming renters, buying hundreds of thousands of homes to rent out to people who have been kept out of the American dream for the past five years.
HEADLEE: If you're just joining us, we're talking to Roben Farzad, contributor to Bloomberg BusinessWeek, about the state of housing. You know, Roben, what does this all mean for your average American person? If I want to buy a house, does this mean that the rates are so low that it's going to be relatively easy for me? Does it mean that investors are coming in from, as you say, Venezuela and buying up all the cheap stock so that I'm not left with many options?
FARZAD: A and B and all of the above. Look, I'm a credit worthy person - I brush my hair, I brush my teeth, I fear God. I...
HEADLEE: Wait, wait, wait.
FARZAD: I keep a good balance sheet.
HEADLEE: Banks care about my hygiene?
FARZAD: Well, I'm surprised. They've asked for everything but a DNA sample so far. I give them every bit of paperwork and then they're like, oh, you know, I don't know - if you're juggling a couple of part-time jobs - I do not know, sir. Meanwhile, six years ago, you know, anybody who made $15,000 a year could walk in and get a $400,000 mortgage. So the pendulum has swung the other way right now. Banks are the bottleneck.
And in fact, we see layoffs happening in mortgage divisions of the big firms right now because mortgage activity has dried up, especially with rates the way they shot up this summer. So there is a bottleneck. You should be able, as a credit worthy person, to go out there and avail yourself of these really super mortgage rates, but the banks ultimately decide that. And instead, we're seeing a record number of all-cash transactions for homes. We're seeing foreign money come in and put 80 percent down in places like Miami and Los Angeles and San Francisco. And so two different things are happening.
HEADLEE: You know, Roben, I don't - you probably remember - we talked a lot about shadow inventory a couple of years ago. This was the number of homes that banks held because they'd been repossessed and they were just kind of holding onto it. And everyone was dreading it because it was going to bring the value of other houses down as soon as they dumped all these properties on the market. Remember that?
FARZAD: I do remember that. And I'm waiting for the shadow inventory. I mean, I'm on the brink of...
HEADLEE: It hasn't happened yet.
FARZAD: I'm having to go maybe shack up at the YMCA Richmond if this keeps up because my wife and I are like, OK, shadow, shadow. Spring comes, fall comes, summer comes - we've seen just a trickle of listings. Maybe it's peculiar to where I am but I hear about this now happening in overbuilt places like Scottsdale, Arizona or Orange County, which was another epicenter of subprime mishegoss. So it's not just unique to where I am.
And certainly, New York and San Francisco have their own idiosyncrasies. Those property markets are really hot - I mentioned Miami before. I mean, just to give you an idea, Miami was so cored out, that if you were out on a boat five years ago looking at the skyline, it looked like a warzone. You had all these empty buildings. Now you cannot find any fresh condo inventory. In fact, the cranes are going back up in a way that we haven't seen since maybe 2006.
HEADLEE: All right, so I'm trying to find some positive news here in all this, what seems to be, bad news, Roben, for the average American. What about somebody who's underwater on their mortgage? Is it getting easier for them to get out from underneath that and maybe sell their home at what their mortgage is for? Or get out of maybe a really crippling mortgage payment?
FARZAD: It depends on how inebriated you were when you bought this home in 2005 and 2006. Frankly, a lot of people are so underwater that it'll take a generation, if ever, for the home to reach that value. I mean, housing after all, when you look at it in real terms, if you go to professor Robert Shiller's website - he's at Yale. He just won a Nobel Prize.
HEADLEE: Of the Shiller Home Index. Yeah.
FARZAD: The Shiller Home Index. Something since like the 1870s, it's normalized that a little less than 1 percent a year in real inflation adjusted terms.
HEADLEE: Holy cow.
FARZAD: So what we saw over the - yeah, what we saw over the past 10 years was really anomalous. And people, who are waiting and waiting to list their homes for the price to go up 50 percent, are somewhat delusional right now.
HEADLEE: OK, so, Roben Farzad, again, bringing the sunshine from Richmond, Virginia.
FARZAD: Celeste, Celeste, you are my sunshine. You know that. You make me happy when skies are gray.
HEADLEE: Roben Farzad, contributor to Bloomberg BusinessWeek. Thanks so much, Roben.
FARZAD: My pleasure. Transcript provided by NPR, Copyright NPR.