You know what we haven’t talked about lately? Residential real estate. Why is that? Because residential real estate is dead. It has been dead for about 6 years and isn’t getting any livelier. Well, maybe it could be. Let’s explain.
The trouble with residential real estate was that it got far too expensive given its economic utility. We will define its economic utility as the rent it could fetch. When a house cannot be rented out for enough money to carry the mortgage, pay the taxes and yield some small pittance to the investor, it isn’t likely to go up in value. We got to the point where with funny money mortgages, you could get a home for zero down, artificially low monthly payments for the first few years and maybe even interest only for a long time. That made no sense from the lender’s point of view, but they were just going to dump the mortgage on some unsuspecting investor in the guise of a mortgage-backed security anyway, so they didn’t care. Read more