For the last twenty years, the United States has been building a tower of paper wealth. Over time the paper value of homes on the market has far outpaced inflation and wage growth. The current realty market has little connection to reality and we are on the brink of a housing catastrophe.

Price With No Reality Check

The real estate market is inherently flawed. Some claim that it is a perfect example of supply and demand, but that is not accurate. Real estate is the perfect example of a capitalistic market where common sense and ethics are overlooked because greed has blinded the people involved.

Home Prices Heading Toward a Cliff

Housing prices are not governed by a person’s (or family’s) ability to pay. They are governed by a real estate professional who has a financial interest in driving the price up, and an owner that wants as much money as possible. The buyer taking all the risk and if the housing prices don’t continue upward, they lose.

So why would anyone buy a house when prices are already too high?

The ‘Investment’ Loophole

Historically, the one house, one owner or owner-occupied concept kept a check on housing prices. If the buyer couldn’t pay the mortgage, he or she would lose their home. That was a big risk. Today’s investment buyer risks little if anything if they can’t pay a second home mortgage. She or he may lose the home if the investment fails but is a loss of potential future revenue and not a personal crisis.

Investment housing creates artificial shortages because one owner can own multiple homes, removing those from the overall inventory. The lower the supply, the higher the price. In 2016, the number of owner-occupied homes in the United States was 63.6%. California’s owner-occupied rate is 55.3% and at $524,000, its median home price is over double compared to $206,300 for the United States.

Median home price in four cities compared to U.S. average

Another 2007?

The current median price for a home in the United States is higher than it was during the housing bubble in 2007. Any shock to the economy would erase the paper home value and flood the market with another round of investment homes being dumped on the market.

It is a crisis that is easy to anticipate, but no one does. When the next recession hits the United States will once again suffer through a massive drop in housing prices as multi-house owners dump their investment homes and walk away.

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