Dan Melson: February 2012 Archives

Something I feel the need to point out when people talk about current issues with the real estate market, for instance, housing prices fall yet again, mortgage rates hitting new lows yet again or the Federal Reserve indicating a need to keep returns low

Q: What happens when you artificially restrict demand (in this case by preventing large numbers of people from qualifying for a mortgage)

A: The price falls until it's low enough that the market will absorb the supply. Profits (return for mortgage investors) becomes non-existent. Money moves elsewhere. Because the supply of people who *don't* need a loan for property is limited to the rich, few people can buy homes. Prices for real estate fall.

Q: What happens to people who move their money from becoming mortgage investors to real estate investors?

A: As prices fall, the same money buys better properties. Capital returns become minimal, but rental returns become very attractive on their own as people who are prevented from buying are forced to rent, driving up demand for, and therefore price of, rental properties.

Q: What happens if you remove those restrictions (Dodd-Frank, et al)?

A: The above trends reverse. Those already wealthy people who moved their money from mortgage investment to real estate investment see massive capital returns as those formerly shut out return to the market.

Q: What is the net effect of this?

A: Massive wealth transfer from those consumers less well off to those with larger financial reserves, including major financial corporations.

Q: Ignoring what the politicians involved say, can I find in their actions any difference between those actions and a directed "evil plan" or conspiracy comparable to those hatched by any number of bad movie villains?

A: Thus far, those involved have gotten away with it.

Otherwise, no

I also feel obliged to point out that even if Dodd-Frank is never repealed, the intended beneficiaries are reaping large gains and will continue to reap them.

UPDATE for clarity

Q: Are the actions of these politicians a credible method of attaining what they say they want - protections for consumers, punishment of those responsible, and avoidance of a repetition?

A: No.

Caveat Emptor