At first, the flood of capital seemed like a one-time opportunity arising from the collapse of the residential real estate market. Once the bargains dried up, the investors were expected to stop buying.
Except they didn't stop. Last year, investors bought about one in five starter homes in the United States (defined as priced in the bottom third of the local market), according to CoreLogic. That was even higher than in the early years after the Great Recession and about double the level of two decades ago.
So, here we go again. The Manchurian President must be in love with this sort of thing. And may well be why he's been pounding on Powell: real estate is largely non-capital capital. That is, it isn't productive in the real productivity sense of a steel mill or auto plant. The only way to make money on real estate, especially residential, is for the buyer to have enough income to pay the nut. We got The Great Recession just because mortgage companies, thence banks, fiddled the numbers to increase the prices of houses. Thanks to Blythe Masters and her CDS fiddle (yes, a 10 year old piece, but at least as relevant today), the conflagration couldn't be contained. Not that anyone involved understood the endemic nature of what they were doing. The triumph of micro-anaylysis over macro. And further proof that a free market disappeared with the barter system.
Without a compliant financial regulatory authority, some or all of that capital would end up being used to build steel mills and auto plants. But, naturally, The Manchurian President and his ilk would rather engage in financial engineering than building infrastructure. Why is this surprising?
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