Speculators bank on buyers for their exit

Private equity and other ‘all cash’ speculators who have bought up assets the past couple of years, need able and willing buyers in order to have their heavily anticipated ‘liquidity events’. This is where asset bubbles hit the road. To exit, everyone needs a buyer, and as prices have soared, and the real economy stagnated, able and willing buyers are in shorter and shorter supply. This basic fact applies across all markets and has recently been showing its presence in US housing once more.

At still historically low mortgage rates–30-year fixed-rate US mortgages under $417,000 at 4.27% and 4.15% on 30-year ‘jumbo’ loans over $417,000– Mortgage Applications have plunged to a 14 year low. The weekly index is now at its lowest level since December of 2000.

“…as all-cash buyers move out of the housing market, leaving mortgage-dependent buyers to pick up the slack. Fall is usually the season where first-time home buyers are most active, but this cohort has had the most trouble participating in the housing recovery, due to tighter credit and weak job and wage growth. Even government-insured loans, which offer lower down payments, are seeing far lower application volumes, down 18 percent from a year ago.”

Once people are already at record margin and consumer credit levels, at century-low interest rates, they can’t or won’t take on more leverage to buy. Then wages have to increase, debt has to be paid down and asset prices have to fall in order to realign sellers with the pool of able buyers. And so asset bubbles correct.

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