Interested in buying a home? Then your first question should be: Is it a good investment? And right now the answer is probably yes.
Housing values are soaring, up as much as 50 percent in parts of the Sunbelt. Buyers are competing with hedge funds to purchase the home of their dreams, and often are outbid by these "flippers" whose game plan is to sell in another year or two at a higher price.
If this sounds all too familiar, it is. This scenario could be a retread of 2006, just before the overheated real estate market crashed and burned. And that is why many sadder and wiser heads are sounding a note of caution: Don't jump in too soon … or at too high a price.
But the real question is: Where is the smart money going? And the answer is: Wall Street is pumping billions of dollars into mortgage insurers, which means that The Street expects the housing market upturn to continue.
Here's some background. A mortgage insurer guarantees that when you get a home mortgage, you pay it back. If you were to die, become disabled or lose your job and be forced into foreclosure, then your mortgage insurer has to compensate your lender for any loss.
Private mortgage insurance (PMI) typically pertains to buyers who don't have at least 20 percent of the home's value to put down when they purchase, and so are at greater risk. In other words: The lower end of the housing market.
Mortgage insurers went through a rough time during the recession, with some incurring losses or going out of business. In fact, the federal government stepped in and guaranteed many of these low-end mortgages.
What Wall Street likes
But the mortgage insurance market is now rebounding, sales are rising and the stock prices of surviving companies like MGIC Investment Group and Radian Group are way up. Radian has quadrupled.
So Wall Street clearly likes the mortgage insurance business. Hedge funds are pouring money into these insurers, says The Wall Street Journal, including some funds that were smart enough to bet against the housing market just prior to the recession. Major investment banks such as Goldman Sachs and J.P. Morgan Chase are backing the initial public offering of new mortgage insurer Essent Group Ltd.
By now we've all heard the warnings of a repeat of the housing collapse:
- Our federal government is on the brink of a shutdown, which would throw us into another recession.
- Newly drawn flood maps and big increases in flood insurance premiums will hurt sales in huge swaths nationwide.
- Millennials, those in their '20s and '30s, would rather rent than buy.
- The hedge funds that are on home-buying binges in Florida and Arizona won't resell, but will instead establish giant rental corporations.
Hungry for a home
Bear in mind that when Wall Street enters into an investment, it also has an exit strategy to make even more money. And this probably entails selling these houses to potential homeowners. Since mortgage insurance is geared to low-end homeowners, this is the perfect way for investors to double their profits. The sale of these houses becomes easier and they also make money when the buyer purchases the mortgage insurance.
And to people who say that young adults don't want to own their own home, those of us who have been there have an answer: Wait until you marry and start a family.