The New Real Estate Bubble? No-Money-Down Loans on $2 Million Homes

real estateThe hottest real estate market in the United States is now offering 1% interest rates and zero-down on $2 million home loans. This won’t end well.

In each successive real estate bubble, realtors, builders, lenders, and borrowers never seem to learn anything. Bloomberg reported yesterday that in Silicon Valley, banks are lining up to offer tech’s elite cushy home loans:

Social Finance Inc. has deals with Google and other top technology companies that allow it to market to new hires. First Republic Bank — which gave Facebook Inc. billionaire Mark Zuckerberg a 1.05 percent interest-rate mortgage — has opened branches in Facebook and Twitter Inc. headquarters. San Francisco Federal Credit Union will finance 100 percent of houses costing up to $2 million.

Lenders are dubbing their practices “white-glove service,” hoping to court elite buyers and establish long-term relationships. They’ll even consider non-liquid assets tied to stock shares as potential future income. Whatever it takes to make a deal work.

The ramifications for real estate ETFs could be severe. While Silicon Valley’s practices seem to be contained to a small area, there’s nothing preventing the process from spreading elsewhere, and perhaps being offered to lower-income borrowers. And if it does, we could easily have a repeat of the last housing crisis — where lenders gave out millions of risky loans in a period of overinflated home values.

VNQ-2016-07-28

The Vanguard REIT Index Fund (NYSE:VNQ) posted small losses in premarket trading Thursday. The VNQ has risen 13.5% since the start of 2016, more than doubling the returns of the S&P 500.

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