The pieces are in place for another humongous, economy-crushing USA housing bubble; Fed, Obama, and big banks, replicate same conditions that existed prior to the last bubble
Tweet Topic Started: 12 Jan 2013, 11:38 PM (4,692 Views)
Heather Perlberg, Bloomberg | Jan. 15, 2013, 5:56 AM
Jan. 15 (Bloomberg) -- Maggie Medved was stuck with her Phoenix house for two years after the market crash wiped out the equity in the property. Last year, as prices in the area rose by the most in the U.S., she and her partner were finally able to sell the 3-bedroom 1950’s style home and move to a larger place.
“We were counting the days for when we could move,” said Medved, 40, who trains employees for weight loss company Jenny Craig Inc. “We definitely knew it was a waiting game because it would’ve been financial suicide if we had sold earlier.”
Medved was among the 12 million borrowers in the U.S. who at the peak of the real-estate downturn owed more on their mortgages than their houses were worth, blocking them from moving or saving money by taking advantage of the lowest borrowing costs on record to refinance. As prices recovered, the number of underwater borrowers fell by almost 4 million last year to 7 million, according to JPMorgan Chase & Co., and could drop to 4 million within 2 years.
The housing market is rebounding faster than anyone thought possible, according to Blackstone Group LP’s global head of real estate Jonathan Gray, as the Federal Reserve buys mortgage bonds to keep rates near record lows and investors sop up a diminishing supply of properties for sale. Housing construction could boost U.S. gross domestic product by 0.4 percentage point and home price appreciation may add another 0.2 percentage point, Bank of America Corp.’s senior economist Michelle Meyer forecasts.
‘Appreciating Asset’
“It supports household wealth, consumer confidence and can generate greater credit creation,” Meyer said. “If prices are rising, homeowners believe that they will once again have an appreciating asset. It’s a very big change in how they think about their wealth and their balance sheets.”
Medved’s Phoenix home was on the market for two days before it sold for $85,000, just shy of the price paid in 1998. She and her partner Wendy Thomas bought a larger property with a pool for $210,000 in Glendale, about 10 minutes away.
“We’d outgrown the house and the neighborhood took a turn we didn’t like,” Medved said. “Almost 12 years later we were in the hole $30,000. We couldn’t take that much of a loss and needed to stay regardless of what the neighborhood had become.”
Arizona’s capital city is leading the U.S. in price appreciation, surging 22 percent in the 12 months through October, according to an S&P/Case-Shiller index, which had the biggest year-over-year advance since May 2010. Eighteen of the 20 cities in the index showed increases from a year earlier.
Even with the gains, Phoenix prices were down about 45 percent through November from their 2006 peak, according to Zillow Inc. Nationally, prices peaked in May 2007, according to the real-estate website, and are down 19 percent.
Supply Dropping
Prices of properties in Phoenix climbed as the inventory of houses for sale dropped to about 14,700 in December, about half of the normal level, according to Tina Waggoner, a real estate broker in Phoenix, and the one who sold Medved’s property last year.
“The supply has dropped substantially,” said Waggoner, who specializes in distressed sales. “Cash investors are beating out buyers all the time.”
JPMorgan analysts led by John Sim estimate the price growth last year was responsible for a drop of almost 4 million in underwater borrowers. The number of homeowners that owe more on their mortgages than their properties are worth may fall to 4 million by the end of 2015, according to Sim, whose team is the top-ranked for residential mortgage securities in Institutional Investor magazine’s annual survey.
Constrained Inventory
While a 5 percent increase in home prices could lower the number of underwater borrowers to just above 5 million, a move of that magnitude in the other direction would push it back over 10 million, he wrote in the Jan. 4 report.
Supply across the country is being been constrained as institutional investors including Blackstone and Colony Capital LLC have pushed out traditional buyers competing for a dwindling number of properties.
Blackstone, the largest U.S. private real estate owner, has accelerated purchases of single-family homes as prices jumped faster than it expected, spending more than $2.5 billion on 16,000 homes to manage as rentals, Gray said during an interview last week. That’s up from $1 billion of homes owned in October, when Blackstone Chairman Stephen Schwarzman said the company was spending $100 million a week on houses.
Underwater borrowers, who can’t sell without taking a loss, contributed to rising levels of foreclosures, which blighted neighborhood prices by increasing the number of abandoned homes. It also increased the phenomenon of borrowers who saw little chance of their homes ever being worth what they owed on it sending the keys back to the bank and moving out, known as strategic default.
Foreclosures Slowing
Foreclosure starts dropped 28 percent in November from a year earlier, data provider Lender Processing Services Inc. wrote in a report this week.
As real estate prices rise further, more homeowners will emerge from negative equity and may decide to sell, adding to supply.
Still, increasing prices will have a more gradual effect on the housing market, said Karen Weaver, head of market strategy and research at investment firm Seer Capital Management LP in New York. “Home prices are not rocketing up,” said Weaver. “But all the trends are in place. You have an improvement in the negative equity situation and you have a reduction in the amount of people in the default bucket.”
Housing Estimates
Home values climbed by more than $1.3 trillion to $23.7 trillion since the end of 2011, according to Zillow, and prices will rise by 3.3 percent after an estimated 4.5 percent jump last year, based on estimates of 15 economists and housing analysts surveyed by Bloomberg. Sales of existing homes will increase about 7.2 percent in 2013 to 4.98 million, the highest since 2007.
Increasing prices compounded with Fed efforts to keep mortgage rates low could widen the population of borrowers eligible to refinance and have implications for bond investors.
Higher levels of refinancing would be a boon for securities without government backing such as subprime bonds and option adjustable-rate mortgages issued during the housing boom that trade at discounts to par. Faster prepayments could hurt holders of government-backed mortgage bonds, whose prices average almost 108 cents on the dollar, according to Bank of America data.
The improving housing market has already helped the broader economy heal after the crash triggered the worst recession since the Great Depression. The unemployment rate has dropped to 7.8 percent, the lowest level since January 2009 and Fed officials in December projected economic growth in a range of 2 percent to 3.2 percent in 2013.
“For most middle class households, homes are by far their biggest asset,” Weaver said. “So once the housing market starts to recover it helps consumer spending, it helps the whole economy.”
Many have named a U.S. housing recovery as a bright spot in a so-called broader domestic economic recovery.
And data seems to support this analysis, despite a slowdown in sales momentum at the end of the year. Existing home sales in December were up 12.8% from the same time in 2011, with the total number of sales in 2012 rising to the highest level in five years, according to the National Association of Realtors. Meanwhile, the annual price for existing homes also jumped to the highest level since 2005, with the median price of a home up 11.5% in December from the same period in 2011.
But David Stockman, former director of the Office of Management and Budget in the Reagan Administration sees little to get excited about.
He tells The Daily Ticker, “I would say we have a housing bubble...again.”
Stockman argues a combination of artificially low interest rates and speculation are to blame, not unlike the last boom and bust cycle in real estate.
“We don’t have a real organic sustainable recovery because in a world of medicated money by the central bank, things aren’t what they appear to be,” Stockman argues.
And according to Stockman, it’s this medicated, cheap money being put to work by investors that’s driving the apparent healing in some of the hardest hit real estate markets in the country.
“It’s happening in the most speculative sub-prime markets, where massive amounts of 'fast money' is rolling in to buy, to rent, on a speculative basis for a quick trade,” he contends. “And as soon as they conclude prices have moved enough, they’ll be gone as fast as they came.”
By 'fast money', Stockman is referring to professional investors like hedge funds and private equity firms. To his point, global investment firm Blackstone (BX) has spent more that $2.5 billion on 16,000 homes to manage as rentals, according to Bloomberg. It’s now the country’s largest investor in single-family homes to manage as rentals, with properties in nine markets. And Blackstone is joined by others like Colony Capital LLC and Two Harbors Investment Corp. (SBY) in trying to turn this market into a new institutional asset class, Bloomberg reports.
Stockman argues the problem in housing is the two forces needed for a recovery, first-time buyers and trade-up buyers, are missing. With the combination of 7.9% unemployment and staggering student loan debt, he doesn’t see a young generation of new home buyers coming into the market. And with baby boomers heading for retirement with less than adequate savings, he thinks they’ll be trading down with their homes, not up.
Stockman sees a rise in interest rates as the trigger for any kind of bust. He says you can’t have zero rates forever, referring to the Fed’s ZIRP and quantitative easing policies of the last several years.
“As soon as the Fed has to normalize interest rates, housing prices will stop appreciating and they’ll probably head down,” he explains. “The fast money will sell as quickly as they can and the bubble will pop almost as rapidly as it’s appeared. I don’t know how many times we’re going to do this, and the only people who benefit are the top one percent - the hedge funds, the LBO funds, the fast money people who come in for a trade, make a quick buck, and move along to the next bubble.”
Mortgage rates, for their part, rose from an average 3.42 percent to 3.53 percent on Thursday, the sharpest increase in 10 months, according to the weekly survey of 30-year mortgages by Freddie Mac, the government-backed mortgage company. Even still, mortgage rates are hovering around their lowest levels in more than 30 years.
As for the "American Dream" of home ownership, Stockman argues the past model where the government was trying to get to 69% home ownership was a huge policy mistake that led to no-downpayment loans, liars loans, and a degradation of lending standards. He says the government should have no dog in the hunt when it comes to ownership versus renting.
In Sydney, private school teachers with some (but I'm not talking decades) experience earn 6 figures. If you were a chemistry teacher here (not necessarily head of department etc) at a good school you would be earning 6 figures within a couple of years (and have 10+ weeks leave per year).
Of course, these are the harder jobs to get though.
Really? Where can I find out more about this? I'm looking for a career change and I have had a lot of success in teaching/mentoring younger people in the workplace. Maybe that would translate into being a good teacher.
The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary. H. L. Mencken
By John Gittelsohn & Prashant Gopal - Feb 12, 2013 4:13 AM ET
Prices for single-family homes climbed in almost 88 percent of U.S. cities in the fourth quarter as the housing recovery broadened.
The median sales price rose from a year earlier in 133 of 152 metropolitan areas measured, the National Association of Realtors said in a report today. In the third quarter, 120 areas had gains.
The best-performing metro area was Phoenix, where prices increased 34 percent from a year earlier. Photographer: Joshua Lott/Bloomberg
An improving job market and low interest rates are driving up prices by fueling demand for a tightening supply of listings. The national median price for an existing single-family home was $178,900 in the fourth quarter, up 10 percent from the same period last year. That was the biggest gain since 2005, according to the Realtors group.
“Home sales are on a sustained uptrend,” Lawrence Yun, chief economist for the National Association of Realtors, said in the report. “Home sales are being fueled by a pent-up demand and job creation, along with still-favorable affordability conditions and rents rising at faster rates.”
At the end of the fourth quarter, 1.82 million previously owned homes were available for sale, 22 percent fewer than a year earlier, according to the Chicago-based Realtors group.
The best-performing metro area was Phoenix, where prices jumped 34 percent from a year earlier. Prices rose 31 percent in Detroit and 28 percent in San Francisco.
Phoenix Deals
In Phoenix, the inventory of foreclosed homes and short sales, when lenders agree to sell for less than the mortgage balance, plunged 42 percent in December from a year earlier, said Michael Orr, director of the Center for Real Estate Theory and Practice at Arizona State University’s W.P. Carey School of Business.
“Foreclosures and short sales have gone down, eliminating the sources of many cheap homes,” Orr said in a Feb. 7 report. “So the more expensive types of transactions, like normal resales and new-home sales, went up. As a result, new-home construction, which was at rock bottom in 2011, also really came roaring back in 2012.”
Private-equity investors including Blackstone Group LP and Colony Capital LLC are helping to reduce inventory in Phoenix as they compete to buy low-cost foreclosures they plan to operate as rental properties.
Other areas hard-hit by the foreclosure crisis showed large price increases. Prices climbed 26 percent in Cape Coral, Florida; 22 percent in California’s Riverside and San Bernardino counties; and 20 percent in Las Vegas.
Biggest Declines
In the New York, Northern New Jersey and Long Island metropolitan area, prices increased 3.6 percent.
The Kingston, New York, area had the biggest decline in the Realtors group’s report, with the median selling price falling 7.9 percent in the quarter. It was followed by Kankakee, Illinois, with an 7 percent decrease, and Erie, Pennsylvania, with a 6.1 percent drop.
Prices in western states climbed 20 percent to a median $245,200, the biggest gain of any area, according to the Realtors group. Prices in northeastern states rose the least, up 0.7 percent to a median $228,400.
LAS VEGAS - Michael Marchillo, a plumber, has been trying and failing for months to buy a bigger home for his family here in Sin City. He was pre-qualified by a bank for a $130,000 mortgage, which a year ago would have landed a typical three-bedroom home in the area. No more. Now, the 36-year-old says, it's hard to compete with "greedy investors" who come to the table flush with cash for quick deals.
Marchillo is on to something. The once-beleaguered Las Vegas housing market has been on fire since investment firms led by Blackstone Group LP, Colony Capital and American Homes 4 Rent began buying homes here some eight months ago, backed by $8 billion in investor cash to spend nationally.
These big investors and a handful of others have bought at least 55,000 single-family homes across the U.S. in the past year. In the Vegas area alone, they have accounted for at least 10 percent of the homes sold since January 2012, according to a Reuters analysis of housing transactions.
That added firepower helps explain why home prices in this metropolitan area of 2 million people are up 30 percent over a year ago, far more than the national average of 10 percent. Permits for new home construction are up 50 percent, twice the national average.
Local real-estate broker Fafie Moore says private-equity firms and hedge funds have largely "crowded out" local buyers like Marchillo. That's because the investment firms have broadened beyond their initial focus - buying homes at foreclosure auctions. Now, they are also bidding for homes listed by private owners and banks. In a sign of how freely the money is flowing, Moore notes around 60 percent of all sales are in cash these days.
Fellow broker Trish Nash says she has seen cases where a home gets listed and quickly draws a dozen bids, many in cash. Realtors are talking about a mini-bubble forming here.
"There is an artificial appreciation in our market," says Nash. "I know (the big investors) say they aren't going to be flippers, but for them it is all about the bottom line."
BLOWING BUBBLES
Las Vegas would seem a highly unlikely locale for a new housing bubble. There are at least 20,000 homes in some stage of foreclosure, and the jobless rate hovers near 10 percent, some two points above the U.S. average. A healthy housing market depends on people having good-paying jobs so they can accumulate down payments and finance their mortgages.
But the surge here has another origin: the Federal Reserve's continuing push to buttress growth in the wake of the 2008 financial crisis, itself the product of the bursting of a much larger housing bubble.
The central bank is pumping the economy full of cash by buying assets such as U.S. government bonds and mortgage securities. Added demand for those assets is pushing their prices up, and hence their yields down. That's encouraging people to put cheap credit to work at riskier activities that can spur growth - for instance, buying shares in new companies, investing in oil wells or renovating houses.
Prodding investors further out on the so-called risk curve is part of what the monetary mandarins had in mind. But in treating the consequences of the last bubble, the Fed is now spawning new, smaller manias like the Vegas rental rush.
Why Vegas in particular? The market tantalized investors because the crash was so deep here. Even after the recent bounce, prices today are 56 percent below where they were before the bust. The thought was that any recovery would mean easy money. The dry climate makes for lower maintenance costs, too. Similar logic applied to other beaten-down sunbelt cities.
Not everyone is a believer. "The Vegas housing market has only firmed because of speculators," said Jason Ader, a New York money manager and former Wall Street casino analyst who invested in foreclosed homes in Phoenix a year ago but bypassed Vegas. "Vegas is only doing well for now because of the greater-fool theory" - the belief that even if an investment is iffy, you can sell it at a gain to someone else. That kind of thinking is typical of bubbles.
Cracks are showing in Vegas and beyond. Here, rents on single-family homes were down an average of 1.9 percent in March from a year ago. In other regions targeted by institutional buyers, such as Phoenix, Southern California, Atlanta and Florida, rents are either falling or flat, according to online real estate service Trulia.
It's also taking longer than planned for institutional buyers to hire contractors, renovate the acquired homes and get them rented out. Industry insiders estimate that roughly half of the more than 55,000 homes acquired by institutions over the past year in the U.S. have yet to be rented.
The combination of rising acquisition costs, prolonged rental lead times and declining rental income is disrupting the spread-sheet analysis behind Wall Street's bet. That could pose problems for what once seemed like a slam dunk. It could also give pause to stock-market investors as some players list their shares. American Homes 4 Rent, based in Malibu, Calif., has said it expects to file soon for an initial public offering.
"I think it's a little late to start investing in single-family homes, because some of these larger firms are price-indiscriminate, and pushing prices up," says Philip Barach, president and co-founder of DoubleLine Capital, a fixed-income mutual-fund firm with $56 billion under management. DoubleLine reviewed the foreclosed-home trade a year ago but passed on it. "In some markets," Barach says, "they are the only bidders."
TO FLIP OR NOT TO FLIP
What excited Wall Street in late 2011 was the prospect of getting homes at 30 to 40 percent discounts, using a combination of investor dollars and cheap financing made possible by the Fed's easy-money policies. The gross annual rental return envisioned on a $100,000 home ranged from 14 percent to 27 percent, depending on the mix of investor dollars and cheap financing. That didn't include expected annual returns as high as 10 percent from the appreciation in home values.
Those projected returns are eye-popping, considering that the yield on the 10-year Treasury bond is 1.70 percent and big investors can borrow at between 3 and 4 percent.
The calculus: With millions of Americans coming out of the housing crisis unable to get a mortgage because of dented credit histories, renting would be the only option. In a few years, after repairing their credit scores, many of those renters would be buyers.
That was then. Now, some investors are exiting the market, scaling back or dialing down expectations.
Early last year, Oaktree Capital Management agreed to provide up to $450 million in equity to real estate investment firm Carrington Capital Management for its foreclosed-home acquisition program. Carrington was projecting an internal rate of return of 25 percent over a three-year period for its portfolio of single-family homes in several cities, according to a marketing document.
Oaktree is now reluctant to commit more money to the trade after souring on the buy-to-rent strategy, said people familiar with the firms. Oaktree saw returns on rents compress and no longer is comfortable with Carrington's initial heady yield projections, they said.
In October, hedge fund Och-Ziff Capital Management Group cited a narrowing in rental income for its decision to put its book of 300 homes in Northern California up for sale — a process it has just about completed.
"The math for investors is looking very different," said Jed Kolko, Trulia's chief economist.
Vegas home prices are up 30 percent over the past year, with the median home now selling for $161,000, according to the Greater Las Vegas Association of Realtors. Much of that appreciation has come since June, when the institutional buyers began to make their presence known.
Blackstone, which entered the Vegas market in November, has bought over 400 homes at foreclosure auctions, from banks and private listings. Nationally, the private equity firm has bought over 24,000 homes. It is using a combination of $3 billion in investor dollars and a $2.1 billion line of credit arranged by Deutsche Bank.
In Vegas, Blackstone is making up for a slow start. Local realtors Moore and Nash said they've begun getting calls from Blackstone, asking them to contact the firm if pending sales fall through. Colony is buying some newly built homes because of the limited supply of foreclosed homes.
Representatives for Blackstone and Colony said they are not daunted by the slump in rents or delays in readying units for tenants in the half-dozen markets they are largely buying in. The firms said they aren't buying foreclosed homes to flip them and are committed to building out subsidiaries that manage and rent single-family houses.
"This is more of a marathon than a sprint," said Paul Fuhrman, chief investment officer of Colony's single-family home subsidiary, which has acquired more than 8,000 homes.
Marcus Ridgway, the new chief operating officer of Blackstone's Invitation Homes subsidiary, said his firm's strategy doesn't rest on the performance "of one single market, and can rely on other markets to balance returns."
American Homes, which has bought at least 14,000 homes nationally, did not respond to requests for comment.
The Vegas market has unsteady legs. Statistics compiled by the University of Nevada at Las Vegas show some 40,000 homes are largely vacant - 8 percent of the metropolitan area's single-family housing stock. Housing research firm RealtyTrac estimates there are 20,000 single-family homes in the metro area either owned by a bank or in some stage of foreclosure.
Some 52 percent of all homeowners still owe more on their mortgages than their residences are worth, more than any other state, according to CoreLogic. It's even worse in some neighborhoods. An analysis by RealtyTrac for Reuters found that in about half of the zip codes in the Vegas metropolitan area, at least 70 percent of homeowners not in foreclosure were under water on their mortgages.
Economists say with unemployment in Nevada at 9.7 percent, there's not much real growth underpinning the surge in home prices and new construction.
A big source of the buying is the big guys. Between them, Blackstone, Colony, American Homes and a joint venture involving Apollo Global Management and Haven Realty Capital have acquired more than 1,500 homes in Las Vegas. A half-dozen smaller investment firms are also buying homes.
Much of the buying is in a crescent that begins in North Las Vegas and runs along the city's western and southern edges. This is where some of the newest homes have been built and where price appreciation has tended to be greatest, realty records show.
With Vegas largely dependent on gambling, tourism and conventions for growth - discretionary spending that tends to recover last — it's unclear whether the city can support broader buying.
"Betting on home appreciation is not a sure thing," said Yale University economics professor Robert Shiller, one of the designers of the S&P Case-Shiller Index, which tracks housing sales and prices. "Right now we have the Fed with a massive subsidy to the housing market, but you can't have a housing recovery without a jobs recovery."
CASINOS AND SCORPIONS
It's not all gloom. Gambling revenues are up over last year. Boosters point to the recent acquisition of the long-stalled Echelon casino and resort complex — one of several unfinished eyesores on the Las Vegas Strip — by a Malaysian gaming company for $350 million. Many also are banking on a plan by Tony Hsieh, founder of Zappos, to move the online shoe retailer from the nearby town of Henderson, Nev., to downtown Vegas and pour in some $350 million to create a tech incubator.
Another selling point: The city has a young housing stock, and so properties require fewer renovation dollars than homes in most other battered markets. Vacant homes tend to fare better in a desert climate such as Nevada's, too - though some investors say scorpions nesting in empty homes are a problem. And since most homes have rock gardens rather than lawns, landscaping costs are low.
In homes that don't need major surgery, institutional buyers are spending between $10,000 and $15,000 on kitchen appliances, granite countertops, carpets and a paint job. In markets with older homes, renovations can cost $25,000.
One spot the institutional buyers are targeting is Enterprise, an unincorporated town in Clark County. With a population of 108,000, Enterprise, formed only in 1996, has lots of new homes. In 2000, the town had just 15,000 residents. So far, big investors have bought more than 150 houses there, according to county property records, in many cases buying several places on the same street.
Kathryn Kay Chapman, a 47-year-old project manager, rents a two-bedroom house here with her boyfriend and has been looking to purchase a place nearby. Neither can qualify for a loan because of tarnished credit histories, so they decided to buy at a foreclosure auction.
The couple scraped together enough cash to make a bid on a three-bedroom home they've been eyeing. Their sweet spot: between $120,000 and $140,000.
On April 22, the house came on the block at one of the auctions held each day in the parking lot of the Nevada Legal News, a few blocks from the Strip. The bidding began at $97,200. But the couple had made a beginner's mistake: Their cashier's check was found to be improperly drawn and they couldn't participate.
It likely wouldn't have made a difference. The place sold for $155,000, above their limit. Chapman says they may try again, though she suspects they'll be outgunned.
"We know there is a minute chance we get anything," she says. "The most frustrating part of all this is how home prices keep going up and up, yet you have so many empty homes."
(Reporting by Matthew Goldstein, editing by Michael Williams and John Blanton)
Really? Where can I find out more about this? I'm looking for a career change and I have had a lot of success in teaching/mentoring younger people in the workplace. Maybe that would translate into being a good teacher.
If you have a bachelors degree you need to do a 1 year bridging teaching diploma (offered by most Australian Unis) and you are good to go.
PS apologises for the late reply - I only just saw this.
“You Keep Using That Word, I Do Not Think It Means What You Think It Means” - Inigo Montoya
Strong demand and still limited supply mean homes are now selling nearly three times as fast as they normally would. The average number of days a listing stayed on the market in April was 46, down from 62 in March and down from the normal pace of 90-120 days, according to the National Association of Realtors.
"I have a seller, his house came on, he got a full-price offer, and he refused to take it because he wanted multiples. Really?" asked Jane Fairweather, a real estate agent in Montgomery County Maryland, a suburb of Washington, D.C. Fairweather said homes in her market are selling in an average of 23 days because inventories are way down and demand is strong. The number of listings in Montgomery County were down 41 percent in April from 2011. In April of 2011, one third of the listings went under contract. In April of this year, 67 percent went under contract.
home sold sticker on for sale sign in front yard"I don't think it's a boom we have to worry about because this is all about low interest rates and low inventory," noted Fairweather. "This is not about easy money. The standards for borrowing are still very tight."
The sales pace is back to what it was during the housing boom in 2005 and 2006, but the circumstances are of course very different. Back then it was all about easy money, and now it's about stiff competition for limited supply. "We need to see home builders increase production," said Lawrence Yun, chief economist for the NAR, in a press conference. "We need a 50 percent increase in starts."
Home builders are actually slowing production, trying to take advantage of home price gains that are nearing double digits. High-end home builder Toll Brothers, based in Horsham, Pa., reported that it raised prices by $26,000 on average, or about 5 percent, during the second quarter. The average price of a contract signed in the quarter was up sixteen percent from a year ago.
While homes are certainly selling faster, double-digit price gains are not considered healthy, especially when wage growth is nowhere near that. At some point buyers will hit the wall, unable to afford the homes they want. First-time homebuyers are already dropping out of the market, representing just 29 percent of homebuyers in April, according to the NAR. That's the lowest in two years. Rising mortgage rates, now at their highest in two months, are playing a part, but there are also fewer low-end homes to buy. The number of homes in the foreclosure process is now down nearly 25 percent from a year ago, according to a new report from Lender Processing Services.
Just 18 percent of home sales in April were of distressed properties, the lowest since the Realtors began tracking this number in 2008. Compare that to 35 percent about a year and a half ago. Sales of homes priced below $100,000 were down 10 percent in April compared to a year ago, while every other price range saw sales gains. Those who can get credit are now competing for what little there is to buy, and pushing prices well beyond expectations. "I don't see it lasting," added Fairweather. "I think the minute they increase interest rates, you'll see people pull back."
The number of new and existing homes sold in California reached the highest level for August since 2006, according to new data from DataQuick.
The estimated 42,546 homes sold in August was 3.1 percent higher than last year, and the highest since 51,054 homes were sold in August seven years ago. The August number was 1.9 percent lower than the previous month, but 3.1 percent higher than August of last year, the San Diego-based firm reports.
The median price for a California home was $361,000 in August, a 0.6 percent decrease from July, but 28.5 percent higher than last year. August marks the 18th consecutive months of yearly increases in median sales price, Dataquick reports.
Markets like California, which were hardest hit by the downturn, have posted some of the largest increases in the last year. Home prices in Las Vegas increased 31.9 percent in August, compared to last year.
Of the existing homes sold in California in August, 7.8 percent were foreclosed properties, the lowest level since July 2007. Foreclosure resales peaked at 58.8 percent in February 2009, DataQuick said.
Short sales made up an estimated 13.2 percent of homes sold last month, down 14.4 percent from the previous month and 26.4 percent lower than last year.
Mortgage rates are rising and the housing market is getting weaker. In May of 2013, the 30-year fixed rate mortgage was 3.59%. Today it is 4.71%, more than a full percentage point higher. That means that the payment on a $200,000 loan is 15 percent more than it would have been just two months ago. The higher rates mean that would-be homebuyers are getting less bang for their buck and might not be able to afford their dream home. It means that housing sales will fall and prices will drop. Higher rates are poison for housing.
Last week, the Mortgage Bankers’ Association (MBA) announced that mortgage purchase applications had dropped 3 percent from the week before following a downward trajectory that has persisted for the last two months. At the same time, new home sales plummeted 13.4 percent in July to 394,000 less than a third of their total in July 2005 when sales tipped 1,200,000 per year. The impact on existing home sales is still unknown because the data from June will not be released until late September, but given the uptick in rates, we can assume that sales will be well-below expectations. The housing market is cooling, sales are sluggish, and prices are flattening out. The recovery is over.
The big banks can see the handwriting on the wall and are making the adjustments they think will maintain profitability in a tighter rate environment. This is from an article by Christopher Whalen at Zero Hedge:
“Wells Fargo and Chase…. both told the industry yesterday that things might become grim in their mortgage divisions. Wells told investors at a conference that it expects mortgage originations to drop nearly 30% in the third quarter to roughly $80 billion, down from $112 billion in the second quarter……Wells has already cut 3,000 jobs in the mortgage business since July (roughly 1% of the bank’s total workforce). Mortgage-banking income dropped 3% at Wells Fargo and 14% at J.P. Morgan in the second quarter from a year earlier. At Bank of America, which announced 2,100 job cuts on 8/29, the decline was 22% from the year-ago period.” (“Mortgage Market Slump: Is it Interest Rates or Jobs and Consumer Income?“, Zero Hedge)
It doesn’t matter that rates are still low by historic standards. What matters is that the Fed’s unprecedented rate stimulus vanished overnight severely dampening the demand for housing. That’s why mortgage applications and new home sales are cratering, and that is why existing home sales will fall sharply. Because what matters is rates, rates, rates; the cost of money. Borrowers don’t buy a house, they buy a mortgage, and the price of that mortgage is what counts. When Bernanke started talking about “tapering” his asset purchases (QE) in May, he pulled the rug out from under housing leaving the market vulnerable to a sales shock. Now traditional buyers are putting off their home purchases for a later date while investors are headed for the exits. Check this out from Reuters:
”A recent survey by polling firm ORC International found that about 48 percent of investors surveyed planned to curtail home purchases over the next year…. Only 20 percent expect to buy more homes, down from 39 percent….
The softening of investor demand has also coincided with a drop in sales of so-called distressed properties, whether foreclosures or short sales. These homes usually sell for less than others and had been the focus of investor interest.
In July, distressed homes made up only 15 percent of sales, according to the National Association of Realtors. That matched June’s reading, which was the lowest since the group started monitoring distressed sales in October 2008…..” (“Analysis: Waning investor demand opens door for first-time U.S. home buyers”, Reuters)
As we’ve been saying for months, Bernanke’s Potemkin housing market is built on four very shaky pillars– (Low rates, suppressed inventory, excessive speculation, and Obama’s bogus mortgage modification programs) Significant change to any of these props will lead to a market stall and a sharp dropoff in sales. Here’s how housing analyst Mark Hanson puts it:
“All it will take is the wave of “cash-money” buyers ‘easing off” a bit; “some” of the organic first-time and repeat buyer cohort stepping away due to the sudden lack of “affordability”; and/or a wave of supply from “panic sellers” hitting the market to send sales volume and prices down sharply, over a very short period of time.”
Hanson is the second best housing analyst in the country (Robert Shiller still holds the top-spot) and his latest blog post is a “must read” for anyone who wants to know what is going on in housing. Here’s an excerpt from the post titled “Housing…Where we sit“:
”Starting in Q4 2011 “housing” was injected with arguably the greatest stimulus of all time; a 2% “permanent mortgage rate buy down” gift from the Fed. As a result of rates plunging over a very short period of time in 2011 from the 5%’s to the low-to-mid 3%’s an instant 15% to 20% “purchasing power” was created out of thin air. In other words…somebody could buy a house that cost 15% to 20% more…ca-ching.”….
Some think the rate “surge” will have little impact… while the bears …. think the rate surge was a rare and powerful “catalyst” only rivaled two times in the last seven years. The first, when the housing market lost all it’s high-leverage loan programs all at once in 2007/2008; and the second, on the sunset of the Homebuyer Tax Credit in 2010.
In both these previous instances …. when the leverage/stimulus went away … housing “reset” to the current supply/demand/lending guideline/interest rate environment, which in 2008 resulted in the “great housing crash”, and in 2010 the “double-dip”. Here we sit in a eerily similar situation.” (“Housing…Where we sit“, Mark Hanson)
The media has tried to downplay the importance of the spike in rates pointing to the fact that rates are still very low by historical standards. But Hanson disagrees. He thinks that the “the greatest stimulus of all time” has just been removed leaving the market exposed to a catastrophe similar to the downturn in 2008 or 2010. If he’s right, then September existing homes sales (which will be reported in late October) should fall precipitously, which they should since the fundamentals –wage growth and employment– are still weak.
Eventually the abysmal condition of the underlying economy will resurface. Bernanke’s smoke and mirrors can’t last forever. Keep an eye out for September’s existing homes sales.
i don't know Gazo - maybe the new chick who might replace bernanke has some tricks up her sleeve. I just can't see austerity, or doing things the traditional way as being part of the feds plan though.
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