Rising home values in the face of stagnant incomes

drhousingbubble's picture

For the first time since September of 2010, nearly two years ago, has the Case Shiller 20 City Index realized a year-over-year gain. Does this signify a sustainable turning point for the market? At this point it is too hard to tell for a couple of reasons. The first has to do with the composition of homes being sold but also, at a more profound level, household income has fallen for well over a decade. Much of the sustained gains have come from astoundingly low interest rates offering buyers more leverage, low available inventory for sale, and a continuation of low down payment mortgages. You will notice that none of these reasons include household incomes rising to meet current prices. It really is unsustainable unless incomes can follow in conjunction. This year, according to the Case Shiller Index home values are now up 3.86 percent. Household incomes are not up. So what justifies this significant move? The CPI is up 1.3 percent so why are overall home values moving up at a rate 3 times higher than the overall index? You also see Millennials taking the brunt of the negative equity situation.


Young and underwater

Zillow recently came out with data showing that a whopping 48% of homeowners under 40 are in a negative equity position. This rate would look even worse if we considered how many of these homeowners actually bought with say FHA insured 3.5 percent down loans and have a razor thin level of equity. The reality is, we have two groups in the US right now when it comes to housing. You have younger Americans confronting a very tough employment market and purchasing homes during the manic 2000s and you have many older Americans that bought pre-2000s and enjoyed the multi-decade long bull market of the US, including steady rising incomes and home values:

zillow underwater young owners

Income is absolutely important and as we discussed previously, younger Americans that are in a deeper underwater state also saw the biggest decline in their earnings potential:


Source: The Washington Post, Sentier Research

So how is it possible that home prices are rising so strongly in spite of weak income growth? First, there is an unusual mix of buying going on. You first have investors competing for a lower amount of distressed inventory. Take a market like Las Vegas were over 50 percent of all sales last month went to all cash buyers, a continuing multi-year trend except inventory is lower now. Cash buyers in Las Vegas are now paying 19 percent more for their summer 2012 purchases versus the purchases made in summer of 2011. For Phoenix 41 percent of buyers paid all cash last month. The vast majority are investors as noted by their absentee status. Nationwide investor buying is a big segment of the market and with falling distressed inventory and people chasing yield, prices have been pushed up as many investors are likely opting to purchase non-distressed homes that carry a higher price tag.

The other segment is coming from the low down payment FHA first time buyers. Rates are at incredibly low levels. Interest rates have fallen substantially in the last year. The 30 year fixed rate mortgage has fallen by 28 percent in the last year alone from an already very low level. So even with stalled out incomes, many Americans found that they could afford more house with the same or even lower household income. With slim pickings for inventory, many bid prices up. Think inventory isn’t low? Take a look at this:


Homes for sale as percentage of working age population

Source: ISI Group

Inventory is at a 30 year low and probably even lower if we had data going further back. Yet as we noted earlier, half of those under 40 are underwater. We discussed that there might be a bounce and slog market as we move along since rising prices will bring more people to the table to unload properties. Banks are methodically dumping distressed real estate.

What is concerning overall is the price rise has come from artificial factors. The low interest rates are already having hidden leakage costs in other sectors of the economy. You also condition the market to low down payment loans that are defaulting in mass in spite of rising home values. And of course the low inventory pushes prices higher given access to more leverage via lower interest rates and also investors competing for a smaller pool of properties in a tight market. It would be one thing if household incomes were moving up in tandem with home values. But even this year, home values measured by the Case Shiller are moving at a clip 3 times higher than that of the overall inflation rate.

Household income absolutely matters and has been a good metric to use for multiple decades. Only recently have we seen such artificial stimulus in the market where it has the ability to push home values up in spite of slow income growth (i.e., Alt-A or lower quality loans during the mania, low down payment FHA loans and massive levels of investor buying in the current market). The interesting point of rising home values is that it will likely drag out some of the underwater inventory and thus add more supply to the market.

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TrulyStupid's picture

Contrary to what most people believe and the government would like you to believe...Homes are NOT savings accounts. The "equity" you think you have in your home is fanciful.. it does not represent true savings... at best it is a prepaid rent expense.

Homes don't generate positive monthly cash flow as real assets do. In fact they generate negative cash flow each and every month. If everyone were to sell their houses to free up their prepaid rent expense, prices would plummet and the  "equity" vaporize.

There is no way that the speculative bubble in homes can be reblown, although they have tried with subsidized down payments, liar loans, no initial interest and finally zero real interest. They may decide to pay you  to "own" your home, but only with devalued dollars with diluted purchasing power.

Articles like this one are simply selling hopium, to keep your nose to the banker's grindstone as long as possible.

donsluck's picture

True. I read a multi-hundred year study of real estate prices in England, the only country where price records go back that far. Adjusted for inflation, prices DECLINE 0.5% a year. This makes sense, since the structure slowly degrades. A house is a place to live, nothing more.

muppet_master's picture

dead cat bounce in housing...

IF you are smart..you'll wait for at least another -40% down...by then you can increase your downpayment and make a mostly cash transaction..

or you could chase and then kick yourself....i've been waiting (and renting) since 2003!! = now that's PATIENCE !! i didn't buy into the housing craze !! what can i say I'm a "CYNIC" LOL !!

i haven't yet bought a house = 0 hours of heart attacks...heart attacks that would be caused by begging the "lender" for time, for a modification, no "ballon payments"....no sleepless nights...no images of the jonesses, watching me get kicked out of the house....(keeping up with the jonesses..stupid)...no bad credit...no foreclosure, no short sales...= NO HEADACHES !!!

hootowl's picture

We might also want to consider that after Jan. 1, 2013 the wonderful Obamacare economic ruination fraud will add a 3.8% sales tax to the cost of buying/selling a home.  So we may be seeing a little pre-tax surge by those who are paying attention to some of the details of what is really in that evil Obama/Pelosi economic ruination scam.



muppet_master's picture

4% tax !!! = rape U can believe in !!

is that tax to bail-out those in foreclosures..ie to bail-out the bankster's bonuses !!

just like the inflation tax to bail-out the fat cats...PRINT BABY PRINT to bail-out the fat cats and rape baby rape the peasants with inflation = rape you can believe in !! hypocrisy you can believe in  !!!!....uuuuh, uuuuuh, i'm the QEorganizer !! your better off now because of me !!

well uuuuh, uuuuh, don't you love me !!!


when the housing ponzi market crashes another -40% those that were patient...won't notice that 3.8% rape tax !!! LOL !!!!!

donsluck's picture

Don't listen to hootowl. There is no sales tax associated with obamacare. I have no idea what he is referring to. I am self employed and obamacare will save me money starting in 2014. It is very entrepeneur friendly.

andrewp111's picture

It is a tax on the capital gains, NOT the sales price. It applies to dividend income as well.

hootowl's picture

Up to IRS allowable limits there is no capital gains tax on the sale of your primary residence.  The 3.8% sales tax still applies.  Do your research.  Why do you think the NAR is so opposed to it.  It doesn't just apply to investors.

donsluck's picture

I stand partially corrected. Hootowl, you are correct, for people making over $200,000 a year and up to the first $500,000 of PROFIT. For most of us, this sales tax does not apply.

Real estate benifits from huge supports including deductability of mortgage interest, full exclusion of profits (for the middle class) for principal residences, etc. In my humble opinion, these advantages helped fuel the bubble and should be eliminated gradually.

Why do you have to enflame the issue with references to illegal aliens and Obama's ass? Can't you have a calm rational exchange?

hootowl's picture

You are dead wrong Obot donsuck!

But you are right.  You have no idea what I am talking about.

The NAR has been fighting this sales tax from the very beginning.

Get your nose out of Ovomits' illegal alien ass and educate yourself.


Gfountain1's picture

I just bought a 1600 sq ft home for 72 cash, im loving this buyers market!

hootowl's picture

Keep some cash in reserve Gf to help with a short sale after another 20% to 30% price decline.  The banksters are holding millions of foreclosed properties off the market to try to hold prices as high as possible.  Their REOs are still increasing. They will have to release them eventually.  The properties will suffer disintegration and extreme vandalism, and squatters, as well as bleed out bank funds for maintainence, repairs, and ever-increasing insurance and taxes.

Not necessarily a smart move on the part of the banksters.....an eventual housing glut when TSHTF.

Both the banksters and the government are considering becoming landlords.....renting out REO inventory.  HAHAHAHAHAHA....good luck with that! ....Landlords!...HAHAHAHAHAHA.  Those days are over.....especially in any of the Liberal/Progressive strongholds.  That will create another 10,000 federally-employed lawyers to fight those battles with local bureaucratic building and zoning thugs and gangland and druglord evictions. Been there....done that.  A real government jobs program. Your tax dollars at work! HAHAHAHAHAHA!


disabledvet's picture

Perhaps you could explain what a "housing inventory" is. The chart seems rather odd...as if somehow a "house" is like "a car" in that "we produce them" and "there is a cycle" and "sometimes buyers and sellers meet" and "sometimes they don't." I was under the impression "a house just sits there" hence "there can be no inventory of housing at all" but instead "built and occupied" or "built and unoccupied." Anywho to paraphrase the war space "economists always pining for the last bubble." Here's what the attempted re-creation of the 2000's so called housing bubble (how can one have a housing bubble in single family homes Alan Greenspan?) looks like this go around: http://www.youtube.com/watch?v=dRCCPYM241E&feature=related
oh, and...how does that line go? "how is one to know whether an entirely rational bummer has been created"? was that the line Mr. "i never saw the marketing of debt to average everyday people as anything but a positive"? Trust me...there will be no limit to stand up material now and going forward...forever it would appear...starting with the line "do you know how broke we are?" i let all of you insert "the real Laugher" if you like...

Peter Pan's picture

We must not forget to praise Ben Bernanke for his ZIRP policy which effectively has deprived savers of any income which in turn causes investors to turn to real estate as a second last resort. The stock market being the last resort as evidenced by the absence of retail investors.

Unless the whole illusion collapses soon, I fear that we may be faced with a multi-year/ multi-decade slump where we all just drift on a slow and grinding downward path of not just the economy and civilization but also humanity.

andrewp111's picture

Isn't that exactly what Japan had for the last 20 years? History  rhyming.

ebworthen's picture

The banks, after hucking mortgages they never should have, are holding massive shadow inventories.

The 1% are buying up foreclosures and fancy homes in high income areas and renting them or flipping them to FHA buyers.

Fannie/Freddie, FHA, USDA underwriting crap again.

Seen home equity loan commercials again.

Fonzie and I Spy Natalie Wood Whacker hucking reverse mortgages.

Housing bubble part two in full swing!


Gfountain1's picture

Theyre holding onto alot of inventory to keep prices up, if they unleashed all of the foreclosures at once they would flood the market and prices would drop again.

Apply Force's picture

Homes are selling in locations where individuals and families have dollars - dollars that were saved through 401k's, retirement funds, market funds, through frugality, inheritance, what ever... All cashing out.  Pretty sure those with any dollars within reach are starting to understand that hard assets (a home, land, gold, guns, etc) will fare better than "dollars" soon enough.

Better years early than a day late, though imo years are not what we are now looking at...


Kamehameha's picture

Yes old people sitting on 40 years of bubble profits, their retirement, and S.S. + 40 years of accumulation from their good job, thinking the next 40 years in real estate will be like the last 40 years.  Younger people who really cannot afford it but need a place to live (we know how that ends).  Um, how long will than one last?  Let's see:

1. interest rates turn up --- gong

2. inflation/hyperinflation/dollar collapse--house for 1 month food --- double gong

3. young people start making more money---not going to happen---gong

4. more rich old people with deep pockets--when their S.S. checks start bouncing not likely

5. foreign immigrants--net emigration now!  gong!

Buy a house double your money!  Rent it out! Yea!



Cabreado's picture

The macro usurps the micro, eventually.

Now, if it weren't for those pesky ignorance, greed, Control, and denial things...

It is important to note that the peskiness equation is the roughly the same at the "top" as it is at the "bottom."

Guess what will win, as we go.... ?

brettd's picture

Is there anything that isn't screwed up?

Zero Govt's picture

the Govt-Banking gravy train is still holding up pretty well

...back-stop Benny and his magic shovel

flacorps's picture

I live in a development of about 1,400 homes, most of which are in the 2k sf. range. It's reasonably upscale, but only a handful of the villages here are gated. I know my street pretty well, and I know a few homes on the main drag. For the sake of argument, let's say I know 70 homes, or 5%. Of those seventy, here are some situations I know about:

1. Home in foreclosure by BAC.
2. Home recently foreclosed by BAC, they filed the case in 2008!
3. Home turned over to Chase two Christmases ago, but it was titled in the name of a trust with Chase's now-defunct foreclosure mill (Ben Ezra & Katz law firm) as the trustee.
4. Home went into foreclosure 4 years ago or so, the law firm actually allowed the foreclosure action to lapse for failure to prosecute. New action has yet to be brought.
5. Home went to foreclosure and was purchased by an investor who has done some cleanup, but has yet to rent out or sell the property.

Five out of seventy unoccupied and essentially unavailable. Extrapolate that to the entire development, and we have 100 homes in shadow inventory. This development has key amenities like a community pool, Lodge on a lake with a dock, tennis courts, a half basketball court, activity center and even a nature center with a theater. Most communities around here just have a playground, maybe a clubhouse too. Many of them are in much worse shape in terms of occupancy/inventory.

This is Land O Lakes, Florida. It isn't entirely representative of the rest of the country, but things are bad here.

I do not see home values turning up anytime soon. Nor does Zillow.

dexter_morgan's picture

"I won't pretend the path I'm offering is quick or easy. I never have," Obama told the cheering crowd in the Time Warner Cable Arena and a television audience expected to number in the tens of millions. "You didn't elect me to tell you what you wanted to hear. You elected me to tell you the truth. And the truth is, it will take more than a few years for us to solve challenges that have built up over a decade."

There. Solved. Excuse me while I go puke.


D-2's picture

I've never hated a president until now. Allow me to puke with you.

11b40's picture

Where were you from 2001-2O08?

Stuck on Zero's picture

Here in San Diego there is literally nothing for sale.  Buyers are desperate and there are no bargains to be had.  Real estate agents have no business at all.  Rents are going up quickly and vacancies are extremely low.  Most people think the banks are holding properties off the market.  I think a lot of people are selling stocks and buying hard assets.  Everyone I know is of the opinion that to send their cash to Wall Street is a sure way to lose it.


joe6px's picture

I hate to say it, but one of my co-workers just bought a foreclosed home for 200k-ish in the bario.  If you are well off and looking for rental properties SD is the place.  There is a disconnect between rent and over-inflated properties here.  Now is the perfect time to capitalize on the rent/mortgage ratio.  There will be a correction but at that point all the sun seekers will be in the SoCal trap.  That is, just enough money to pay bills but not enough to move away....Welcome to the hotel Kalifornia....You can check-out anytime you want....but you can never leave.

Zero Govt's picture

but with States bankrupt their usual way-out is not to cut their spending but blame it on the tax-slaves and hike property rates ..and that's already coming down the pipes ...if you hold property you're a sitting duck

spinone's picture

Look:  Home values are rising and incomes stagnant nominally.  All it means is that standard of living is decreasing.

TrulyStupid's picture

Should read: Rising notional home values in face of declining mortgage interest rates. Should interest rates ever turn, house prices will plummet.

donsluck's picture

Read my lips. Interest rates...will...not...go...up. Ever. Until the system finally breaks.

Zero Govt's picture

Dr. Housing Bubble

chuckle :)

Snakeeyes's picture

The biggest increase in today's job report was in ... low wage food services and drinking places. Seriously. That won't help the housing market.


Arnold Ziffel's picture

I see lots of empty houses but no For Sale sign out front. Holding all these houses off the market cannot be good.

How about all the vacant Mall slots? And when a decent store goes under, it is replaced by C-r-a-p where they just throw stuff on a shelf.

Zero down, low mortgages and poor job checks are perpetuating a very wobbly RE market. To make matters worse, i now hear those "Flip That House" ads on the radio again. That's a sure sign of brewing trouble for years to come.

spinone's picture

What do you mean, can't be good.  Who do you think owns the homes?  If the Fed ibought all the MBS from the banks, who owns them?  If Fannie Mae and Freddie Mac are the only market for new MBS, who owns them?  The geovernment tooke them over.  So keeping those homes off the market is bad for who?  The Fed?  Fannie and Freddie?  Who owns them? 

Starting to understand?

Zero Govt's picture

the "Flip that House" ads just shows the resilience of the Bubblenomics Theory the country is persuing, as advised by economists (cough) Paul Krugman, Larry Summers, Beneth bubbles Bernanke and economic guru to the President, Jon Corzine

let's set aside (or continue to hide under the carpet) Fannae and Freddie

when one bubbe deflates, just try, try and try again

donsluck's picture

What's happening is insiders are getting baskets of distressed homes from fannie and freddie through the back door with guaranteed profits upon cosmetic remodeling. It is relieving the shadow inventory, but as with most current fascist programs, you have to be an insider to get them.

hannah's picture

who says home values are going up...? how is the data collected and what homes are being bought (or not). i would make a bet that the 'average' price has gone up because more expensive homes are being bought. so if a few million dollar homes sell and a bunch of $50k homes the average is $400k....doesnt mean that homes values are going up. in fact the expensive homes could be heavily discounted and the numbers would still show 'home vales rising' on sold homes if most of the home sales are in the high end.....

donsluck's picture

Had to down vote you for your lack of understanding of Case Shiller. The index compares each individual house price as it is bought and sold over the years. That is why it is limited to certain cities, the data is difficult to gather, having to go back through records for each individual house to find it's historical price, then compiling them. The "average" sales price is not accounted for. Nor is the "median". It is considered the most accurate barometer of housing sales.

iamse7en's picture

Short term sustainability with a bit more pump priming. But I ain't buying until there's blood on the streets. Too risky.

RingToneDeaf's picture

None of you people get it.

The recovery is now, along with hope and change.

It is all on the level.

You heard the eventual election winner right last night.

The only requirement is to be an empty chair.

TruthHunter's picture

The banks seem to have perfected a rinse and recycle business. I watched a recent deal where 

an FHA loan  with most of the characteristics of the good ole days were there. Questionable appraisal,low down payment, plenty

of fudge, and to grease the wheels, whopping mortage insurance. 

If you watch zillow you will see that houses are moving for the right price. That isn't because

people are flush with cash.

Zero Govt's picture

not just houses, check out General Motors sub-prime car loans

one trainwreck isn't even cleared up (see Fannae and Freddie) and these morons are onto another train and acceleratiing it up to ramming speed!

Cthonic's picture

Government Motors? But the lady at the convention was holding up a Ford sign...

divide_by_zero's picture

Chinese showing up with cash, probably get torched like the Japanese did last time.

lotsoffun's picture

one real cure (sure) for the housing market.  1 billion chinese, 1 billion indians.  take 10 million out of each - 20 million home sales - offer them citizenship.  don't think it's not on the table.  10 million - drop in the bucket. they get fleeced, and we can't compete.

andrewp111's picture

No need. Chinese kleptocrats are flocking to the USA, UK, Canada, and Australia by the millions. They first get their families and their loot out, then themselves. 

joe6px's picture

We get fleeced, and we can't compete..There, fixed it for ya.