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How to increase home prices in the face of stagnant household incomes.

drhousingbubble's picture





 

It is easy to get swept into the momentum of the housing market. The Federal Reserve has managed to push interest rates to historically low levels creating additional buying power for US households. As we enter the slower fall and winter selling season, there is unlikely to be any major changes until 2013 as the election year concludes. We do face major challenges ahead. This current momentum in housing isn’t being caused by flush state budgets or solid wage growth. No, this is being caused by low inventory, big investors crowding out households, and a concerted effort to push mortgage rates lower. If you simply follow the herd, you would think that prices are now near peak levels again (or soon will be) and household incomes are hitting record levels. Let us examine where things stand today deep in 2012.

California and nation

california and us home prices

It is clear that 2012 has pushed home prices higher overall. This has occurred both on a nationwide basis and also for California. Yet California home prices are far away from that peak reached in 2006. However, some mid-tier markets never really corrected and we are now seeing flippers selling homes for prices that are near peak levels. The argument is that overall things corrected but then this is applied to niche areas where prices are now back near peak levels (at least with the current prices being seen with some flips).

The low inventory and the narrative that the bottom is here is causing a flood of people to buy especially with low interest rates. In lower priced areas, a good portion of the market is being over bought by Wall Street and big money investors. This is still anything but a normal market.

US home prices

us home prices oct 2012

It is evident that US home prices have hit a new trend in 2012. Prices are moving up. Yet the driving force behind this is low interest rates, low inventory, and the high amount of investors buying up properties. Keep in mind that low interest rates and especially investment buying is finite. This money will dry up. In housing what you want to be seeing is sustainable appreciation in combination with rising household incomes and a healthy employment market. Those should be the driving forces instead of the Fed committing to another $500 billion of MBS purchases via QE3.

Median household income

median household income

This is the one argument that is always missing from the home boom 2.0 narrative. Is it possible to have sustained rising home prices when household incomes are falling or stagnant? It isn’t and the Fed and banks are fully aware of this. So the Federal Reserve has decided to push affordability via low rates as far as they can. It is a win-win for the financial industry. They can unload properties at much higher prices courtesy of the low interest rate. Some people think this comes at no expense. It does. Carrying a negative interest rate is pummeling those on fixed incomes and also, with one out of seven Americans on food stamps many are seeing those monthly deposits not going so far when they go shopping for food. Ultimately the cost is being shouldered by those who can least afford it. Ironically this flood of investors has also pushed rental prices higher as well creating a double-whammy.

LA Tiered home prices

la home tiered prices

Probably one of the better measures of price is the Case Shiller Index. This looks at repeat home sales so we are measuring apples to apples. The median price is also important but it is prone to changes with the mix of sales. Right now, the big drop in foreclosure resales is causing prices to surge. Yet it is important for trend shifts and also because the media and the public rely on this for their purchasing behavior.

As you can see from the chart above, each tier in Los Angeles County has shifted up a bit. We are far from peak prices and given the mania in certain areas, you would think this would be rising much faster. You are not missing anything. For those thinking they are missing something you might as well go to Las Vegas and try your hand at the tables. There is a mini mania in prime areas of California happening right now. As you see from the above charts, household incomes simply do not justify this movement. The momentum right now is in favor of higher prices but for fleeting reasons.

Home sales and trends

home sales

If things are so hot, why are home sales not running at a higher pace? The 12 month moving average is running a little bit higher than 35,000. This is the pace we’ve had since 2009 when the market was flying off a cliff. From 1998 to 2007 the moving average was above 45,000 sales per month. So what really is going on then with prices rising so fast overall?

The explanation comes from a few items:

-1. Inventory is low (we even hear complaints from real estate agents about this)

-2. Low rates increased leverage in the face of falling incomes (refer to earlier chart)

-3. From the bottom everything is higher (the increase is big from the bottom but put into context, still has us way below the 12 month moving average from over a decade ago)

-4. You are competing with big money investors

This is why sales are not exactly off the charts given all the favorable elements that are being perceived. For this market to continue on this path, nothing from the above can be removed. Keep in mind that with the “fiscal cliff” some items on the table include the mortgage interest deduction cap. This will hit California hard especially in these mania locations. There is no reason for the nation to allow mortgage interest deduction above a certain level (i.e., $500,000 or capped at certain income levels).

“(LA Times) But since only about one-third of taxpayers itemize on their returns — the rest opt for the standard deductions — who's really getting these tax savings? As you might guess, people who have higher incomes are more likely to itemize and claim mortgage interest and other housing deductions. Citing the latest data on the subject, published by the IRS in 2009, Kolko found that only 15% of households with incomes below $50,000 took itemized deductions, while 65% of those with incomes between $50,000 and $200,000 did. Just about everybody with incomes above $200,000 — 96% — itemized on their returns.”

And guess who was number one on the list?

“California ranked No. 1 in the size of home mortgage deductions, with $18,876 on average. Next came Hawaii ($16,730), the District of Columbia ($16,720), Nevada ($15,502), Washington ($14,262), Maryland ($14,162) and Virginia ($14,094).”

There is little reason for the mortgage interest deduction to allow for such a large write-off especially when the typical US home price ranges from $150,000 to $170,000. We are in massive debt and for the nation to subsidize expensive California housing does not make sense.

Underwater

Mortgages underwater

Even with home prices moving up we still have over 9,000,000 underwater homeowners. This is a sizeable number. The above chart highlights underwater mortgages at various increases or decreases in home prices. The distressed inventory is still large but is decreasing.

The thing with the housing market is that it largely isn’t a market anymore. So with all of these market incentives and the fiscal situation looming next year, there has to be a catch. We have yet to see household incomes increase. The economy is still on shaky ground. Yet in many pocket markets you have people ignoring the macro economy and just running around their little enclaves with blinders on. Hot money is flowing in. There is no doubt about that. Yet it is not sustainable. Since election years usually produce very little change, we’ll have to wait until 2013 to see if this trend actually has some real teeth.

Do you think household incomes are important when it comes to home price?

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Sat, 11/03/2012 - 09:29 | Link to Comment deerhunter
deerhunter's picture

Property taxes high at 3K for a 130K house?  Try living in Obamaville,  how about 6200K for property taxes on a 150K house?  Kane County.   Had Romney bumper sticker on car for 2 days and both sides of car keyed in Home Depot parking lot.  Free speech right? 

Sat, 11/03/2012 - 06:35 | Link to Comment WhiteNight123129
WhiteNight123129's picture

If Ben multiply the monetary base by 5 times, home prices will go up regardless of income, they will crash measured in Silver though.

Sat, 11/03/2012 - 07:39 | Link to Comment Element
Element's picture

 

 
This analysis from Hussman is a rather clear-eyed take on what's been happening economically and statistically in the US, and across the Pacific.

--

October 29, 2012
 
Distinction Without a Difference
 
John P. Hussman

 
"…Recession? The advance estimate for third-quarter GDP was released last week, showing a slow but above-consensus figure of 2% growth at an annual rate (paced by a 13% surge in defense spending). Surely, this is inconsistent with concerns about recession, isn’t it? No – not if we examine the historical pattern of data revisions early in previous recessions – a point that Lakshman Achuthan of ECRI also emphasized recently on Bloomberg.
 
Recall that in 2001, with the U.S. economy already in recession for months, Q1 GDP growth was initially reported at 1.2%. That figure was actually revised slightly higher a few months later, but based on final revision, Q1 2001 GDP is now reported at -1.3%. As a side-note, Q2 2001 GDP was positive, while Q3 2001 was negative. The 2001 recession did not contain two consecutive quarters of negative GDP growth. Contrary to what many analysts suggest, that is not how the National Bureau of Economic Research (the official arbiter) defines a recession in the first place.
 
The heavy revision of GDP figures is not the exception but the rule. In the first quarter of 2008, as another example, with the U.S. economy already in recession for three months, Q1 GDP was reported at 1% growth. That figure was later revised to -1.8%. Just like 2001, the following quarter was reported at positive growth. The economy then collapsed in the second half of 2008, but by the time that was evident in GDP figures, the stock market had already plunged. The upshot is that early GDP figures are often reported positive even after a recession is already well in progress, and waiting for two consecutive quarterly declines in GDP is a poor way of gauging recession risk, because that pattern sometimes doesn’t emerge until much later revision, if at all.
 
Based on the most leading economic signal that we infer from dozens of economic variables (see the note on extracting economic signals in Do I Feel Lucky?), the best we can say about recent data is that the signal is negative but the pace has not worsened, which suggests that at least over the next 4-5 months, the character of the recession is likely to be moderate, and not the sort of off-the-cliff collapse we saw in 2008. Again, this falls into the category of a distinction without a difference, as investors completely ignore the existence of a recession anyway, leaving them vulnerable to its eventual recognition. …"
 
… //…
 
"… On the subject of deficits, the situation in Japan seems increasingly strained. The gross debt/GDP ratio in Japan is now about 225%, and net debt (which excludes debt held by the government itself for monetary, pension and other reasons) is about 130%. During the entire post-war period, Japan has enjoyed a significant trade surplus, which has allowed it to run growing government deficits. Meanwhile, household savings have declined from nearly 15% in the 1990’s to next-to-nothing today. Needless to say, that large and persistent trade surplus has enabled economic dynamics that normally would not be sustainable. But over the past year, Japan has fallen into a trade deficit, which has deepened recently due in part to tensions with China. We are now observing an ominous combination of a significant trade deficit, a deep government deficit, non-existent household savings, a steep debt/GDP ratio, and a contraction in both manufacturing and service sectors according to the latest purchasing manager’s surveys out of Japan. While Europe remains our primary source of concern, I am concerned that both China and Japan are likely to have a more destabilizing impact than is widely assumed. …"
 
Hussman's Weekly Comment Archive:
http://hussman.net/weeklyMarketComment.html

--

But then again, in REAL rather than nominal terms, the US probably never left the 2007-2009 recession because it sure hasn’t 'recovered' since derbanke declared it "very probably over", on Sept 14th 2009.  I don’t think we're supposed to notice this didn’t happen though, but ZIRP and open-ended QE kind of makes it hard to not notice that the US economy and political circus is out of strings to push on.

All that's left since is propaganda, and printing.

Marc Faber says don’t underestimate the power of printing money, but the same applies to the power of state and corporate propaganda, but once both are out of 'credibility', and CONfidence, within this laughable rigged-game, then that game's over.  And it's clear both propaganda and printing are steadily losing traction in the US, and globally.

Storing capital (eggs in more than one basket) is the driver of RE re-stabilisation, though it sure isn't a move to a 'recovery'.

Now mix in Sandy and its GDP and FIRE sector impacts, the fiscal cliff, the pending Debt-Ceiling fiasco, the EU mess and Spain bond-bailout, and the ensuing US downgrade, plus the HFT beserker rampage (as Nanex revealed occurred last time the US was downgraded with a negative outlook).

 

Now what do you get?

 

EDIT: - I almost forgot this lovely little multi-year trend, where the down-trend's peak basically corresponds with the timing of the first Greek emergency bailout agreement in March/April 2010, and the global PMI's been on a general slide ever since that point, and is only being punctuated by the less and less effective flushes of QE to try and arrest the cummulative damage of a global sovereign bond contagion inducing pseudo-austerity ... that still doesn't even come close to 'balancing' budgets below real inflation levels - enjoy.

Global Manufacturing Contracts 5th Consecutive Month
Sat, 11/03/2012 - 00:19 | Link to Comment Stuck on Zero
Stuck on Zero's picture

In my book the McMansions are going to take the huge hit in prices.  Young people are more interested in urban, townhomes, short commutes, and trendy neighborhoods. 

 

Sat, 11/03/2012 - 08:55 | Link to Comment kaiserhoff
kaiserhoff's picture

and putting off marriage and adult responsibilities..., foreveh.

Sat, 11/03/2012 - 03:10 | Link to Comment Element
Element's picture

And not mowing the lawn on their 15 minutes off work.

Fri, 11/02/2012 - 19:54 | Link to Comment WhiteNight123129
WhiteNight123129's picture

When Silver was demonetized between 1870 and lastly in 1930s in China all the Silver landing on Chinese shores meant booming real estate in local prices even if wages were not following. The rich people were moving out of financial assets. When NO financing is available buy a home with your Silver, patience....

 

Fri, 11/02/2012 - 17:40 | Link to Comment SmittyinLA
SmittyinLA's picture

income is irrelevant as long as you can keep churning new buyers, restrict new housing, add costs to new housing, and import more people, and with FNM having the "greenlight forever" govt financing guarantee the ponzi can run indefinitely  

 

When the Communists said they would "sell us the rope we'd use to commit suicide", they were speaking of FNM.

Stragenly enough we indemnified the foriegn Socialist banks from the losses of their treachery. 

Fri, 11/02/2012 - 15:47 | Link to Comment Kasperfx
Kasperfx's picture

I'll say it Again and Again, If it's not Organic it's not sustainable in a real world. 

Fri, 11/02/2012 - 16:52 | Link to Comment hidingfromhelis
hidingfromhelis's picture

This applies to real estate and Monsanto.

Fri, 11/02/2012 - 15:08 | Link to Comment Trimmed Hedge
Trimmed Hedge's picture

Only problem is rates will stay down here for another 20 years...

Sat, 11/03/2012 - 16:13 | Link to Comment WhiteNight123129
WhiteNight123129's picture

Well, since the PoBC is accelerating internationalization of the Yuan and then you can expect BRICs to dump US dollars end over fist and diversify in USD, this phenomenon will surface the true cost of borrowing for USD by the mere effect of competition in reserve currencies.

http://www.centralbanking.com/central-banking-journal/feature/2200857/th...

 

Fri, 11/02/2012 - 15:39 | Link to Comment Thisson
Thisson's picture

No way, Jose, this Ponzi doesn't have 20 years left. 4-8 if we're lucky, till she blows!

Fri, 11/02/2012 - 16:39 | Link to Comment Bunga Bunga
Bunga Bunga's picture

Japan has been doing "well" for 20 years with zero rates, endless QEs and declining/flat asset prices. The new normal.

Sat, 11/03/2012 - 08:29 | Link to Comment Element
Fri, 11/02/2012 - 14:53 | Link to Comment Bicycle Repairman
Bicycle Repairman's picture

Romney says he'll close tax "loopholes", if elected.  The mortgage interest deduction?

Sat, 11/03/2012 - 01:25 | Link to Comment DeadFred
DeadFred's picture

Romney is a politician and the son of a politician, he was born to lie. The only question is what form of lie is he telling. 

Fri, 11/02/2012 - 22:19 | Link to Comment “Rebellion to t...
“Rebellion to tyranny is obedience to God.”-ThomasJefferson's picture

Romney has proposed capping income tax deductions in the 50k per annum neighborhood. This includes mortgage interest deduction.  Those affected will be those borrowing against their portfolio; more often than not those with several homes.

Bottom line: Don't worry about the status quo, people.  Your nickel and dime mortgages won't be affected.

Fri, 11/02/2012 - 15:30 | Link to Comment ChanceIs
ChanceIs's picture

While the mortgage interest deduction may or may not continue to exist in a legal sense, effectively it has been vacated by the low rates.

I personally don't think that there should be a deduction. Only a fool believes in a free lunch, and the interest deduction is paid by the homeowner with the higher price required at closing. Just like college tuition - and everything else the government tries to "make fair." But if they take it away prices will get all the more pasted when rates rise. J6P can only afford so much monthly nut, and if he can't deduct the higher interest......

Sat, 11/03/2012 - 11:37 | Link to Comment Poofter Priest
Poofter Priest's picture

???? How the hell can you see a tax deduction as a 'free lunch'???

Try to remember, it's YOUR money being taken from YOU.

But I will say, things like tax deductions help drive prices upwards.

Fri, 11/02/2012 - 18:04 | Link to Comment carambar
carambar's picture

How is it that corporation can deduct loan interest from profit before tax and not individual?

Sat, 11/03/2012 - 09:01 | Link to Comment kaiserhoff
kaiserhoff's picture

Because you failed accounting 101.

Sat, 11/03/2012 - 08:31 | Link to Comment Bicycle Repairman
Bicycle Repairman's picture

Because a corporation is an individual, but an individual is not a corporation.

Fri, 11/02/2012 - 16:14 | Link to Comment object_orient
object_orient's picture

True that lower rates = less to write off.

But how does interest deduction lead to higher closing costs?

Also, J6P probably makes below median wages and, per the article, doesn't itemize and write off interest.

Fri, 11/02/2012 - 15:28 | Link to Comment socalbeach
socalbeach's picture

For details on the Romney tax plan, see following link:

http://www.romneytaxplan.com/

Fri, 11/02/2012 - 15:33 | Link to Comment Bicycle Repairman
Bicycle Repairman's picture

LOL.

Fri, 11/02/2012 - 14:49 | Link to Comment ChanceIs
ChanceIs's picture

I RARELY see discussed the old adage about the home price being proportional to the monthly nut.  That is: people can afford say 30% of gross as a "housing payment."  If rates are low, then the seller can demand a higher price.  The interest part of the nut is down so that allows room for the principle part to be higher.  Conversely, when rates are high, the seller has to take a lower price.  The bottom line is that the sum of the "interest nut" and the "principal nut" is constant while their proportions vary with rates.

The smart thing to do is buy when rates are at nosebleed levels.  That way when rates drop, house prices go up and you can refinance into a lower rate which drops your monthy payment.  Life is good.  You have a higher asset price and your monthly costs are lower.  Buying at low rates is INSANE.  When the rates necessarily rise, your house price drops.  You wouldn't necessarily want to refinance, but God help you if you have to move.  A pox on the realtors who chirp, "buy now before rates go higher."  Today's would-be buyers should be begging for higher rates.  Then we can get into demographics, employment, household formation, etc.  What individual would want to buy a house today?  Suicide.

Why are investors buying?  Anecdotally I hear that they are using cash.  NO DOUBT they figure that the investmnt will be at or near positive cash flow on an internal rate of return basis.  I mean after all - when doing an IRR, an investor's other possible internal rates are those of the financial markets - which are all negative.  With all cash, they will never get a margin call.  They will likely have the opportunity to take cash out when the rates rise - if they want to.  That way they can buy back at 80%, the bonds they sold at or above par to buy the rental investment property.  The rental property will probably still be cash flow positive in an absolute sense if they took out a mortgage on it.

Please tell me that the financial community didn't deliberately drive rates low so that they could cash out of their bonds at the top and into real estate at relatively off peak prices.  Oh.  And that would be after they got the Fed to buy all of the total crap MBS from them.

I have an argument with a friend that a good/smart/wise parasite never kills its host.  A good warm juicy host is hard to find.  I guess that these bankers think that they can keep sucking the current host forever.  Why would they think otherwise?  If they are watching Greece and had an ounce of sense, they would be retracting a blood funnel or two.

Fri, 11/02/2012 - 15:53 | Link to Comment socalbeach
socalbeach's picture

You wrote,
"Buying at low rates is INSANE.  When the rates necessarily rise, your house price drops."

During the early 1970's, interest rates were low and then skyrockted into the late 70's, but housing still went up in nominal terms.  The housing price rise didn't keep up with inflation, but combined with a large mortgage at low fixed interest rates and high price inflation, one would have come out ahead in purchasing power terms by buying when interest rates were low. Daniel Amerman goes through the numbers in a few of his articles.

http://inflationintowealth.com/Course/ewFIVEla5.pdf
http://inflationintowealth.com/Course/gdSIXb8q.pdf

That's not to say that I'm a buyer at current prices either, they have gone up enough since late last year that prices are too high, at least around here.  If Obama wins I expect stocks and probably real estate to go down some, since he's going to raise taxes. People with appreciated assets will probably sell to lock in lower rates on their gains.

Fri, 11/02/2012 - 16:05 | Link to Comment ChanceIs
ChanceIs's picture

Fair enough.  Interesting data.

The changing demographics may offer an explanation.  Back then you had the introduction of the two breadwinner family.  That was a chicken and egg issue.  Did we have two incomes because high house prices required it, or because with two incomes one could afford to chase a higher priced home.  I don't offer an answer.

We could beneficially argue until the cows come home about demographics and other variables factoring into housing prices.  I think that most of the variables are currently trending against what was going on in the '70s.  I will say that food stamp usage wasn't setting record highs every month and leave it at that.

Fri, 11/02/2012 - 22:55 | Link to Comment Dan Conway
Dan Conway's picture

Looking back it is easy to see that the boomers have been the driving force for so many trends since the 60's.  Whether it was building schools, building homes, buying cars, buying stocks, buying crap, but they had a huge impact.  The rationale expectation is that over the next 10-20 years they will be sellers of homes, net savers, transition from riskier investments to less risky, etc.  Add to this trend that our idiot politicians have created too many free-loaders and made promises they can't possibly honor.  This won't end well. 

Fri, 11/02/2012 - 19:33 | Link to Comment GAAPpreNixon
GAAPpreNixon's picture

Well said. This is NOT 1970. Demand is going DOWN from lack of household income. This is exacerbated by supply going UP, regardless of the desperate attempts by bankers to keep houses off the market to try to keep prices from toatally crashing.

The demographics in 1970 were aiding an increase in price. Now they are aiding a decrease. Housing prices will always be a function of income. The monthly payment is irrelevant. The main criteria in sound accounting practices is that NO ONE can afford a house that costs more than 2.5 times their annual NET income after taxes.

Sat, 11/03/2012 - 05:34 | Link to Comment andrewp111
andrewp111's picture

That 2.5 x income rule is a resonable approximation in both high and low rate environments because it accounts for property tax. The carrying cost of a house is the principal + interest + property tax. Property taxes get raised whenever values are rising, as local governments take a good chunk of any benefit of a rate cut.  They charge what the market will bear, just like anyone else. If the Fed gave out 0% 30 yr mortgages, the cost would be just principal + property tax, so you can bet your bottom dollar that local government would jack up the taxes to the sky. At 0% interest, a 30 yr mortgage would cost just 0.033 of the purchase price every year.  Under those conditions, people could afford a house of about 10x income, so local governments will make up the difference in taxes to get it back down to 2.5 x.

Sat, 11/03/2012 - 09:08 | Link to Comment kaiserhoff
kaiserhoff's picture

+insurance+utilities+HOA fees +maintenance++++++++++

Many have gone broke underestimating carrying costs of real estate.  Let's try not to mislead the innocent youth.

Fri, 11/02/2012 - 14:39 | Link to Comment kito
kito's picture

lets not forget the millions of homes that the baby boomers will be adding to the market within the next 5-10 years as they move into assisted living or into retirement communities.........................this market has no legs........

Fri, 11/02/2012 - 22:43 | Link to Comment Dan Conway
Dan Conway's picture

I agree but I would make it for the next 20 years.  In 5-10 years most boomers will still be working hoping for the elusive housing recovery our stupid leaders have been promising for 3.5 years.  Just like the adage of sports biggest losers (Cub fans)  they will be "waiting till next year" for a long time for that promised recovery to fund their dreams of luxury retirement communities.  Remember, too many 65 year olds still have mortgage debt.  We are all so screwed. 

Fri, 11/02/2012 - 14:13 | Link to Comment adr
adr's picture

Rising prices, ha. That's a good one. Enough to make it as a Las Vegas comic.

You might want to tell that to appraisers in my area. My home lost $18k in value according to the appraiser. A home around the corner from me was bought for $142k in 2010 and is now going for $125k, appraised for $125k.

Middle class white neighborhood.

The upper class neighborhood of Chagrin Falls is seeing price increases. A home that went for $650k in 2009 just sold for $725k. SO the market is turning up for them, but affordable homes in the $125-200k range are all losing value. Most likely because there aren't enough young people with jobs that can buy them.

What gives a better picture of the economy? A couple mansions going up in value or hundreds of homes in a middle class neighborhood losing value?

Sat, 11/03/2012 - 03:30 | Link to Comment Element
Element's picture

 

 

" ... but affordable homes in the $125-200k range are all losing value. Most likely because there aren't enough young people with jobs that can buy them. .."

 

Or maybe the unjustifiable misallocation of resources called student loans, and their repay schedules means they can't afford to buy a low-end home at any price for about 25 years or so. 

Fri, 11/02/2012 - 18:24 | Link to Comment markar
markar's picture

Just shows how all real estate is local. Here in the desert cities of CA the opposite is occurring. Median priced homes($200-$300K) have inched up in price due to competition from investors, Canadians & low inventory from the banks. Homes in the $750K up range continue to bleed value.

Fri, 11/02/2012 - 14:00 | Link to Comment Trimmed Hedge
Trimmed Hedge's picture

A $155K house in my neck of the woods would get me a 1-room shack with an outhouse..

 

In other words: Real estate is still way overpriced in my region...

Fri, 11/02/2012 - 19:54 | Link to Comment GAAPpreNixon
GAAPpreNixon's picture

Exactly!

But this comment from the author is a grossly inaccurate assumption: "It is clear that 2012 has pushed home prices higher overall".

Housing prices, regardless of what any statistically challenged economist will tell you,  are a function of INCOME. If the AVERAGE INCOME is going DOWN, there is NO WAY IN HELL that the average house price can go UP!

However, the stats DO SHOW that a tiny sliver of the population has increased their income so, YEAH, THAT group is purchasing properties at higher prices. A close look at that group shows a plethora of investors and wealthy home buyers which, because of their big ticket purchases, end up skewing the stats to make it look like prices are going up. The moment you add in the ENORMEOUS INVENTORY BEING DELIBERATELY HELD OFF THE MARKET, those stats go SOUTH!

Do you want to know the average home is "worth" in purely monetary terms? Multiply the average income by 2.5 and you will know. The MEDIAN income can also be lined up against the MEDIAN home "worth" this same way. IOW since both average and median income, after inflation, have been going DOWN for the last decade (now down about 7% from ten years ago) the "worth" of your home, unless you are in the top 5% with increasing income, HAS GONE DOWN. 

Let's be charitable and say the average household income is $50,000 a year (that's a lot higher than published stats right now). That means the average house will can DEMAND a price of $125,000. But it gets worse. The SUPPLY is bat shit crazy over the top right now. When you have a glut of supply, guess what happens to demand, DUH?

 

 

 

Sat, 11/03/2012 - 00:12 | Link to Comment mmanvil74
mmanvil74's picture

This commenter makes no sense. On the one hand inventory is being held off the market, on the other hand supply is "bat shit crazy"? The author of the post IS correct that household incomes determine the 'fair' market value for a home, but if I ask anyone if they would rather pay more to rent a home than buy a home, most people will say 'buy'. So what the author assumes is that while wages stagnate, home prices will remain low even while rents rise. I disagree. At some point anyone with a stable job (which is still a heck of a lot of people no matter how you calculate unemployment and certainly the majority) will choose to own. As for that shadow inventory, some of it is likely being moved off the big banks' and Fannie/Freddie balance sheets over to private equity without ever coming on the open market. As shadowy as that inventory is, a good chunk of it might not come on the market for years because it has changed hands away from the big banks who are dumping it at silly prices to get it off their books. There are also a lot of credit worthy homeowners who are underwater but choose not to be foreclosed on to avoid the repercussions. Sure the FED can be largely held responsible for any bump in house prices but they can also be 100% responsible for the stock market rising and t-bills rising, of the three housing is the only one that has already crashed so that's the one I would invest in. You can blame the fed for a price of something rising or you can buy now before the price goes higher. If you have cash you are taking a gamble betting against the fed. I don't believe we will see another us housing 'boom' per se but to remain bearish on this sector today is akin to being bearish on stocks in 2009, they were a bad investment until they weren't. The idea is to be ahead of the curve as an investor and yes the worst is absolutely behind housing relative to almost any other asset class for reasons I have outlined multiple times in previous comments on this blog.

Sat, 11/03/2012 - 11:27 | Link to Comment socalbeach
socalbeach's picture

The I Survived Real Estate seminar held Oct 19th, 2012 at the Nixon Library in S Cal backs up a lot of what you say.  Here is the link to the playlist, beginning with video 2. Start at about the 3 min mark,

http://www.youtube.com/watch?v=9suImsJT2v8&feature=bf_prev&list=PL_XoqKF...

Bruce Norris makes the initial presentation, which is followed by panelists including Eric Janszen of itulip.com and Rick Sharga of Carrington Holding, one of the companies buying up real estate to hold for rent. The primary emphasis is on CA real estate, but some of the charts are national in scope.  The Inland Empire area which he discusses includes Riverside and San Bernardino, less desirable than the coastal areas, but where he has made his fortune.  Norris correctly called for real estate doubling in 1997 (over a 5 yr period I think), and collapsing in 2006.

I'm not as bullish as Norris, mostly because I don't believe employment is improving (don't believe gov't stats).

(in Norris' presentation, he initially refers to perennial deflationist Gary Shilling who has called for a further 20% drop in housing.  Then later he mistakenly refers to him as Mr Shiller (Robert Shiller of Yale))

Sat, 11/03/2012 - 11:39 | Link to Comment mmanvil74
mmanvil74's picture

Thanks. Certainly there are pockets of the US housing market that will out perform others from an investment perspective. It wouldn't surprise me to see so cal near the top of that list. I have been focusing on the Phoenix and las Vegas markets which were among the hardest hit in the nation, but also the most likely to snap back upwards the strongest. Miami area would be another good spot to target if you believe in a housing recovery. National housing stas may remain subdued for quite some time even while the more attractive markets are rising (such as is happening now). My models target rental income as the main roi with appreciation as a bonus IF there is any, which I believe there will be. Certainly buying and flipping is a possibility as well in these markets if you know what you are doing. Buying reo from the banks, fixing and flipping to retail buyers. Critics will say this is all temporary and housing will quadruple dip, I say great, more opportunity to buy more homes at record low prices. Once all of the foreclosure inventory does work through there will be a big pop in prices and people will be sorry they waited. Peace out.

Fri, 11/02/2012 - 14:22 | Link to Comment adr
adr's picture

Check out what you can get near me for $130k in a middle class white suburb. Can't guarantee that it won't drop to $100k for lack of buyers.

http://www.howardhanna.com/property/property.asp?PRM_MLSNumber=3359141&P...

Fri, 11/02/2012 - 16:24 | Link to Comment object_orient
object_orient's picture

Your property taxes are high. 3k on a 130k house? Ouch.

Sat, 11/03/2012 - 05:39 | Link to Comment andrewp111
andrewp111's picture

Maybe that is why the house is so "cheap". Carrying cost is principal + interest + property tax.

Fri, 11/02/2012 - 13:48 | Link to Comment sbenard
sbenard's picture

Let's see. Rising prices and a stagnant workforce/economy! Isn't that called STAGFLATION?

Fri, 11/02/2012 - 19:42 | Link to Comment Offthebeach
Offthebeach's picture

Muppets serfs once again let down our central planning Fedgov overlords.

http://cnsnews.com/news/article/cdc-us-birth-rate-hits-all-time-low-407-...

Sat, 11/03/2012 - 02:31 | Link to Comment Never One Roach
Never One Roach's picture

Wait until interest rates begin to revert to the mean.,...house prices will tumble faster and further.

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