This page has been archived and commenting is disabled.

Housing Bubble 2.0 Veers Elegantly Toward Housing Bust 2.0

testosteronepit's picture




 

Wolf Richter   www.testosteronepit.com   www.amazon.com/author/wolfrichter

They’re not even trying to blame the weather this time. “Housing affordability is really taking a bite out of the market,” is how Leslie Appleton-Young, chief economist for the California Association of Realtors explained the March home sales fiasco. “We haven’t seen this issue since 2007.”

In Southern California, the median price soared to a six-year high of $400,000, up 15.8% from a year ago, as San Diego-based DataQuick reported. It was the 24th month in a row of price increases, 20 of them in the double digits, maxing out at 28.3%. Ironically, prices per square foot are increasing fasted at the bottom third of the market (up 21%), versus the middle third (up 15.9%) and the top third (up 14.3%).

Ironically, because at the bottom 65%, sales have collapsed.

People, wheezing under the weight of their student loans and struggling in a tough economy where real wages have declined for years, hit a wall. Private equity firms and REITs, prime beneficiaries of the Fed’s nearly free money, gobbled up vacant homes sight unseen in order to convert them into rental housing, and in the process pushed up prices - exactly what the Fed wanted. But now high prices torpedoed their business model, and they’re backing off. So sales of homes priced below $500,000 plunged 26.4%, and sales of homes below $200,000 collapsed by 45.7%.

These aren’t poor people who stopped buying them but two-income middle-class families who’ve been priced out of the market. Thanks to the Fed’s glorious wealth effect, however, sales of homes ranging from $500,000 to $800,000, increased by 2.9% from a year ago, and sales of homes above $800,000 increased by 5.4%. In total, 35% of the homes sold for $500,000 or more. But combined sales, due to the collapse at the low end, dropped 14.3% from a year ago to 17,638, the worst March in six years, and the second-worst in nearly two decades.

“Southland home buying got off to a very slow start this year,” said DataQuick analyst Andrew LePage. Among the culprits: the suddenly absent large-scale investors, the jump in home prices, and the increase in mortgage rates [read.... Hot Air Hisses Out Of Housing Bubble 2.0: Even Two Middle-Class Incomes Aren’t Enough Anymore To Buy A Median Home].

And he put his finger on a new culprit: potential move-up buyers were stymied because they’d refinanced their current home at a “phenomenally low” interest rate. They can’t afford to abandon their relatively low payment, which they already stretched to reach, and buy a much more expensive home – a move-up home during a pandemic of inflated home prices financed at a higher mortgage rate. They’re trapped by the consequences of the Fed’s policies:

They could sell, but they can’t afford to buy!

“Lately on Saturdays and Sundays, you see open house signs everywhere,” Carey Chenoski, a real estate agent in Redlands, told the LA Times. “The houses that last spring would be gone in the first day are sitting maybe 60 days.” That’s at the low end. At the high end, at prime beachfront locations in Manhattan Beach, the wealth effect runs the show. Agents are getting “multiple offers on just about everything,” said Barry Sulpor, with Shorewood Realtors. “The market is really on fire.”

In the nine-county Bay Area, the median price paid for a home in March jumped  to $579,000, up a bubblelicious 23.2% from a year ago, the highest since December 2007, according to DataQuick. In my beloved San Francisco, the median price jumped 14.6% to $937,500. In Solano County, the “cheapest” county in the Bay Area, the median price soared 30.4% to $300,000.

Alas, sales plummeted 12.9% to 6,308 houses and condos in the Bay Area, the worst March since 2008, and the second-worst in the history of the data series going back to 1988. And the debacle was concentrated at the lower end: while sales of homes over $500,000 rose 5.2%, sales of those under $500,000 collapsed by 32.9%.

The same phenomenon is playing out across the nation.

Redfin, an electronic real-estate broker that covers 19 large metro areas around the country, saw year-over-year price gains of 9.9% in March, after 17 months in a row of double-digit gains. Las Vegas topped the list with an annual gain of 20.8%.

But home sales in these 19 markets dropped 11.6% year over year, the fifth month in a row of sales declines. Beyond California, where sales fell off a cliff, sales in Washington DC tumbled 13.5%, in Las Vegas 15.8%, and in Phoenix 17.3%. It's tough out there.

Some analysts, tired of looking silly blaming the weather, started blaming low inventories. So inventories were flat in the 19 markets overall compared to March last year; no reason for plunging sales. In Boston, Portland, and Austin inventories dropped. But in the cities where the sales plunge has been particularly nasty, inventories skyrocketed: up 41.9% in Phoenix, 28.9% in Ventura, 25.7% in Riverside, 24.8% in Los Angeles, 23.1% in Sacramento, 21.3% in San Diego.

And the number of new listings across the 19 markets rose by 6.3%, the first year-over-year growth in March in three years. The usual suspects in California saw the largest jump, with listings in Ventura up 13.1%. But they were up elsewhere too: in Long Island 12.7%, in Las Vegas 11.9%, in Chicago 10.6%, in Phoenix 7.8%, etc.

You get the idea: rising inventories, rising new listings, soaring prices, and plunging sales. Something has to give.

Unlike stocks, housing is subject to the real economy. When the price at the bottom half of the spectrum soars beyond what people can afford even with today’s still extraordinarily low interest rates, and beyond what makes sense for speculators that fix them up and rent them out, then demand stalls. Homes sit. Sellers get frustrated. People who need to move can’t move because they can’t sell their house for the price they want. People who want to move up can’t. Pressure builds. And eventually, the prices that the Fed conspired to inflate into the stratosphere, well.... This is like so 2006.

A report from the asset management and investment banking division of Groupe BPCE, the second largest bank in France, predicts what daredevil voices at the maligned margin of financial analysis have worried about for a while: another global financial panic. Read... What Happens When ‘All Assets Have Become Too Expensive?’

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Thu, 04/17/2014 - 21:11 | 4671642 Libertarian777
Libertarian777's picture

Bay Area is nuts, 2 income family and we're priced way out the market.

 

$550k for a 1098sq ft 25 year old CONDO in SAN JOSE?

Thu, 04/17/2014 - 19:53 | 4671388 NihilistZero
NihilistZero's picture

It makes about as much sense as the PE of the average tech stock.  I'm a housing bear and see the run up of the last 2 years as nothing but the illusion it is.  But with the funny money of Silicon Valley flowing strong, I think your 'hood will be more elastic than most.  If people are putting high percentages down they likely won't/won't have to default or sell as long as they stay employed.  The Bay Area, Silicon Valley, LA and OC prime and possibly San Diego will likely get moderate adjustments coinciding with increased interest rates and inventory.  The marginal suburbs are going to get creamed.  In fact they already are volume wise.  Prices are the most lagging of indicators.

Thu, 04/17/2014 - 13:37 | 4670057 new game
new game's picture

exactly what has happened to us. priced out of the market by OUR choice! the housing market is now just an investors commodity. peaks and valleys like apple stock. home is a share to be day traded or a dividend payment(with much baggage-renter)-thanks to all the manipulating cast of stimulators starting with the 10 yr treasury.

patience til the next "move" is obvious...moving to rent within biking or walking distance to work...minimalize to the max and save for another opportunity. also,  just don't want ot have to sell another home(inspections ect.) fugly dude. finally getting that good feeling about not participating and keeping all my options open including moving to timbukto...

Thu, 04/17/2014 - 18:01 | 4671027 novictim
novictim's picture

You are not alone.  There are many who are smart enough to see the writing on the wall.  Well done.

Thu, 04/17/2014 - 22:05 | 4671839 new game
new game's picture

meeting to finalize the lease in the morning-one more fucking move...talk in a year.

see the bonds got hammered today- another jeckle hyde market. nothing, i mean nothing

makes any sense. zh is starting to be like turning on the tv (and that fucker never gets turned on except for netflix).

bunch of shit that my brain can live without-i'm starting to think...i mean really we get wtf is going on!

remember i said the new tv is the internet. tic toc til power off. think about not knowing anything that is happening in this fucked up world-pure bliss...

rant out

Fri, 04/18/2014 - 07:45 | 4672488 dontgoforit
dontgoforit's picture

At other times in history things have been super-screwy, too.  It's up to us to fix it.  No time to give up.  Independence, freedom - more than concepts.  Sometimes we have to fight for the right to party.

Thu, 04/17/2014 - 15:53 | 4670654 NEOSERF
NEOSERF's picture

Yes, good analogy.  You used to be able to ignore the fluctuations because you knew you'd have a job and stay 20 years and at the end have good 2-3x equity.  Now, there is no such economy and if you buy HI, you likely won't be able to sell HI when you have to leave for job purposes etc... it is more imperative you don't get caught at the top of the housing market as it may be the difference between leaving with money in your pocket or not.

Thu, 04/17/2014 - 18:10 | 4671053 novictim
novictim's picture

Exactly.
This Frankenstein Housing market, the cobbled together-ing of artificially low interest rates, shadow "all cash" investor/flippers, Wall Street scammers bundling of RBS--Rental Backed Securities, and of course, first time home buyers being given loans they cannot possibly afford are all leading to a unsustainable speculative rise to the moon of home prices.

You buy now, you loose EVERYTHING. This is the unintended consequence of trying to solve local and federal financial difficulties through inflated housing prices...

If the Powers-That-Be could merely have put their energies over the years into growing good paying consumer jobs and wages instead of Housing Hocus Pocus we might have had a chance as a country and people...

Thu, 04/17/2014 - 18:42 | 4671139 AdvancingTime
AdvancingTime's picture

Predicting this market is difficult. Never before has mankind diverted such a large percentage of wealth into intangible products or goods.  I contend this is the primary reason that inflation has not become a major economic issue.

If faith drops in these intangible "promises" and money suddenly flows into tangible goods seeking a safe haven inflation will soar. It is possible many of these investors or buyer are trying to get a jump on us. If they are right watchout! More on this subject in the article below.

http://brucewilds.blogspot.com/2014/04/inflation-seed-of-economic-chaos....


Fri, 04/18/2014 - 18:05 | 4674089 g speed
g speed's picture

Advancing T

There are only a very few who get out with something---every one else ends up with disappearing zeros---not a lot left to buy "tangible goods" with. When credit goes all intangibles go ---zip lickity split-- something has value at market --it may be priced at any level --and that includes money.

Fri, 04/18/2014 - 07:42 | 4672482 dontgoforit
dontgoforit's picture

Bo-dough.

Thu, 04/17/2014 - 14:36 | 4670324 Skin666
Skin666's picture

Ride it out like I'm doing. Stack gold, silver and crypto, wait for the epic bust, and buy a house for peanuts

Thu, 04/17/2014 - 15:39 | 4670594 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

I am a renter. Just waiting the storm to blow over and buy then. Pick of the neighborhood and house at a good price.

"Buy when there is blood in the street, even if it is your own blood."

-A famous Jew

Sat, 04/19/2014 - 11:44 | 4675519 dizzyfingers
dizzyfingers's picture

Vampyroteuthis ...

When you sign the mortgage you agree that every teacher and municipal (public) worker can put his hands in your pocket for pay, benefits, and retirement. It's what real estate taxes are all about. Even when those people are no longer working for you (they are retired) and even when your mortgage is paid off you're still paying real estate taxes to the ones who are retired and the new ones that replaced them, and you have no say over their pay scales or benefits.

Thu, 04/17/2014 - 15:44 | 4670612 KidHorn
KidHorn's picture

Waiting is a good idea, but be prepared to wait a long time. If you owe more than 100% of the home value, you won't sell. Better to live rent free for a few years before being evicted.

Thu, 04/17/2014 - 18:13 | 4671057 novictim
novictim's picture

That recipe takes balls that most people don't have.  And most people don't get your drift here, anyways.

But that plan is a good one.  

Thu, 04/17/2014 - 23:25 | 4672015 willwork4food
willwork4food's picture

Not just for those underwater. Most of us are one car accident away from finding out whether their state is trustee, judicial or come & get it mother fuckers.

Fri, 04/18/2014 - 07:38 | 4672480 dontgoforit
dontgoforit's picture

The last three words in the Jewish Bible: "Get the money." - another famous Jew.

Thu, 04/17/2014 - 16:25 | 4670774 Manthong
Manthong's picture

Geez.. what do you get for $200K in Dago nowadays.. a little room out back with a crescent moon on the door ?

Do NOT follow this link or you will be banned from the site!