Real Economy Bites Housing Bubble 2
When the home-sales curve kinked south last fall, soothsayers had some handy reasons: The fiscal cliff, the threat of a government shutdown, and the potential government default that no one took seriously made home buyers uncertain. The jump in mortgage rates in reaction to the Fed’s taper cacophony? Homebuyers would get used to them, soothsayers mused.
By December, it was water under the bridge, but home sales dropped through the winter. Polar vortices were convenient excuses, though in the West, the weather was gorgeous. Then the spring buying season came around when the mood was supposed to perk up, but sales were still dropping.
Beneath the smoothened headline statistics, a darker scenario was playing out: this year through April, sales of the most expensive 1% of homes have soared 21% year over year, while sales in the bottom 99% – a sign of our times that the twisted term, bottom 99%, has become the norm – have dropped 7.6%. In numerous cities, sales at the lower end of the market have plunged, for example by 46% for homes below $200,000 in San Diego. Low inventories were cited as excuse, but inventories in many cities have been rising, which sent the industry scrambling unsuccessfully for fresh excuses [read.... Housing Bubble 2 Already Collapsing for the 99%].
Even Fed Chair Janet Yellen was suddenly concerned about the housing market. Which is ironic. The Fed wanted to create this very situation. And it succeeded with QE and ZIRP that made unlimited amounts of essentially free short-term money available to private-equity firms, REITs, and other large investors that then plowed it into the housing market and gobbled up vacant homes. It started in earnest in early 2012, and with connivance of the banks that were carrying many of these vacant homes on their books, they managed to drive up prices.
It didn’t take long. From January 2012 to April 2014, the median price of existing homes soared 30% and over the same period, the median price of new homes jumped 24%. In February 2013, new homes set new all-time highs, beating the prior peak-of-the-bubble price set in March 2007. And in many cities, including San Francisco, the median price of existing homes has already shot past prior bubble highs.
Other measures of home prices come up with different figures, but the trends are the same: home prices have jumped.
What hasn’t jumped? Incomes. According to Sentier Research, which uses data from the monthly Current Population Survey, median household income, adjusted for inflation, in April was $52,959 – 4.2% lower than at the official end of the Great Recession in June 2009, 5.9% lower than in December 2007 before the bottom fell out, and 7.0% lower than in January 2000.
With its strategy of throwing free money at Wall Street, the Fed has carefully selected the winners: among them, Wall Street players and banks that would buy or already owned vacant homes. To defend its actions, the Fed assiduously points out that homeowners were winners too.
On paper. Homes are worth more, and homeowners feel richer. But how can they profit from this “wealth?” They could draw cash out of it by borrowing more against their home, but that’s not profit. That’s leverage. Or they could sell the home to pocket the price increase. Alas, unless they want to move to Detroit or live in a tent, they’re going to end up buying a home whose price has also been inflated – at a similar rate if it’s in the same neighborhood – and the “profits” from the sale, and the illusory “wealth effect,” will dissipate in the inflated cost of the new home.
And now some of the Fed’s chosen losers were tabulated in the MacArthur Foundation’s How Housing Matters Survey. Turns out, the inflated cost of housing, in combination with the lack of pay increases, has turned into an affordability crisis, which is killing the housing market.
In order to stay current on their rent or mortgage, 52% of all adults in America over the last three years had to do at least one of these things: take an additional job or work more hours; stop saving for retirement, pile up credit card debt, cut back on healthy foods, or slash health-care spending.
For these people – over half of the adult population! – housing costs consume a disproportionate part of their incomes. They’re barely scraping by: 47% of the homeowners and 56% of the renters reported that their housing situation wasn’t “stable and secure.”
Rising housing costs make their problems worse. An increasing number of them can’t afford to buy a decent home at current prices. Since they represent a big part of the population, not just a few unlucky ones, home sales take a hit.
Affordability, like the rest of real estate, is local. In numerous cities, the mere word has become an insider joke. For example, in San Francisco, people with low six-figure incomes are struggling to find a halfway decent apartment they can buy and have enough money left over to commute to work and buy groceries. And those making $40,000? Well, maybe they can find, after a long wait, a taxpayer subsidized apartment. But that isn’t a solution either.
So it’s surprising that the Fed would express concern about the housing market. It knowingly created that monster. I wrote about the ascent of Housing Bubble 2, and what role Wall Street played in it, for the first time in March 2013 and I’ve writing about it ever since. I don’t have access to the voluminous data, brain power, and resources the Fed has. I’m just a guy who likes a good craft brew after battling it out all day. But even to me, it was clear at the time. Yet since then, the Fed has printed another $1 trillion, and ZIRP is still the relentless law of the financial land, all in order to inflate asset prices beyond recognition – including home prices.
But unlike some other assets, housing is still rooted in the real economy – a link the Fed never could sever, though it severed the link between stocks and the economy with surgical precision. When real folks cannot afford to buy, sales decline everywhere except at the top, anxiety spreads, and even many of the lucky ones who bought their home years ago can no longer afford to move: they can sell, but they can’t afford to buy the next home whose inflated price has to be financed with higher mortgage rates. This is what the Fed has wrought by “fixing” the housing market.
The equation might not have gone so horribly awry if each class of college graduates had seen their incomes skyrocket in line with their student debt. Ha! Read.... This Chart Is The Fate of Housing In America As Student Loans Bankrupt A Whole Generation
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