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California Housing Market Cracks in Two, Top End Goes Crazy

testosteronepit's picture




 

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

That the housing market is seriously twisted is apparent by the mortgage conundrum: despite historically low mortgage rates of around 4% for a 30-year fixed rate mortgage, mortgage originations averaged only $357 billion per quarter so far this year, according to the New York Fed. Unless a miracle intervenes in the fourth quarter, 2014 will be the worst year since 2000.

But home prices have soared 74% since 2000, according to the S&P Case-Shiller index. Unit sales are higher as well. Mortgage originations soared with them during the boom, crashed with them during the bust, and re-soared with them. Now home prices have “recovered” beyond the bubble highs in many markets, pumped up by big Wall Street players with access to the Fed’s free money. They gobbled up vacant homes for their buy-to-rent scheme. And they’re now stuffing rent-backed structured securities into retirement portfolios via conservative-sounding bond funds. But even these firms are getting cold feet [The Big Unwind: After Messing up the Housing Market, the “Smart Money” Bails Out].

Yet purchase mortgages started fizzling last year and today remain below the level of a year ago. At the segment where first-time buyers enter the market and where regular folks are trying to cobble together their American dream, buyers have to get a mortgage to buy a home. And there, things have gotten tough. Incomes have stagnated, and prices have been shoved out of reach.

And at the upper end, in the rarefied air where the beneficiaries of the Fed’s “wealth effect” are buying?

“It’s pretty mind-blowing, to be honest,” Los Angeles real estate agent Cindy Ambuehl told the LA Times. “The luxury market has been completely on fire.”

In the third quarter, 1,431 homes worth over $2 million were sold in the six-county Southland, up 14% from a year ago. In the second quarter, 1,436 of such homes were sold, the highest number ever. Sales of homes worth over $10 million are on track this year to double the prior record set during the peak of the last housing bubble.

“It’s just a completely different story between the two segments of the market,” said Selma Hepp, senior economist for the California Assn. of Realtors. “Those who are doing well are doing really well.”

The Fed’s ingenious “wealth effect” gets a big part of the credit. And incomes at the upper end of the spectrum have been growing strongly. So these folks want to translate these gains into something nice and real.

The wealth effect has been a success in other countries too, and some of the cash pouring into the top California housing markets comes from China and elsewhere. These folks are buying second homes and investment properties in an effort to move their wealth beyond the tentacles of political purges, anti-corruption strategies, and other governmental or business calamities that might entangle them at home.

“Everything’s just more global now,” Drew Fenton, an agent who specializes in high-end homes at Hilton & Hyland in Beverly Hills, told the LA Times. A decade ago “it was much harder to reach those people, and they didn’t travel as much.” Now a whole system has been set up to entice them.

A similar scenario is playing out in San Francisco. But already, cracks are appearing. Today’s S&P Case-Shiller September home price index for San Francisco edged down to 194.21 – the third month in a row of declines from the June peak of 195.88, and the first declines after a two-and-a-half-year period of uninterrupted gains totaling a phenomenal 57%.

But the index doesn’t fully portray the craziness in San Francisco. It covers five Bay Area counties that include cities like Oakland, which has been anointed the second most dangerous city in the US though it now has its own Bay Area housing boom and the mind-bending gentrification that comes with it.

In San Francisco itself, according to CoreLogic DataQuick, sales volume in October stagnated at last year’s level, but prices jumped 6.5% from September and 18.3% from a year ago to $999,250! A tad shy of the perfect $1 million mark of June, and nearly 23% above the prior record set in November 2007 that everyone afterwards acknowledged as totally crazy.

And that median home in San Francisco is a two-bedroom no-view apartment in a so-so neighborhood.

“After hitting what many view as a stratospheric level, Bay Area home prices have shown signs of leveling off,” said CoreLogic DataQuick analyst Andrew LePage. “To some extent it’s the result of sticker shock and a modest pickup in inventory.”

These are the cracks. But far above the median, it’s a different world. So a Victorian 3-bedroom, 3-bath, 4,000-square-foot single-family home in the Mission – an iffy area at the wrong time of the night – was bought by a flipper for about $1.6 million, rehabbed, and put back on the market less than three months later at $3.595 million. It quickly sold for $3.5 million. SF Curbed had this comment:

This home, an example of Stick/Eastlake architecture, was built in 1889 and is filled with both period details (hello, stained glass) and homey modern updates (solar panels!). There’s a lot to love here, from the trendy gray exterior to the hidden butler’s pantry in the dining room. Whoever bought this place paid in all cash.

At that segment, where money has a different meaning than for regular folks, the market is still hot. But there aren’t enough buyers with these means out there to prop up the entire housing market, and even if there were, they wouldn’t want to buy anything near a median home. That’s where the Fed’s ingenious wealth effect falls apart: it works with Wall Street firms and people who’re already well off. But by pushing up prices, it turns the American dream into a pipedream for an ever larger number of people.

Despite six years of unprecedented central-bank free-money policies that caused asset prices to jump, global economic growth is in trouble, according to the very businesses that are supposed to drive the economy forward. Their outlook for the next 12 months has plummeted to the worst level since crisis year 2009. Read…   Global Business Outlook: “Darkest Picture since Financial Crisis.” US Deterioration “of Greatest Concern”  

 

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Wed, 11/26/2014 - 21:18 | 5492812 devo
devo's picture

Do not move here. Worst State for liberty or freedom.

Wed, 11/26/2014 - 20:47 | 5492718 Downtoolong
Downtoolong's picture

there aren’t enough buyers with these means out there to prop up the entire housing market, and even if there were, they wouldn’t want to buy anything near a median home.

Are we supposed to be surprised? Strong demand and borrowing capacity of the entry-level first-time buyer has always been the foundation of broad sustainable growth and strength in the housing market. What’s happening today is the exact opposite of that, an upside down pyramid market which is inherently an unstable structure.

It’s not even a good example of the Wealth Effect either. Wait until people buying and customizing these statement homes go to sell them. Many will discover the next buyer isn’t nearly as excited as they were about their $700 per square foot backlighted turquoise granite countertops. This wealth not only fails to trickle down, it doesn’t trickle over very well either. The white elephants many of these homes are destined to become will be sorry examples of spending and investment malfeasance which destroys wealth, even the wealth of the rich. This too has been happening in the high end real estate market for hundreds of years, and it’s the best accomplishment the Fed can claim in the real estate markets from its cheap money policies.       

Wed, 11/26/2014 - 18:14 | 5492287 JR
JR's picture

Wall Street via Silicon Valley money is flowing once again into the small resort town of Carmel-by-the-Sea, 75 miles south of San Jose, California.  New multimillion dollar homes are appearing once again on the few ocean and nearby sites left in this beautiful little Shangri La of 3,807 inhabitants, 90% white.

But, just 22 miles east in the same county is Salinas, California, where the white population has fallen from 90% in 1970 to 13.5% ( 2012); the Hispanic population growing to 76.7%. Today (2014), Salinas is nearly 80% Hispanic with 163,665 residents – and is known for its surge in Hispanic residents since the early 2000s.

Look at the demographics below and you predict what the future impact on Carmel-by-the-Sea will be:  Real estate, retail, cultural, et cetera. And if you can, you will know the direction of California. (It has one of two impacts on Carmel, IMO: it is either going to swamp Carmel and whites will leave in droves, or it is going to isolate it as the only place wealthy whites can get away from the Central Valley changes, i.e., into  a "gated" community.)

Carmel-by-the-Sea

Population in 2012: 3,807 (100% urban, 0% rural). Population change since 2000: -6.7%

Mean prices in 2011: All housing units: $1,083,290; Detached houses: $1,086,511; Townhouses or other attached units: $1,005,430.

· White alone - 3,350 (90.0%) [down from 92.7% in 2010]

· Hispanic - 174 (4.7%) [up from 2.94% in 2010]

· Asian alone - 105 (2.8%) [up from 2.25% in 2010]

http://www.city-data.com/city/Carmel-by-the-Sea-California.html#ixzz3KDC8xvsm

Salinas:

Population in 2012: 154,484 (100% urban, 0% rural). Population change since 2000: +2.3%

Mean prices in 2011: All housing units: $302,332; Detached houses: $320,818; Townhouses or other attached units: $225,134; In 2-unit structures: $267,368; In 3-to-4-unit structures: $149,155; In 5-or-more-unit structures: $199,464; Mobile homes: $98,362

· Hispanic - 118,406 (76.7%) (64.13% in 2000)

· White alone - 20,824 (13.5%) (24.19% in 2000)

· Asian alone - 11,218 (7.3%) [6.2% in 2000]

 

http://www.city-data.com/city/Salinas-California.html

Wed, 11/26/2014 - 20:23 | 5492650 Crisismode
Crisismode's picture

Actually,

a simple 18-kiloton nuke would take car of that town

tout suite.

 

And that's a fact.

 

Wed, 11/26/2014 - 18:03 | 5492272 Meremortal
Meremortal's picture

This has happened in other markets too, and it happens at the end of every real estate long cycle. I've watched it happen through three real estate major cycles since 1975. As usual, the writer ignores the main reason for this normal adjustment.

There is pent up demand from the depression, and almost no homes were built for four years. Low supply, higher demand.

I've only got 45 years experience in real estate development, land speculation, mineral rights, appraising and sales, so I don't know very much, but this is a familiar part of the cycle.

 

 

 

 

Wed, 11/26/2014 - 20:19 | 5492645 Crisismode
Crisismode's picture

You are right.

You don't know much at all.

You don't know that the ChinaMan is dominating this market.

 

AND ALL MARKETs!

 The ChinaMan is taking over the USA.

Fucking Don't YOU REALIZE THAT!?

 

Wed, 11/26/2014 - 17:22 | 5492186 walküre
walküre's picture

Chinese money up and down the Westcoast. It's no secret how HAM has distorted the RE picture in CA, OR, WA and BC.

Wed, 11/26/2014 - 16:26 | 5491998 robnume
robnume's picture

Yup, being a native Californian is just great these days! Can't afford to buy anymore; priced out of the market. Owned a home in So. Cal. bought in 1998 for $99,000.00 with a 2300 sq ft & one acre of land, sold 5 years later for $140,000.00 been renting for 12 years in Santa Rosa at $1595.00 mo. Now gotta move back to So. Cal as a renter. It sucks.

Wed, 11/26/2014 - 20:16 | 5492637 Crisismode
Crisismode's picture

You can thank the ChinaMen for that.

 

Kiss the Chinaman's ass.

 

Wed, 11/26/2014 - 15:57 | 5491906 I Write Code
I Write Code's picture

What would you pay to get away from the legal/illegals and Ferguson protesters?

Wed, 11/26/2014 - 15:47 | 5491868 reset71
reset71's picture

<<<< Prices will not go under where they are now during the next recession.

<<<< Prices will go under where they are now during the next recession.

 

I know a couple who is moving to San Francisco. The houses (two bedroom nice apartments) next to his employer run 1-1.5 million. Should they buy now or wait?

Wed, 11/26/2014 - 20:14 | 5492630 Crisismode
Crisismode's picture

Your friends are assholes.

Maybe they should just kill themselves.

And rid us of another bunch of kissass whores.

Think?

 

Wed, 11/26/2014 - 15:19 | 5491798 Dent Research
Dent Research's picture

San Fran's annual gains were at +26% in 2013.  Now?  9%.  Go figure.

Wed, 11/26/2014 - 18:00 | 5492264 Ruffmuff
Ruffmuff's picture

Who's asshole numbers are those? Plus 26%, fucking drinking koolaid next.

Wed, 11/26/2014 - 15:10 | 5491761 the grateful un...
the grateful unemployed's picture

the rich consistently overpay for things. part of it is ambience, part of it is supply demand, too many rich people, not enough high end homes. golfer Phil  Mickelson is trying to sell his Rancho Santa Fe home, which he built a few years ago, and he is going to take a beating. he has had to drop the price several times. he was rumored to be an interested buyer of the local MLB franchise last year, while a few million wont cramp his style, the rich measure themselves by how much value their name adds to something. they really arent like you and me

Wed, 11/26/2014 - 16:20 | 5491981 Winston Churchill
Winston Churchill's picture

You don't know many very rich people do you ?

Most are so tight they squeak when they walk.

One of my oligarch clients queried $400 in a $80k bill recently, and he is not one of my Jewish ones.

Wed, 11/26/2014 - 18:58 | 5492376 janus
janus's picture

lemme guess...he was an ornery scot; was he not?  probably not...but it was my initial reflex.  it's more a proactive/preemptive kinda thing.  you scan a document, look it over carefully, and then isolate a single thing that could be plausibly disputed.  you then bicker and rant and rave and rasie hell.  that way, the issuer of remit thinks thrice before submitting anything.  it's pretty fuckin effective, too.  

https://www.youtube.com/watch?v=zCrT96QJBfQ

i hated the colonel with his wee beady eyes/

and that smug look on his face...,

janus

 

 

 

Wed, 11/26/2014 - 19:37 | 5492514 Winston Churchill
Winston Churchill's picture

Danish actually.

Very similar in outlook.

Wed, 11/26/2014 - 20:29 | 5492667 janus
janus's picture

something tells me you know this already, but i'd interpret it as a mark of respect...otherwise, he'd-a paid the bill without comment and never contacted you again.  if, that is, the cost of ignoring was less than that of litigation.  

sounds like you got some more danish business comin your way, WC.  they're good people -- homeland of Soren Kierkegaard -- but they have their idiosyncrasies. covetous danes ended up on the wrong end of the north sea...tain't our fault....bloody good with numbers, too.  

Wed, 11/26/2014 - 20:13 | 5492622 Crisismode
Crisismode's picture

Another Fucking Euro Asshole.

 

Say no more.

 

Wed, 11/26/2014 - 14:32 | 5491633 ebworthen
ebworthen's picture

Housing house of cards.  We've seen this B movie before.

2008-2009 redux, just "bigger and better" Amurika style.

Wed, 11/26/2014 - 14:13 | 5491553 silentboom
silentboom's picture

"These folks are buying second homes and investment properties in an effort to move their wealth beyond the tentacles of political purges, anti-corruption strategies, and other governmental or business calamities that might entangle them at home."

I don't think they've fully done their research.

Wed, 11/26/2014 - 18:05 | 5492280 Meremortal
Meremortal's picture

Yeah, they're dumbasses. That's why they are rich.

Wed, 11/26/2014 - 16:15 | 5491960 Winston Churchill
Winston Churchill's picture

Frying pan into the fire, obviously has no Chinese equivalent..

Wed, 11/26/2014 - 13:30 | 5491345 livefreediefree
livefreediefree's picture

Wonder when it will become fashionable for our elite to construct vomitoriums in their palaces?

Wed, 11/26/2014 - 13:23 | 5491299 RaceToTheBottom
RaceToTheBottom's picture

China exodus money.

USA got jealous of Canada realestate appreciation.

After Vancouver closed the door to the chinese money laundering schemes, we were glad to step in and give them a set of laundering opportunities.

In one way it is good.  If your parents live in or near one of those neighborhoods, your kids can get a job being a maid or a gardener for them.  They can walk to work!!!  SUCCESS!!!

Wed, 11/26/2014 - 13:18 | 5491296 basho
basho's picture

paid for in yuan?

Wed, 11/26/2014 - 14:19 | 5491572 A Nanny Moose
A Nanny Moose's picture

Pertrodollars...coming home to roost.

Wed, 11/26/2014 - 13:19 | 5491294 silverer
silverer's picture

Good thing the mass media spends a considerable time pointing this out to mainstream, USA.

Wed, 11/26/2014 - 13:38 | 5491401 KnuckleDragger-X
KnuckleDragger-X's picture

The media exist's for propaganda purposes. They love to hype initial applications but do their best not to tell you how many actually close. Of course we have the banks holding foreclosures in abeyance for 6+ years now so people don't how bad the market really is.

Wed, 11/26/2014 - 13:23 | 5491318 divingengineer
divingengineer's picture

They are all pretty much rubbing our noses in it at this point.  

Wed, 11/26/2014 - 13:14 | 5491269 i_call_you_my_base
i_call_you_my_base's picture

Trickle down is coming. Any. moment. now...

Wed, 11/26/2014 - 14:01 | 5491509 kchrisc
kchrisc's picture

"Trickle-down" is quite funny when one thinks about it.

They are robbing us and enriching themselves on our wealth via "printing" and fraudulent-reserve banking, and then promise that a "wealth effect" of that theft will "trickle down" to their victims.

"The universe will pay you back," the mugger chortles as he runs off with your wallet.

An American, not US subject.

 

And remember, most of the thieves at the top can "return, flee with the loot, to where they're really from.

Wed, 11/26/2014 - 13:21 | 5491315 divingengineer
divingengineer's picture

We have an old saying in Kentucky: "Don't piss down my back and tell me it's raining". 

Wed, 11/26/2014 - 21:16 | 5491647 Zirpedge
Zirpedge's picture

Janet Yellin is taking a wet California elitist gluten free dump on your chest and then having Jamie Dimon slip you the chili dog. 

Wed, 11/26/2014 - 13:21 | 5491304 FeralSerf
FeralSerf's picture

"Mr. David Stockman has said that supply-side economics was merely a cover for the trickle-down approach to economic policy—what an older and less elegant generation called the horse-and-sparrow theory: If you feed the horse enough oats, some will pass through to the road for the sparrows." -- John Kenneth Galbraith

Wed, 11/26/2014 - 22:33 | 5492993 TheGreatRecovery
TheGreatRecovery's picture

Amen.  That's what made Reagan "great": he was such a well-trained actor that he was able to look very serious while he lectured the serfs that if he took their money and gave it to the super-rich, that would make the serfs richer. Clearly nonsense, but since the super-rich own the media, they all nodded in sync with Reagan and said, "Now see there?  THAT'S the way a WISE MAN speaks".  And they're still saying it.

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