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2015 Housing Trends: Will The Echo Bubble Continue Expanding?

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Considering the reality that only the top 5% have benefited from the policies of the past six years, it's difficult to see how the Echo Bubble can continue expanding in 2015.

After two years of bubble-type price increases, the big question for housing in 2015 is: will the Echo Bubble continue expanding, or will it follow its 2002-2007 sibling's epic bubble pop and decline? To answer the question, we first need to identify the key trends that have enabled the expansion of the Echo Bubble.

There are three key dynamics underpinning housing's Echo Bubble.
 
1. The unprecedented intervention of the Federal Reserve to push mortgage rates to historic lows.Nothing fancy here; lower rates serve two purposes central to the policies of central banks everywhere: they enable marginal buyers to qualify to buy homes, and they boost prices higher.
 
2. The post-2008 slump in housing construction and the demand for rental housing pushed inventory down and demand up. This led to a classic imbalance of supply and demand: as demand by investors and overseas buyers rose, inventory fell. Prices naturally skyrocketed in areas with tight inventory and high demand.
 
3. The end of the Fed's monetary easing/money-printing devastated the periphery emerging-market economies, forcing capital to flee to safe havens such as U.S. real estate. As China and the emerging economies that had boomed as Fed money poured into their economies rolled over, those who had accumulated fortunes rushed to transfer their wealth (often ill-gotten) into safe havens such as the U.S.
 
The goal wasn't just to transfer capital, but safeguard the families' physical safety; buying a house with cash is the ideal solution. This dynamic has fueled a vast all-cash housing trade in areas favored by foreign capital: New York, Miami, Los Angeles, San Francisco, Vancouver, etc.
 
The question then boils down to: are these trends likely to continue or fade? To answer that, we have to refer to a fourth dynamic, one that undermines the entire Echo Bubble: the erosion of household income.
 
How can housing prices keep rising as household income continues declining in real terms?
 
The Fed and federal housing agencies have reversed the natural downward pressure on demand and prices by making mortgages incredibly cheap and reducing the down payment requirements. This enables marginal buyers to qualify, but the previous housing bubble revealed that enabling marginal buyers to qualify for mortgages triggers a time-bomb of defaults: last ones on, first ones off.
 
Marginal buyers are the first to default when lay-offs, divorces, medical crises, etc. arise, as they inevitably do.
 
Here is a chart of per capita income. This broad measure of income doesn't reflect the enormous skew in household income to the top 5%--a reality that is thoroughly covered by Doug Short in Household Incomes Across Time: The Divergence at the Top 5%. In effect, most of the gains in income and wealth over the past decade have flowed to the top 5%, leaving the bottom 95% with stagnant income and net worth.
 
Let's consider each of the three trends that have pushed prices higher.
 
Mortgage rates: it's difficult to see how rates can decline much further, as they are already near-zero in real (inflation-adjusted) terms. there is precious little incentive for lenders to accept the risk of default for near-zero returns.
 
The Federal housing agencies appear to have recognized this limit, which is why they're pushing near-zero down payment loans again.
 
Inventory. Courtesy of Market Daily Briefing, here is a chart of inventory and the Case-Shiller house price index. Inventory plummeted in the past few years, and remains low.
Cash sales/mortgage credit. This chart of mortgage credit growth and the Case-Shiller house price index shows that mortgage credit has lagged the explosive rise in price, suggesting much of the price appreciation has been driven not by Americans buying homes to live in, but foreign buyers and domestic investors paying cash.
Is there any limit on the number of foreign buyers with hot money to launder by buying U.S. houses? That's an unknown with multiple variables. The imposition of capital controls in periphery economies could trigger a tsunami of hot money seeking safe haven. But once that wave breaks, the flow of hot money could subside.
 
We might also ask: is there any limit on demand for rental housing? Investors flocked into housing in the great chase for yield in a zero-interest rate economy, but the sharp rise in rents in many areas may be reaching limits on what households can afford to pay.
 
We see a hint of slackening demand in this chart of home sales, which tend to lead price. As sales decline and inventory slowly rises, prices tend to follow.
Will the Echo Bubble continue expanding in 2015? Let's answer with another set of questions: is a housing market that is dependent on marginal buyers who would never qualify to buy a house with prudent risk management a sustainable market? Is a housing market that is dependent on hot money from overseas buying houses for cash a sustainable market? Is a housing market that is dependent on investors buying homes to rent a sustainable market?
 
Considering the reality that only the top 5% have benefited from the policies of the past six years, it's difficult to see how the answer is "yes." Income has gone nowhere, while the wealth of the top 5% has soared. Is that a healthy economy that can support a sustainable rise in house values? No, it isn't.
 
 
 

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Wed, 12/31/2014 - 11:59 | 5609025 tarsubil
tarsubil's picture

If kids today weren't so lazy! Why in my day where the average price to hh earnings was 37% instead of 550% as it is today, I put down 20% on my home and paid 7.5% interest!

Wed, 12/31/2014 - 13:10 | 5609277 DetectiveStern
DetectiveStern's picture

Debt slaves living in neo-fuedal times. 

 

I have no debt and have no plans of taking out debt so I will probably never own property. 

Wed, 12/31/2014 - 12:03 | 5609030 buzzsaw99
buzzsaw99's picture

i fail to see what a healthy economy has to do with anything

Wed, 12/31/2014 - 12:09 | 5609055 kaiserhoff
kaiserhoff's picture

Like the early Christians, buzz,

  we live in hope;)

Wed, 12/31/2014 - 12:07 | 5609043 Dexter Morgan
Dexter Morgan's picture

And the Home Ownership Rate continues to plummet.....we foreclosed on some folks.

http://www.businessinsider.com/q1-2014-us-homeownership-rate-2014-4

Wed, 12/31/2014 - 14:14 | 5609560 KnuckleDragger-X
KnuckleDragger-X's picture

We're still not back to historic levels of ownership and bubbles will continue in hot zones like SF until the tech market finally takes a dump...

Wed, 12/31/2014 - 12:11 | 5609058 SethDealer
SethDealer's picture

we need more low income mortgage favortism

Wed, 12/31/2014 - 12:10 | 5609061 i_call_you_my_base
i_call_you_my_base's picture

And I'm sure we'll get it.

Wed, 12/31/2014 - 12:11 | 5609063 Tin Hat Salesman
Tin Hat Salesman's picture

10yr moving average YoY...what a useless graph

Wed, 12/31/2014 - 12:32 | 5609132 wagthetails
wagthetails's picture

add the selling pressure of the boomers over the next 15 years downsizing, dying or moving into assisted living.  This is going to kill all those 4 bedroom houses.  not only is the next generation smaller and can't possibly soak up the supply, but the today's millenials (although bigger than boomers) aren't having 3-4 kids.  Small houses will cointinue to do well, but those large, high tax, high energy cost homes are going to take a beating over the next 15 years. 

prices have increased due to tight supply, not increased demand.  that supply is going to break free over the next decade. 

Wed, 12/31/2014 - 12:59 | 5609230 Firehawk734
Firehawk734's picture

I agree about the boomers adding selling pressure.  It will drive prices down a bit, and the investors will come in, pay cash, and turn them into rentals or flip them.  This has been going on since 2010-2011 and is in my opinion the primary reason for the drive-up in prices.  I honestly don't know how the ship ever gets 'righted'.  If interest rates go up that means it is more expensive to buy a house, even though prices will likely come down.  BUT, if the housing market acts anything like the stock, market, maybe house prices continue upward regardless.  Stock prices have gone straight up no matter what has happened.

For an investor, the house has to cash flow.  If they can't get it cheap enough, they won't go near it, which means those huge, high tax homes are going to sit and wither.

Hard to know what's going to happen.

 

Wed, 12/31/2014 - 14:11 | 5609543 wagthetails
wagthetails's picture

the only answer is steady moderate economic inflations (which is obviously what the fed is trying to do).  If we can maintain 4-5% inflation, rates will be allowed to move back to reality and the economic inflation will allow house prices to appriate therby minimizing debt.  But this is like trynig to land a jumbo jet in a driveway.  no person or centrally planned gov could achieve that kind of accuracy.  and with income dropping, there isn't any pressure on prices.  The fed is just pushing us to skip right over inflation into a crisis of confidenc in currency - Hyperinflation. 

The big fear is that with global Debt/GDP at about 300%, there are is an oversupply of debt.  Eventually some countries won't be able to sell debt at current rates...not because there are better investments, but because there is no one left to buy debt.  just imagine, we have the same global economy but with 10yr rates at just 5%?  does it even work?  a 2.5% increase in 30/year rates should lead to a 25% decline in purchasing power.  assuming this stagflation scenario.  an never mind the governmental debt service implications.

 

All that being said, none of this happens until the first currency falls.  As long as Japan limps along, the charade continues. 

Wed, 12/31/2014 - 14:53 | 5609681 The_Dude
The_Dude's picture

I actually think demand for the large homes will boom since everyone is transitioning to multi-generational homes since to many don't have stable jobs or have tons of debt to service.  Plus here on the left coast, the flood of Chinese, Indians, Mexican (et al) are traditionally multi-generational to start with. 

(The plan is working...we are all 3rd worlders now!!)

Wed, 12/31/2014 - 13:04 | 5609251 agstacks
agstacks's picture

Are we seriously going to sit here and let the slacking Millennial generation bust our housing market because they refuse to get off the xbox, find a good paying job and buy a house?!  My house has increased in value 1,000% over the years, and to think some slacker that doesn't want to buy a house could impact my hard earned gains due to their own apathy is ridiculous.  Between my investments, pension, and SS, I live on a very fixed income now and my plan is to sell my house and use that money to fund the rest of my retirement and maybe buy a small ski house up north.  ($5,000/m only goes so far you know)

I'll tell you what, this upcoming generation is doomed.  They don't save, they don't invest as much as they should, and then when they complain about everything. Spoiled brats!  In my day we worked hard; the work ethic in this country is lost. It was easy for me to pay my way through college with only a part time minimum wage factory job! If I could do it, there's no reason why these kids today cannot do the same. The fact that they don't work means the increases to my social security entitlement don't grow as fast as they should to keep up with inflation.  I am being whittled away here! 

The upcoming generation only thinks of themselves, and are very selfish! I think we might want to start charging the freeloaders a tax, er, penalty for refusing to keep this market going for us older folks. If you don't want a house, fine, but why should I have lose out based on someone else refusing to contribute to the economy because they are so self-absorbed.

Anyway, I gotta run, I'm late for my tee time and I'm getting worked up here.

 

Wed, 12/31/2014 - 13:16 | 5609290 Firehawk734
Firehawk734's picture

Times change.  Every future generation has it easier and easier due to technology.  Just how it is.  I am 36 so I think that is top end of Millenials and I remember hearing my mother say "these kids are lazy, they have it so easy!".  Now I'm saying that about the next generation, because they have it 10 times easier than even I did as a kid.  If i wanted to go hang around with my friends I would go to their house and knock on the door, or MAYBE give them a call if I was feeling lazy first.  But nowadays it's viewed as 'rude' to go knock on someone's door without texting first. 

Nowadays you don't have to go to the Library to seek information.  You are 6 seconds away from looking up anything at any time.  Manual labor is an underrated trait, but it is needed less and less these days.  The further we get away from religion, the more future generations will avoid marriage and will just 'shack up' with their significant others. 

Times, they are changing. 

So you'll have investors come in and buy up your house for half price and rent it out for awhile, then sell it off to another investor, and so on and so forth, until you run into ONE family that wants to buy.  But they will be fewer and far between.

 

But who are you kidding?  Everybody is out for themselves and their families. 

Wed, 12/31/2014 - 14:00 | 5609502 okyoureabeast
okyoureabeast's picture

As a millennial, you'll find me hard press to let a bunch of fat, feckless old folks live a life of decadence while I toil away in a 60k, 25% tax bracket paying a god awful amount of money into a rental so some jerk off boomer who was lucky to be a child in the era of cheap oil, cheap homes, and bountiful american opportunities can claim to me that he "paid" into the system when the rising tide rose every boat. Excellent run on sentance. 

Screw working hard if it means some boomer can't retire. 

Personally i'm looking forward to moving out of the country and renouncing citizenship so I don't have to pay the "Boomer Fat Tax" aka Social Security. 

Wed, 12/31/2014 - 14:07 | 5609532 Mike Honcho
Mike Honcho's picture

Easy pappy, save some for your therapist.  A few things here:

"they refuse to get off the xbox, find a good paying job..." - yea, the jobs are waiting for a good save point

"think some slacker that doesn't want to buy a house could impact my hard earned gains" - bizarre and well, bizarre

"very fixed income" - $5k a month isnt very fixed, you need to downsize

"It was easy for me to pay my way through college with only a part time minimum wage factory job! If I could do it, there's no reason why these kids today cannot do the same." - correct, it WAS cheaper, not just you but your generation had that situation, no kudos deserved

" the increases to my social security entitlement don't grow as fast as they should to keep up with inflation.  I am being whittled away here!" - whiny bitch, the fact that people dont want to pay into a broke system just so you can get more is offensive to you? The millenial you speak of wont have the SS income you are "entitled" to.

"The upcoming generation only thinks of themselves, and are very selfish!" - your whole rant is about you and how society is ruining your house value and SS income.

 

In summary, eat more prunes, you sound like the crabby, self promoting guy in the foursome that no one wants to share a cart with.

Wed, 12/31/2014 - 14:47 | 5609660 agstacks
agstacks's picture

Granted, the first few paragraphs were very dry sarcasm, but I thought the mandate/tax on non-participants in housing would be ridiculous enough to let it be know that was a sarc comment from another disgruntled 30 something without a home or plan of ever retiring.  This is my best impression of my uncle who rails Obama for spending too much.  (He's a neocon) I asked him, what would you like to cut, you get three choices; defense, medicaid or SS.  

"Well, of course I don't want to cut any of those things, I PAID IN MY WHOLE LIFE." 

"Then you do not want ot cut spending, because those three make up the vast majority of the budget, asshole."

Wed, 12/31/2014 - 14:18 | 5609574 wagthetails
wagthetails's picture

sad but true. 

the upcoming generation is indeed selfish....for not saving you from your mistakes. 

current prices and maybe even quality of life are all dreamland.  there won't be an easy exit and there won't be a ski house.  i'm sure you could still survive without your ski house.  or if it is that important just live in the ski house. 

bottom line, never stop working unless you can take care of yourself.  but if you need others (SS, buyers in housing market, and even a pension - which probably won't last as it si based on stocks), you better keep working.  yess that means 99% of us should continue to work until we physically can't...just reality. 

I'm some ways i do see this harder on the boomers.  they actually think they get to retire early and live the good life.  it was always a lie, but taking that away is indeed painful.  younger generations will won't assume a good retirement as automatic and won't be as depressed when it doesn't pan out.  the old: is it better to have love and lost, or to never have loved at all.  Happy New Year!

Wed, 12/31/2014 - 14:26 | 5609576 Skateboarder
Skateboarder's picture

Good sir,

Median household income:

http://research.stlouisfed.org/fred2/series/MEHOINUSA672N

Does that match your 1000% increase in home price valuation?

"Home prices double every 10 years" is a very true statement in the SF Bay Area where I live. I can guarantee you that incomes have not increased 4x in the last twenty years.

Wed, 12/31/2014 - 15:53 | 5609964 scrappy
scrappy's picture

I love the sarc - agstacks

Happy New Year!

Wed, 12/31/2014 - 13:19 | 5609322 gcjohns1971
gcjohns1971's picture

If you are a GEN-Xer, scrap all plans for a retirement.

Work as long as you can.

Pick up vacated baby-boomer houses when they are cheap.

Rent them to millenials or their children.

Do repairs to rentals yourself.

Avoid paper wealth.  Go for material assets.

Cross your fingers and hope that they don't use tax policy to nationalize the homes/rest of your life savings, and that they go after the paper-wealth guys who are easier.

Wed, 12/31/2014 - 15:04 | 5609739 Ewtman
Ewtman's picture

Housing will collapse even further into the abyss in 2015...

 

http://www.globaldeflationnews.com/inflation-vs-deflation-part-3how-the-...

 

Wed, 12/31/2014 - 16:46 | 5610179 Bemused Observer
Bemused Observer's picture

"they enable marginal buyers to qualify to buy homes, and they boost prices higher."

Which, since they are marginal buyers, drives them right back OUT of the market.

I don't think the marginal buyers are biting like they were though. Don't expect them to rush in and bail out those investors who bought up foreclosures in the hopes of making a killing in the rental market. Those guys are stuck with that shit. When they finally take their losses, and prices come down to reality, maybe then you'll see housing recover.

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