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The Housing Mega-Bubble Is Definitely Not Different This Time - It's Much More Of The Same
Submitted by Mark Hanson via MHanson.com,
How do you know when you are in a real estate bubble? That’s fairly easy. Knowing when it will pop is the hard part.
- Air pocket between present, bubbled-out house prices driven by the “unorthodox, unfundamental, incremental demand using unorthodox capital” and fundamental, end-user, shelter-buyer affordability has never been larger.
- At peak bubble, all that it takes is a narrow and shallow stream of a few dumb money buyers to keep the prices of thousands of houses bubbled out, indefinitely. Most everybody else is just hanging on for the ride, unable to transact due to the unaffordability. Then one day market suddenly runs out of dumb money buyers, which is the Wile E. Coyote moment.
- SF Bay Area is not an example of a healthy, fundamentally-driven “housing market”, rather a stimulus-fueled commodities market.
- Just like in 2007/08, if the “unorthodox, unfundamental, incremental demand using unorthodox capital” suddenly went away, house prices would revert back to what end-user, fundamental, shelter buyers with traditional financing can afford, which is about half of what houses cost today.
- Why is everybody so sure that the current age of “unorthodox, unfundamental, incremental demand using unorthodox capital” is here to stay? They were all wrong in 2007.
- Housing bubbles don’t exist in isolation; when the known bubbles finally pop, it will take the rest with it.
- If everybody in the US had to buy real estate using the same amount down and fully documented 30-year fixed real estate loans, house prices could never detach from end-user, shelter-buyer, employment and income fundamentals in a city of region. There would be — could be — no bubbles. It’s when the “unorthodox, unfundamental, incremental demand using unorthdox capital” enters the market, prices quickly detach from end-user fundamentals and bubbles form swiftly, exactly like we saw from 2003 to 2007 and exactly what we are experiencing today.
- To believe this isn’t a bubble is to believe that all of the hot momo money from insti’s, high/biotech, flipper, flappers, fraudsters, and foreigners buying houses is fundamental and here to stay, which is exactly what everybody thought in 2006. Or, to believe that interest rates will keep falling 1% per year going forward, which would lend an element of support to prices.
- It’s not different this time. In fact, it’s exactly the same, including how everybody is absolute and resolute in their belief that house prices always go up and can’t experience another 2007-2010 type crash again.
Backing out the “unorthodox, unfundamental, incremental demand using unorthodox capital” that has driven the lion’s share of house price gains for the past four years, I look at what the fundamental, end-user, shelter buyer can afford using the typical down-payment, mortgage guidelines/terms, and mortgage rates of the period. That’s because at the end of the day, the typical, end-user, shelter buyer must be able to support the market once the unorthodox, transitory capital (hot, momentum, foreign, institutional et al), exits the market, which it always does for some reason or another.
House prices, based on “comparable sales”, are always worth what the last few houses in the immediate area sold for. As such, when house prices achieve bubble status and sales volume peaks/ebbs – happening now — all that it takes is a narrow and shallow stream of a few dumb money buyers to keep the prices of thousands of houses bubbled out indefinitely. Then one day market suddenly runs out of dumb money buyers, which is the Wile E. Coyote moment. This is in contrast to a normal market, in which most can truly “afford” houses in the cities in which they live, and they sell and rebuy based on fundamental reasons, such as moving up due to career advancement or a larger family.
Analyzing average household income vs house prices in order to establish the “true, end-user, shelter buyer affordability”, when I throw the data in a spreadsheet — like I do for my provocative and widely misunderstood national resale and builder “affordability” comparison worksheets and charts — it’s easy to discern whether the average household income in a city or region can technically “afford”, or support, the average priced house using 20% down and a 43% DTI ratio for the mortgage. And in most every highly populated region in the nation – the exact regions that were the most bubblicious in 2007 — house prices are significantly over-valued and absolutely reliant upon the “unorthodox, unfundamental, incremental demand using unorthodox capital” to keep the party going.
Moreover, on a post-crash basis, sales volume has gone up and down on stimulus events, rate plunges, and hangovers, but has achieved nowhere near the growth analysts forecasted with ZIRP and QE in the background for so many years on end.
Remember, back in 2013, when volume was more-less the same as this year, sell-side predictions were for 700k new home sales in 2015 and last month we got a run-rate of 468k SAAR and have averaged only 505k SAAR ytd. Substantial house price gains amidst surging supply and lackluster demand must always be viewed skeptically because something “unfundamental” is likely occurring.
A good example of a region with many mega-bubbled cities is the San Francisco Bay Area where only a fraction of the population — the incremental buyer; high/bio tech professional with record high stock prices, institutional or private speculator, foreigners with strong dollars, flippers, fraudsters — can afford to pay whatever they want. The problem is that most “everybody else” is simply hanging on for the ride, mostly stuck in place, unable to sell and rebuy in the same city, or region, because house prices are out of their reach. This is not an example of a healthy “housing market”, rather an example of a commodities market.
Just like in 2007/08, if all of the “unorthodox, unfundamental, incremental demand using unorthodox capital” suddenly went away today, house prices would revert back to what end-user, fundamental, shelter buyers with traditional financing can afford, which is about half of what houses cost today.
And just like sheep, when “something” happens that kicks-off the selling wave, they will all sell at the same time. And at this time, the small cohort of “unorthodox, unfundamental, incremental buyers using unorthodox capital” will be overwhelmed with supply.
Everybody knows that the 2003 to 2007 housing bubble was an era of high-leverage, unorthodox financing, which super charged affordability making houses always affordable to everybody all of the time. Why is everybody so sure that the current age of “unorthodox, unfundamental, incremental demand using unorthodox capital” is here to stay? I am old enough and lived in the SF Bay Area long enough to know that the current conditions driving house prices are the exception and not the rule. I saw the same thing in late 90’s, which jump-started and bled into 2003 through 2007.
On a national basis, it’s consensus that certain regions are “isolated” from bubbles popping. It doesn’t work like that. Conditions that create regional real estate bubbles float all boats. In other words, when the known bubbles finally pop, it will take the rest with it. Just look how cheap houses got in 2010, below replacement cost.
Some will say, “you are full of crap, based on rents house prices are cheap”. Well, that’s of course, unless, rents are in a bubble too. I believe they are. It’s obvious in major metros. But, look at Phoenix Arizona, for example, where over 50% of households can’t afford the average rent on a two bedroom apartment, based pm data put out by ARMLS in Q2’15.
Item 1) Example of the massive air pocket under house prices in two bedroom communities outside of San Francisco.
Example A) My City, Bay Area, NorCal
Average house price: $1.45mm
Average household income: $180,000 yr
Loan Term: 30 year
Downpayment: $290,000
Homeowners Ins: $1000
Prop Taxes: $14,500
Car Payment: $700
Credit Cards: $400
Other: $500
Result: Typical, end-user, shelter buyer can “afford” a $778k house
DOWNSIDE RISK: = $672k ($1.45mm – $778k), or 46%
Results Bottom line: This very qualified end-user, fundamental, shelter buyer profiled in the data above, can only “afford” a $778,000 house with 20% down and a mortgage loan. Yet, the average house price is $1.45mm.
The difference between the present average price of $1.45mm and $778k, or $672k (46%), is how far house prices can fall if all of the “unorthodox, unfundamental, incremental demand with unorthodox capital” exited the market like it did in 2008-09. And I went easy on the car, credit card and other debts.
In short, house prices this far above the average buyer’s qualifications is the exception and not a durable phenomenon.
Example B) Menlo Park, North Silicon Valley, Bay Area, NorCal
Average house price: $1.95mm
Average household income: $170,000 yr
Loan Term: 30 year
Downpayment: $300,000
Homeowners Ins: $1000
Prop Taxes: $14,500
Car Payment: $700
Credit Cards: $400
Other: $500
Result: Typical, end-user, shelter buyer can “afford” a $740k house
DOWNSIDE RISK: = $1.21mm ($1.95mm – $740k), or 62%
Results Bottom line: This very qualified end-user, fundamental, shelter buyer profiled in the data above, can only “afford” a $740,000 house with 20% down and a mortgage loan. Yet, the average house price is $1.95mm.
The difference between the present average price of $1.95mm and $740k, or $1.21mmk (62%), is how far house prices can fall if all of the “unorthodox, unfundamental, incremental demand with unorthodox capital” exited the market like it did in 2008-09. And I went easy on the car, credit card and other debts.
In short, house prices this far above the average buyer’s qualifications is the exception and not a durable phenomenon.
* * *
Item 2) The 2003 to 2007 and 2011 to 2015 periods are more alike than anybody recognizes; “unorthodox, unfundamental, incremental demand using unorthodox capital” drove massive real estate bubbles in both instances.
The last and cruelest false-start of all.
- 2003 to 2007 was a story of “unorthodox, unfundamental, incremental demand” (every ma and pa with a heartbeat) using “unorthodox capital” (fed induced high-leverage, exotic, easy credit 1st and 2nd mortgages) for speculation, creating a situation in which house prices detached from true, end-user, employment and income fundamentals. When the “unorthodox, unfundamental, incremental demand using unorthodox capital” went away over a relatively short period of time and the end-user, owner occupant, fundamental buyer took back control of the market by default, house prices re-attached to that cohort – “reset to end-user fundamentals” — and fell by 30% to 50%.
- 2011 to 2015 has been a story of “unorthodox, unfundamental, incremental demand” (institutions, buy to rent, flippers, high/biotech bubble workers, mortgage fraudsters, foreigners with strong foreign dollars et al) using “unorthodox capital” (“cash”, stock/options portfolio loans, levered credit looking to historical low UST yields as benchmarks, and end-users with mortgage rates at historical lows vis’-a-vi’ QE) for speculation, creating a situation in which house prices detached from true, end-user, employment and income fundamentals. When the “unorthodox, unfundamental, incremental demand using unorthodox capital” began going away late last year and the end-user, owner occupant, fundamental buyer began to take back control of the market by default, house prices began to re-attached to that cohort and reset lower. But, the consistent drop in rates in 2014 and plunge in Q4’14/’15 postponed the inevitable and breathed a last rush of life into the sector at the prefect time; Q1 and Q2 ’15 going into the busy season. This gave the “perception of a durable recovery with escape velocity” when on the contrary this is the last and cruelest false start of all, with little fundamental, underlying demand behind it, meaning a weak year-end 2015 and start to 2016. Just like at the end of Bubble 1.0, this housing market is on the precipice of “resetting lower”, ‘by how much this time’, is the question.
Item 3) One last thing to think about. If everybody in the US had to buy real estate using the same amount down and fully documented 30-year fixed real estate loans, house prices could never detach from end-user, shelter-buyer, employment and income fundamentals in a city of region. There would be — could be — no bubbles. It’s when the “unorthodox, unfundamental, incremental demand using unorthdox capital” enters the market, prices quickly detach from end-user fundamentals and bubbles form swiftly, exactly like we saw from 2003 to 2007 and exactly what we are experiencing today.
To believe this isn’t a bubble is to believe that all of the hot momo money from insti’s, high/biotech, flipper, flappers, fraudsters, and foreigners buying houses is fundamental and here to stay, which is exactly what everybody thought in 2006. Or, to believe that interest rates will keep falling 1% per year going forward, which would lend an element of support to prices.
In sum, housing has gone from a sector with more tailwinds than ever before to the power of 10 to a sector with gale-force headwinds hitting in the form of an uncertain Fed; a plunging foreign demand cohort; an institutional demand cohort that is mostly sidelined; and an end-user, fundamental demand cohort looking at out-of-control house prices 30% above their fundamental ability to buy against an uncertain and weakening global economic backdrop.
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Housing, boring. Lets face it, most in this job market are priced out for a long long time. Besides who wants the headaches.
Same as ever it was
You are tell yourself, this is not beautiful house, this is not beautiful wife...
Banning cash allowing significantly negative rates could easily cause this bubble to go into a super bubble as explained here. The E-Dollar could do the same. The fed is far from out of bullets, but that doesn't mean the gun won't blow up in their face.
"Or, to believe that interest rates will keep falling 1% per year going forward, which would lend an element of support to prices."
Ding ding! NIRP here we come!
Your words are a testimony to the infintessimally short memories of modern man.
Sorry, what is that we are talking of?
Those property taxes are super cheap compared to some places where they are over3.5%.
When California finally raises the property taxes to pay for water the camel's back may break. Alternatively, when a cap is placed on the money laundering bizniss from China things may change also.
Shit, 3.5% is a second (no let me correct that, a First) mortgage. Where is that? I thought I had it bad.
Some places have 2 percent or more, which is a total rip. You don't even come close to owning your house at that point. I like places where property taxes are less than 1 percent, that's at least not shit in your face robbery like 2 or 3 percent a year is.
I live in the atlanta suburbs and am seeing the same exact scenario that took place back in 2007/2008. lots of for sale signs popping up, several abandoned houses and foreclosures. i live in a subdivision with about 1500 houses.
Hmmmm...I also live in the Atlanta suburbs and in my area prices are being driven up by a lack of inventory, to the point where every odd scrap of land that can possibly hold a house is being cleared and where older, smaller homes are being razed to make room for larger, more upscale homes. Older ranch homes on large lots are being bought, razed and replaced by mini-sbudivisions, with 3 to 5 homes clustered around a one-street cul-de-sac. The schools in my area are among the best in the state and crime is very low, which is what buyers with school-aged children seek. The Atlanta metro has a wide variety of real estate market conditions, with the north side generally being stronger, so I guess it depends on where you live. That is not to say that macro conditions created by the Fed's money printing are not a factor as well, or that the real estate market here wouldn't come crashing down in the face of another financial markets panic.
Retiring baby boomers will be the trigger, unless they do a Custer's last stand from within their four walls.
This is real easy...housing prices are a function of a number of things that revolve around supply and demand. Demand is driven by income, down payment requirements and interest rates. Essentially demand revolves around how many people can afford to make monthly payments to buy a house. If the payment amount is constant and interest rates go down then prices rise. In this world of manipulated ZIRP we have seen home prices blow up. As rates are increased you will see prices revert to the mean UNLESS there is solid employment AND income growth...neither of which seem to be in the cards right now. Real estate in the bubble markets is not a good investment right now for obvious reasons. If the Fed takes their foot off the gas then shit will get real. The big concern is deflation and how it will impact the loan market again. A surge of underwater loans could take down the economy. Either the Fed does QE to infinity until it all blows up or we watch a deflationary implosion. Either way we're fucked thanks to Central Bank over-intervention.
ZIRP+Lots of foreign money flooding into the country+lax mortgage standards
"There's never been a better time then now to pay three times the value for a house," is what even my former realtor says.
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I don't know who formatted that thing, but it was damn near illegible.
Classic Mark Hanson ("Mr. Mortgage"); fantastic analysis; I've been reading him since the last bubble, but he is clearly on 20 cappucinos. Or something. Hope his heart holds out.
With 95 million Americans unemployed and the flow of incoming money from Canada, China, etc slows, prices will eventually correct downward fairly dramatically.
If there's other unforeseen changes or disasters like an earthquake, war, increased social conflict, etc, the prices could tumble very fast.
Yep, imagine how all real estate sales would immediately cease if one dirty bomb were detonated in a US city. Chicago is first on the list if I remember the forecasts correctly.
Bring on the crash so I can buy in Palm Beach FL. Meanwhile, the idiot box tells a different story. We are just helping you. Their next step is to use homes as section 8 under Agenda 21. It won't happen, the TV will tell you the opposite.
Electronic Behavior Control System - YouTube
This is EXACTLY the symptoms taht I warned about on ZH and elsewhere a few years ago would arrive. It is a symptome of what occurs when the society allows thuggish behaviour by supposed "keepers of the gate" ,ie, politicians both local and state and Federal.
One such example is one i posted on ZH a few years ago wherein the US Taxpayer always bails out CA Homeowners when natural disasters come. This in spite of it being exactly known that they will come. The only question is when?
So, before you start blabbering Mr. Hanson let me get to the rest of the story and where fraud begins -as im sure you well know - and as i cited in my warnings years ago. It comes from the fruad that exists in CA against the rest of the Nation.
You see, no one in Cali buys earthquake insurance. I know this because at a dinner party hosted by my sis and bro in-law in Corte Madera, CA, Marin County which is amongst, if nto THE priciest RE in all of the nation. It's beautiful but damage will come. It is a scientific certainty. And yet when i found out at said dinner party taht none of the couple dozen of couples attending had earthquake insurance, in teh middel of earthquake alley, I asked how many were independently wealthy such taht they did not have a mortgage on these multi-million (and I mean all exceeded $3MM valuations) homes.
Teh answer was every single couple had a mortgage. In fact, ALL had equity less than 60% of the mortgaged value of their homes. Most less than 25% equity.
Sooooooo, what this says is the day has come to finally expose where the rest of the nation has been subsidizing the two coasts for decades. Let the SOBs live where they want but make them fucking pay for it and not the rest of us.
The BANKS are facilitating this FRAUD. They have the Govts' arm-twisted squarely behind their back and get assurances that their mortgage will be covered by the balance of the innocent US Taxpayers when, not if, the next disaster affects their mortgage on top of the San Andreas fault to these Mega Mansions.
Go fuck yourself fella and attack the fucking cause if you want to come round here complainin'. But you will NOT do that because, as you damn well know, that will prevent you from buying that home atop earthquake alley as your mortgage banker will then require earthquake insurance to protect his investment as he will only then know the balance of teh US Taxpayers will not!
Once the earthquake hits, liberals and illegal sanctuary city's will be history. It can't happen any sooner. One good CME from our dead sun will take out the fault line.
Actually the earthquake hit,(Northridge 1994) and a firehouse of federal cash came in and showered the illegals with housing, documents, ID, jobs programs, employment education and debit cards.
FEMA showered Americans with debt.
FEMA used the same model in NOLA with Katrina and any other disaster, even importing Ebola carriers was a FEMA debt gig.
FEMA even imports disaster victims from foreign countries.
2015 FEMA budget 10B+ they're carrying 21B in bad debt+ loan guarantees¿ and transnational treaty liabilities.
CB
s reported on the earthquake on the evening news.
They interviewed a local, who could have been Obama's cousin.
The reporter asked the denizen to tell the national audience what they needed most to recover from the earthquake.
He replied,
We gotsa have more hoes, we need more hoes.
I live in rural northern ca 14 miles from the coast. I cannot get earthquake insurance at any cost - and the fire insurance is more than my taxes, and I have a pretty damn fire-safe place - I was the local fire chief for 20+ years - clearance, fire-proof sidings and roofs, lots of on site water storage, skirted buildings - an only Lloyds will touch me.
In effect, the gubernmint winds up providing earthquake insurance (and flood insurance in Louisiana and Florida) because so-called private industry won't.
And damn near every place has its hazards - tornado alley, anyone? How much is tornado/wind damage insurance in those parts, and is it obtainable?
And nuclear plant disaster? Remember, the nuke plants are exempt from being sued if they happen to melt down and fuck up your envioronment/home 20 or 30 miles downwind - a perk given many years ago by congress to 'stimulate' bulding of nuke plants (and GE...).
So, Californians on the west side of the state are all suppossed to go live somewhere else? There ain't no safe place in todays world. "On a long enough time line..."
Your statement about what happens in Cali happens everywhere is not true. Atleast not for the areas I have lived. In fact, Earthquake insurance is even available where my sis lives. But no one buys it because, well, its' expensive. Why?
Because you are damn likely to have an earthquake and incur damage as a result. This is not my issue.
My issue is that teh rest of 'Murica has to pay for it as a result of the TBTF WS Bankster lobby which would lose biz the minute they forced their borrowers in Cali to purchase it. Yes, its' expensive because the actuary on it is highly likely that 100% of those living in those areas will incur major claims.
Now, back to your bit wrt OK's tornado alley and Southern Coast Flooding. I can tell you as I just sold a home in OK as well as I still have one on the TX Gulf Coast. YOU MUST HAVE Tornado and Flood Insurance in those areas in order to get a loan. Further, they require areas in Dallas, TX of all places to have flood insurance in order to cover an effing sink pipe rupture. WHY?
To cover those on the coasts who are not required to purchase this coverage yet who are likely to incur the damage.
What an effing country, eh?
We must destroy the FIRE industries in this country before they destroy the country.
When you run our of sheeple to purchase an overpriceed home, they just change to rules so that more sheeple can enter financial ruin. Cant't afford a 3% down payment, no problem... How about 0% with a free fridge! A perfect example of this:http://www.athomeillinois.gov/. We will GIVE YOU money to buy a house.
I love stealing homes at banking auctions from dirty Jews that don't have a pot to piss in. They dress well and drive a nice car. But they're two shekels from broke.
Could you say "unorthodox, unfundamental, incremental demand using unorthodox capital" one more time?
Vinz
I have plenty of Jewish friends. I don't need to be politically correct for you. They refer to them as pigs. Do you want me to call them Jewish pigs in future? Please advise.
Otay, I'll play.
WTF are you talking about?
Vinz
I placed you on my ignore meter.
I was referring to the original article, which used the word "unorthodox" 36 times.
Note the lack of indent relative to your post.
Vinz
I got you Vince, I thought the article could be interesting but written like shit and very repetitive.
Atomizer, WTF is your deal? Take the cucumber out of your ass and take a charm school course or two.
My neighbor who inherited a partially paid for house from her dad $450K ACV $300K debt pushed the debt up to $666K, deferring all maintenance forlike 10 years while renting to a menagerie of renters, then goes disabled/unemployment vacation retard gets a 100K in CA "mortgage relief" now she lost the home to the mortgage broker who transferred the upside down house to granny on medicaid, who turns around and gets a reverse mortgage on a home with $300K in negative equity.
Orgy of looting will end badly.
Wait until the reverse mortgage scandal immerges. It won't be pretty.
Your examples are scewed to the Bay area. That is definitely the exception not the rule.
I would look at business real estate to have a bursting bubble first.
I think the analysis is missing the impact of a buyer selling their previous home at bubble levels and using the proceeds for a larger down payment and making the next bubble house more "affordable" relative to their income. So if regional bubbles float all boats, the upward price trajectory is self-reinforcing. Sort of like a the fraction reserve multiplier, which replicates the faux "capital" at each transaction. And in this case "non-affordability" doesn't really track home prices since the funny money is present on the sale and purchase sides of the equation. I would hypothesize that the creative financing (and of course ZIRP/NIRP), is where the damage is wrought. If you can afford the payments at 900k and the value drops to 600k, it doesn't affect your payment, all else equal. Sure, you just can't ever move or lose your job. But it's just funny money ledger entries. if you're in an ARM loan, or they stretched their DTI for you to qualify, or you ever want to move, change jobs or retire, or have an unexpected major expense (bc no one has a savings account) you're fucked.
All due to funny money sloshing around from the Fed sand their member banks looking to grab as much as possible by signing up ever more indebted slaves.
Tell me, Hanson, did you factor in Unorthodox, unfundamental QE to Infinity here?
Yeah, some wild card there.
The solution for "too much debt" is not "more debt". Yet the entire premise of the current fraudulant "house price boom" is that "maximum debt is healthy".
That's just insane.
Note: cliff ahead.
Beep beep!
so would NIRP as applied to a mortgage mean that the bank pays you the interest if you take a loan? Shit, sign me up for a 1.47million dollar house at -10%!