Housing Bubble

California home prices experienced a big surge in 2012. This might fly in the face of stagnant household incomes but the incredible push for lower interest rates and reliance on low down payment FHA insured loans has brought many people off the fence. In Southern California home sales are up by 14 percent over the last year and the median price is now up by 16 percent. The median price is largely being pushed by the mix of home sales. Distressed properties are making up a smaller pool of sales. With low inventory, you have regular home buyers competing also with house flippers, big Wall Street buyers, and foreign money with limited supply on the market. The result has been to push home prices much higher making it more difficult for middle class families to afford a home. As we approach the end of 2012, let us look at the data for Southern California.

As was expected, the October Case Shiller data showed that the recent transitory pick up in the housing sector, now that both REO-to-Rent and Foreclosure Stuffing, not to mention unparalleled debt forgiveness by virtually every bank has been thrown at the housing problem, continues with a ninth consecutive month in Top 20 Composite Index increases, rising 4.3% in October. On the other hand, based on the NSA data, the 4th consecutive dead cat bounce may be coming to a much expected end with October NSA data posting the first sequential decline since March. What drove the pick up in Seasonally Adjusted data? Nothing short of yet another housing bubble in the much beloved speculative areas such as Phoenix and Detroit, where home prices rose by 21.8% and... 9.9%. Yes: apparently one can pay for mortgages with foodstamps now. Other places such as Chicago and New York were not quite so lucky, with the average price declining by 1.3% and 1.2% in the past 12 months. What remains unsaid - very much on purpose - is that the shadow inventory problem is only getting worse, as we reported a week ago, when we showed that nearly half the market cap of Bank of America is in 6 month + delinquent mortgages, or mortgages that are not yet in foreclosure but virtually certainly will be, and will also be discharged.

Presenting Dave Collum's now ubiquitous and all-encompassing annual review of markets and much, much more. From Baptists, Bankers, and Bootleggers to Capitalism, Corporate Debt, Government Corruption, and the Constitution, Dave provides a one-stop-shop summary of everything relevant this year (and how it will affect next year and beyond).

There was little excitement in today's November housing starts and permits numbers, the first of which missed expectations of 872K modestly, and was down from 894K to 861K on a seasonally adjusted, annualized basis (64.6K unadjusted, non-annualized, the lowest since March; the Northeast unadjusted print was 25% lower than a year ago!). The prior two months were also revised lower from from 863K and 894K to 843K and 888K. On the other hand, permits which are nothing more than an opportunity cost fee for an application filed with the local housing office, rose from 868K to 899K. Curiously enough, this was the one series that was supposed to benefit from Sandy, as builders would step up reconstruction efforts in the hurricane impact areas. Alas, that did not happen, in the impacted Northeast Region, as both Starts (73K) and Permits (76K) came at multi month lows (in the case of permits, this was the lowest print of all of 2012). What did drive housing starts and permits? The "South" where both categories saw the respective data prints jump to the highest since 2008. The same south which was promptly featured in our "Interactive Guide to the Housing Recovery." The housing bubble is back in full force.

Imagine a stock - best for the hypothetical exercise is probably a tech stock - rising for 12 years without interruption. A net gain every year, sometimes a small one, sometimes a bigger one, but nicely compounding at an annual yield of more than 17.13% (that's a devilish 666.67% in 12 years). What would people say about this stock? Would there be a steady stream of negative press trying to dissuade people from buying it? We somehow doubt it, although almost every investment that has seen a great deal of appreciation has its detractors (and sometimes they are right). When it comes to gold, one could certainly debate the merits of buying it at what appears at least on the surface as a high price. Gold bulls can only profit from examining bearish arguments, in order to see if they have merit.

The assumption that households are doing much better simply because the stock market is up is really a problematic understanding of how wealth is dispersed across the United States. I vividly remember a handful of parties back during the peak of the bubble where people would often quote how much their net worth went up courtesy of the housing bubble. “My home that I bought in the 1990s is now worth over $1 million.” As all of you know, until you sell the home those gains are largely on paper and many did not sell. In fact, many tapped out large portions of that equity and spent it. This is why even with home prices moderately recovering US households still have close to record low equity in their homes. It probably does not help that low down payment FHA insured loans are such a large part of the market encouraging Americans to make the biggest purchase of their lives with very little down. The Fed reported last week on net worth figures and it is worth digging deep into the data.

Your comprehensive yet concise, one-stop summary of all the bullish and bearish events of the past week.

• MSM discovers window dressing: Fund Managers Lift Results With Timely Trading Sprees (WSJ)
• White House Unyielding on Debt Limit (WSJ)
• Obama, Boehner talk; Geithner prepared to go off "cliff" (Reuters)
• Republicans urged to resist tax rises (FT)
• China looms large over Japanese poll (FT)
• As predicted here two months ago, Greek Bond Buyback Leads S&P to Cut to Selective Default (BBG)
• Japan opposition LDP set to win solid election majority – polls (BBG), but...
• Japan Opposition LDP’s Main Ally Cautions Abe on BOJ Pressure (BBG)
• U.S. and Europe Tackle Russia Trade (WSJ)
• King Seen Maintaining QE as Osborne Extends Fiscal Squeeze (BBG)
• Syria pound fall suggests currency crisis (FT)
• Irish budget seeks extra €3.5bn (FT)
• U.K. Extends Cuts Due to Poor Outlook (WSJ)
• ECB Seen Refraining From Rate Cuts as Yields Sink on Bond Plan (BBG)

Europe is supposedly fixed and/or well on the path to being competitive and "rebalanced." Or so they say every day. What they don't say, is that to complete the process of rebalancing, in the absence of external devaluation mechanisms under a currency union, is that wages in countries such as Spain, Italy and even France, will have to drop by another 30%-50% for internal imbalances between the Eurozone's nation states to be evened out. What they certainly don't say is how this could ever possible be achieved...

Desirable areas in Los Angeles County are finding bidding wars and many places are selling for prices last seen during the peak of the bubble. A fierce competition between flippers, foreign money, and households with healthy incomes leveraging low mortgage rates are pushing prices higher. A few readers were sending over some of the recent action taking place in Culver City. A few recounted their tales of open houses and the sense of urgency to purchase a property. The flood of easy money has certainly had an impact on mid-tier and prime locations. Only a two hour drive up north, in California City you can find homes selling for rock bottom prices. This is a trend bearing out in income statistics. It is becoming harder for the middle class to find affordable housing in California. Some have mentioned in zombie like fashion that some areas are becoming fortresses while other areas are left struggling. Let us take a look at some recent data.

As of late there has been a flood of commentary written about the housing recovery pointing to the bottom in housing and how the revival in housing will drive economic growth in the years ahead. It is true that the revival in the housing market is a positive thing and is certainly something that everyone wants.  However, the hype surrounding the nascent recovery to date may be a bit premature. Much of the current buying in the housing market has come from speculators and investors turning housing into rentals.  This, however, has a finite life and rising home prices will speed up its inevitable end as rental profitability is reduced.  Furthermore, the majority of home building has come in multifamily units, versus single family homes, and that segment has been growing faster than underlying demand. It is important to understand that housing will recover - eventually.  However, the reality of that recovery could be far different than what the current media and analysts predict. The point here is that while the housing market has recovered - the media should be asking "Is that all the recovery there is?"

Five years ago, every American would have considered a trillion-dollar budget deficit a national tragedy.  If you believe the CNBC parrot show, NOT having a trillion-dollar deficit is now a sure sign of the Apocalypse.  I speak of course of the cleverly dubbed “Fiscal Cliff,” which panicked CNBC apologists are required to mention no less than 5,000 times a day. Creating the illusion of economic growth is easy if you can print money.  It’s a prank you can play on an entire country.  Cut the value of the currency in half and the economy’s size will appear to double.  If it doesn’t, you’re in recession (whether you know it or not).   Cavemen probably understood this concept better than America’s best economic minds.

"After six years of declines, lending for so-called Helocs will rise 30 percent to $79.6 billion in 2012, the highest level since the start of the financial crisis in 2008, according to the economics research unit of Moody’s Corp. Originations next year will jump another 31 percent to $104 billion, it projected."

We remain in the throes of a secular era of disinflation. We also are in a long-term period of sub-par economic growth and below-average returns. This has become so well entrenched that U.S. pension plans now have more exposure to bonds than to stocks, as we highlighted two weeks ago. Look, this is not about being bearish, bullish or agnostic. It's about being realistic and understanding that in our role as market economists, it is necessary to provide our clients with information and analysis that will help them to navigate the portfolio through these stressful times. Our crystal ball says to stick with what works in an uncertain financial and economic climate — in other words, maintain a defensive and income-oriented investment strategy.

Or Maybe the Biggest of All Time ...