It looks like the bottom-callers of 2012 were right. Continued interference in the mortgage market by the federal reserve lowered mortgage interest rates to record low levels. Plus, changes in policy at the major banks held back the tide of foreclosures and greatly restricted the MLS inventory. Demand was up slightly, mostly due to investors as owner-occupants remained absent from the market. First-time homebuyer participation fell to very low levels. The small uptick in demand, fueled by record low interest rates, and the dramatic decline in for-sale inventories caused prices to bottom in 2012. It isn’t how the bottom callers thought it would happen (most predicted a surge in demand), but being right for the wrong reasons is good enough. It certainly beats being wrong for the right reasons like the bears were.
By Christopher Matthews — Dec. 27, 2012
Without a doubt, the U.S. housing market has been the most successful sector of the economy this year, …
The housing-market “bottom” was one of the biggest business stories of 2012. After years of falling home values, the data clearly showed that the bleeding stopped somewhere in the first part of 2012 and that home prices have actually begun to slowly rise since then. In addition, other indicators like housing starts, new home sales and foreclosure statistics all point toward a healing housing sector.
Note the tiny uptick similar to the tax-credit surge of 2009…
These dynamics have gotten some economists and market analysts excited about the growth prospects for the U.S. economy in 2013. Robert Johnson, director of economic analysis for Morningstar, called housing “the big change factor in 2013″ and believes that “direct housing investment will be a meaningful contributor” to economic growth in 2013. He also sees industries related to housing — like furniture manufacturing and sales — adding to economic growth in 2013 as the housing market begins to pick up.
There’s no doubt that we’re finally seeing the beginnings of what economists call a positive feedback loop when it comes to housing. Rising home prices allow lenders to be more generous with home financing, which allows even more prospective home buyers to access the market, further driving up home prices. And higher home values give consumers and builders more confidence to go out and spend money or make investments, which also stimulates the real estate market and broader economy.
Actually, there is significant doubt whether or not we are in a positive feedback loop. Lenders are not becoming more generous with home financing. FHA is facing a bailout, and the GSEs are suing banks with buy-backs on bad loans forcing banks to become even tighter with their lending standards. The positive feedback loop meme is what everyone hopes for, but that isn’t what’s happening in the real world.
But with all this enthusiasm for the housing-market recovery, it’s important to take a step back and think about the real driving force behind rising home prices. Jonathan Miller, president and CEO of the real estate appraisal and consulting firm Miller Samuel Inc., astutely asks the question of how home prices can rise in an environment in which unemployment remains high, there is little growth in take-home pay, taxes seem poised to rise and lending standards continue to be tight.
That is a very good question. Those are what economists ordinarily label as the fundamentals of the housing market, and they are all weak.
One of the answers to this riddle, according to Miller, is the Federal Reserve. Record low mortgage rates, primarily (though not exclusively) due to the Fed’s decision to buy up mortgage-backed securities, have done much to boost home prices. Last month I wrote about an analysis done by Tim Iacono of Iacono Research that illustrated just how significant Fed stimulus efforts can be when it comes to home prices. He showed that today’s superlow rates can enable a home buyer to purchase a house that is 50% more expensive than she would have been able to afford under the average mortgage rates over the past 20 years.
The cost of ownership on a monthly payment basis is less expensive relative to rent than any point in the last 25 years. That’s the main bullish signal in the housing market.
In addition, there is reason to be concerned that distressed home sales — like foreclosures or short sales — will hamper the housing recovery in 2013. Miller notes that distressed home sales began to increase yet again in the second quarter of 2012, as banks started to ramp up their foreclosure mechanisms after the resolution of the robo-signing scandal earlier this year. Homes sold under these conditions are usually done so at a steep discount, and large amounts of distressed properties on the market will drive down home prices more generally.
This is where the housing markets across the country diverge. In judicial foreclosures states, mostly on the east coast, prices are falling and will continue to fall throughout 2013. They did not experience the big drops of 2008 that the non-judicial foreclosure states of the west coast went through. Their pain was merely delayed, but not avoided like they hoped.
This is not to say that the recent trend of rising home prices isn’t a good thing. It’s very difficult to imagine a significant economic recovery in an environment of falling real estate prices, as a house is most Americans’ single most significant asset.
Realistically, why would this matter? Only in an economy dependent upon HELOC abuse would fluctuations in asset prices make a difference. For most homeowners, at least those who don’t tap their home equity, a change in asset value is irrelevant to their spending. The wealth effect is an illusion. The Ponzi effect is real. Only through rising home prices, and people spending those increases, do we see an economic boost from rising home prices.
But any sober analysis of the recovery must admit that Federal Reserve stimulus is probably the single most important factor driving rising home prices. And until we see a significant drop in unemployment, or a significant increase in wages, we won’t get a housing-market recovery that can sustain itself without unprecedented intervention from the central bank.
That is the reality of life. The federal reserve will keep printing money to monetize government debt to keep mortgage interest rates low until wage inflation kicks in enough to support higher interest rates. If the federal reserve doesn’t keep printing money, house prices will fall again, and the member banks of the federal reserve will recover less on their bad loans and will be insolvent. This is the main reason I don’t believe the predictions of rising interest rates in 2013. They may tick up slightly, but even 4% interest rates would remove about 15% of the affordability stimulus from the market. The banks can’t afford that, at least not now while they have so many bad loans yet to process. I believe low interest rates will be with us for quite a while, inflation be damned.
The template for the future
The federal reserve is counting on the “wealth effect” of Ponzi borrowing to stimulate the economy going forward. Rather than discouraging borrowers to take out loans they can’t repay, the federal reserve encourages it. Apparently, allowing the irresponsible to steal from the prudent is justified by the positive effect it has on the economy when the irresponsible spend their ill-gotten money.
Since most first-time homebuyers and Ponzis who reenter the market are using FHA financing, we will see much more of what the former owners of today’s featured property were doing. They put very little down, and they extracted and spent their equity as it materialized. Many more people will follow their example during the next bubble because these people were handsomely rewarded for doing so.
- This house was purchased on 8/11/2000 for $259,000. The owners used a $246,050 first mortgage and a $12,950 down payment.
- On 10/21/2002 they refinanced with a $243,000 first mortgage. At least they started on the right path.
- On 7/28/2003 they refinanced with a $262,500 first mortgage
- On 2/23/2004 they obtained a $85,000 HELOC.
- On 9/22/2006 they refinanced with a $560,000 first mortgage completing the extraction of $313,950 in mortgage equity withdrawal. That’s an excellent return on their $12,950 initial investment.
Wouldn't you be embarrassed to overpay by $100,000? Only fools buy houses without knowing neighborhood values. Don't be a fool. Don't suffer the pain of an underwater mortgage. The surest way to lose your house is to overpay for it. Our reports identify overvalued and undervalued neighborhoods. Use it to broaden or narrow your search area. Savvy buyers work with us to find bargains. We've saved thousands from financial ruin. Let us save you too. If you want peace of mind while shopping for your next home, sign up for our monthly market newsletter.
We're sorry, but we couldn't find MLS # S721198 in our database. This property may be a new listing or possibly taken off the market. Please check back again.
Proprietary OC Housing News home purchase analysis
$459,900 …….. Asking Price
$259,000 ………. Purchase Price
8/11/2000 ………. Purchase Date
$200,900 ………. Gross Gain (Loss)
($36,792) ………… Commissions and Costs at 8%
$164,108 ………. Net Gain (Loss)
77.6% ………. Gross Percent Change
63.4% ………. Net Percent Change
4.6% ………… Annual Appreciation
Cost of Home Ownership
$459,900 …….. Asking Price
$16,097 ………… 3.5% Down FHA Financing
3.41% …………. Mortgage Interest Rate
30 ……………… Number of Years
$443,804 …….. Mortgage
$114,058 ………. Income Requirement
$1,971 ………… Monthly Mortgage Payment
$399 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$115 ………… Homeowners Insurance at 0.3%
$462 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$2,946 ………. Monthly Cash Outlays
($290) ………. Tax Savings
($710) ………. Equity Hidden in Payment
$17 ………….. Lost Income to Down Payment
$135 ………….. Maintenance and Replacement Reserves
$2,099 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$6,099 ………… Furnishing and Move In at 1% + $1,500
$6,099 ………… Closing Costs at 1% + $1,500
$4,438 ………… Interest Points
$16,097 ………… Down Payment
$32,733 ………. Total Cash Costs
$32,100 ………. Emergency Cash Reserves
$64,833 ………. Total Savings Needed