Apr102015

High home prices don’t benefit everyone

High house prices are demanded by foolish Ponzis, enjoyed by real homeowners, and favored by politicians pandering to both groups.

California_real_estate_billionaireWhy are high house prices the keep rising considered a universal good? Does everyone benefit if house prices are high and keep moving higher?

The assumption is that ever-rising house prices are good, and that a decline in house prices is bad. Ordinarily we cheer when the price of an essential product goes down, and complain when it goes up.

Recently gasoline fell from $4 per gallon down to $3 per gallon, then it rebounded back up to $4 per gallon quickly. I felt good about the drop from $4 to $3, but when price went back up, I was annoyed. Why is that?

Most people have to consume a certain amount of gasoline each week to commute to work, drive to the grocery store, and live life. Lifestyle gasoline consumption doesn’t vary much based on the price, so when prices go up, people spend more, and when prices go down, people spend less.

The problem is that most people’s income doesn’t fluctuate with gas prices, so if they spend more on gasoline, by necessity, they spend less on everything else. Higher and rising gas prices reduce the amount people have available to spend on other goods and services, which benefits gas companies (and foreign oil producers) at the expense of all other industries.

So why is it different with home ownership?

When house prices go up, the owner of that house accumulates equity. In the past, this might have caused the homeowner to feel good about owning their house, and it may have prompted a few additional expenditures because the homeowner felt “rich,” the traditionally defined wealth effect, but it wasn’t until lenders started providing access to equity through home equity lines of credit and cash-out refinancing did the wealth effect balloon into the monstrous, greed-induced, free-money orgy it is today.home_price_appreciation_fairy

The simple fact is people want higher house prices because they want the financial gain of owning an appreciating asset. Nothing more.

What is so bad about using a home equity line of credit? What is wrong with spending the free money from the appreciation fairy?

The problem is that this money is not free; debt must be repaid. While the infusion of cash and the resulting spending may boost the economy in the short term, the repayment of debt with interest pulls money out of the economy because the borrower no longer has this money available from their income to purchase other goods and services.

When I first started writing about real estate matters, some of the bulls accused me of talking down the market so I could profit from its demise. boiling_debt_oilWhen I replied that I wanted prices to go down and stay down because it’s better to spend less on housing, people responded to me as if I were insane.

Some people live their lives from one infusion of debt to another spending all their income on debt service and repayment in one form or another. At the extreme this devolves into Ponzi borrowing where people borrow from one lender to repay another in a downward spiral that implodes once the borrower runs out of lenders to sustain the Ponzi scheme.

High house prices that keep rising higher is not a benefit to borrowers who rely on rising house prices to support their personal Ponzi schemes because these borrowers end up losing their houses and endure the unceremonious fall from entitlement when their lenders cut them off.

High house prices that keep rising higher certainly don’t benefit buyers who must pay higher and higher prices to own their homes. They bear all the costs but obtain none of the benefits — at least until future buyers push prices even higher.

If it’s too good to be true, it probably isn’t true or good. High and rising house prices are not the panacea everyone imagines.

The dark side of rising home prices

What’s wrong with higher home prices

by Louis Cammarosano on Apr 1, 2015a_house_deflation

… By mid 2007 the housing market party was over and prices began a four-year nationwide decline.

Fast forward to 2015: The Fed has learned that you can reheat an economic souffle. We are in the midst of another housing bubble driven by Ben Bernanke and Janet Yellen’s Fed Funds Rate at zero percent and massive doses of quantitative easing (QE) that involved the Fed buying $85 billion a month worth of mortgage backed securities and US Treasury Securities.

I wouldn’t go as far as to say we are currently in another bubble, but we certainly reflated the old bubble or “reheated an economic souffle” as he puts it through lowing mortgage rates from 6.5% to 3.5% from 2006 to 2012.buy a house or die

The dark side

Although the Fed and others cheer on the rise in housing (and stock market) prices as good for homeowners and the economy, there is a dark side to rising home prices.

Rising home prices:

• Are artificial

The current surge in home prices is not driven by strong economic fundamentals such as higher productivity, wages and labor participation rates, but rather by artificially low interest rates orchestrated by the Federal Reserve’s zero interest rate policy and quantitative easing programs. …

Yes, that’s exactly what they did. House prices didn’t bottom in 2012 because fundamentals improved. We placed the cart before the horse by reflating the housing bubble with the hopes that fundamentals would improve later to justify the valuations. We don’t know how this will turn out yet, but so far the sales journey has been bumpy.prices_too_high

Raise home affordability

Ask a first-time homebuyer, a part-time worker or anyone looking for a home if higher home prices are a good thing. Higher home prices shut would be homebuyers out of the market, lower the home ownership rate and raise the cost of shelter. …

This fact is indisputable, but since current buyers are a much smaller and less organized voting block, current homeowners get preferential treatment.

Cause property taxes to rise

Because property taxes are based on home values, rising home prices lead municipalities to increase property taxes.

Prevent mobility

The whipsaw in housing prices over the past ten years — dramatically higher, then lower then higher again — creates an immobile work force whose fortunes and mobility are tied to the values of their homes.

prepared_life_underwaterMillions of loanowners are trapped in their homes owing more than the property is worth.

An immobile work force hinders economic recovery that would otherwise take place.

Are bad for the real estate industry

Although higher home prices lead to higher commissions, …

Higher home prices put home ownership further from reach. Young first-time homebuyers already are facing difficulties in purchasing homes as many have large student loan debts and are unemployed or underemployed.

Potential new homeowners whose wages are not keeping pace with rising home prices and millennials find homeownership ever more elusive.

Without a solid pipeline of new homebuyers, the mid- and long-term outlook for the real estate industry is dim.

must_see_real_estateOf course myopic realtors refuse to see high house prices as the problem and instead they blame tight lending standards, a red herring. We tried giving realtors everything the wanted once by eliminating all qualification and income barriers, and we ended up with a massive housing bubble that nearly destroyed the industry and the broader economy.

Will come down

The Fed’s manipulation of the economy by driving rates down to get people to move in and out of houses is as foolish as paying people to dig ditches and then paying others to fill them up. Nothing of lasting structural value is produced in either example.

entitlementsThis artificially manipulated game of real estate musical chairs works until the music stops.

And it will as the low inventory strong demand dynamic reverses and inventory increases and demand drops.

A housing inventory shortage is not the same as a housing shortage. We have a temporary inventory shortage not a permanent housing shortage. Inventory will become available just as demand drops due to a weak economy and rising interest rates. When that happens, this housing bubble will burst. …

Here in California we have both a permanent shortage of housing that inflates prices and a temporary shortage of for-sale houses due to the absence of underwater borrowers from the seller pool. The for-sale housing inventory will remain low until prices reach the peak and lenders rescind the loan modification entitlement they used to can-kick loans.

We saw what happened in 2008 after we had massive nationwide rise in prices and subsequent massive decline.

Still want higher home prices? Be careful what you wish for.

Housing has been identified by an entire generation as a fountain of free money. Many people in California are going to consume hundreds of thousands of dollars more than they earned due to owning HELOC producing California real estate. It is so embedded in our culture that only a multi-decade housing recession would purge the kool aid. That won’t happen as long as the kool aid intoxicated have anything to say about the matter.

California_Kool_Aid

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