Jun202013

It’s official: Housing bubble has reflated

Language has a powerful influence on our perceptions and beliefs about reality. The current meme on the housing market is that prices have “recovered.” Financial recovery suggests the return to a natural equilibrium from and undervalued state. In the case of housing, this suggests the peak of the housing bubble was the fair market value and restoring peak prices means housing has “recovered.” The reality is far different.

A bubble is a financial condition where asset values become greatly detached from fundamentals and inflate beyond any reasonable measure. When a financial bubble bursts, asset values crash back to fundamental values and often overshoot to the downside. The deflation of a bubble to fundamental values is the recovery. Reflating asset prices to peak valuations is merely a manipulation of  market pricing — the opposite of recovery.

The chart above shows the median cost of rent with the monthly cost of ownership for Orange County, California from 1988 to present. Comparing the median rent to the monthly cost of ownership is more useful because it factors out the distorting impact on price caused by fluctuations in interest rates.

The last housing bubble from the late 80s and early 90s is evident. A long period of stability from 1993 to 2000 demonstrates a market tethered to fundamentals. The period from 2001 to 2003 represents an overheating market detaching from fundamentals. Then, of course, we have the Great Housing Bubble from 2004-2007 with its proliferation of toxic mortgage products and widespread kool-aid intoxication.

In response to crashing prices, the federal reserve lowered interest rates to record lows in an attempt to reflate asset prices. Starting in 2008, rental parity began to rise rapidly as low interest rates infused affordability into home finance. Prices still overshot to the downside, but together with changing accounting rules which helped remove inventory, the market leveled out and finally bottomed in 2012.

So has the market recovered? It depends on your measurement. When the cost of ownership crashed back to the fundamental support of the cost of rent, the market recovered. This was the first and most important measure of recovery. Because interest rates are so low, market pricing is below its normal relationship to rental parity (rents translated to house prices). When pricing hits this limit of affordability, I would argue that means pricing has “recovered.” Most markets around the country crashed below this value even with interest rate help. The latest increase in pricing is starting from an undervalued condition. Irvine is one market where pricing has nearly recovered already.

I have argued many times that we are reflating the old bubble, and the efforts of the federal reserve, government officials, and bankers are with an eye toward increasing prices as far as they can as quickly as they can. However, since prices are still below fundamental values in nearly every market, we are not in new bubble territory — yet.

As far as bankers and loanowners are concerned, the market has not “recovered.” Until nominal pricing is pushed back to peak valuations, those two groups won’t consider the recovery real.

Is Bay Area housing bubble back?

By Pete Carey — 06/15/2013 01:00:00 PM PDT

It seems absurd, but a few short years after the biggest home price crash in memory, soaring prices are stoking fears — or at least stirring talk — that another housing bubble is forming in the Bay Area.

That has some buyers skittish and others dropping out of a market that favors cash offers and whopping over-asking-price bids.

“It’s back to the bubble,” said Janine Epstein, a San Jose schoolteacher who is having trouble finding a condominium or townhouse she can afford.

I don’t want to jump in and watch all the prices go down, and at the same time, I don’t want to not jump in and watch the prices keep going up,” she said. …

That is the central dilemma of the current market. Most buyers just put blind faith in the appreciation fairies and start planning on how they’ll spend their HELOC money. The wiser and more cautious prospective buyers realize there are risks involved.

Are there significant risks for anyone getting in the market now?” said DataQuick’s Andrew LePage. “Absolutely. Take away any one of three things — ultralow rates, ultralow supply and ultrahigh investor levels — and the market’s going to feel it.

Those are the current props. It’s like a three-legged stool. Take away one leg, and it falls over.

Realistically, only a spike in interest rates has potential to bring on a crash because buyers would lose their ability to make the crazy bids they are today. If we had more supply and less investor activity, which we will in 2013 and beyond, it will only weaken the rate of appreciation, not lead to a crash.

At $564,250, the median sales price of an existing single-family Bay Area home in May was 23 percent below its 2007 peak of $738,500 just before the crash, according to DataQuick.

“The market is coming back, but it’s not coming back as robustly as some people think it is,” said Contra County Assessor Gus Kramer. “I don’t think there’s a bubble per se, because the number of sales are not even close to what they are in a normal market.”

The low-volume rally is not a sign of strength. The demand is up slightly, but inventory levels are down 50%, so prices get bid up.

But, he said, buyers should be careful about purchasing a house in some neighborhoods where prices have soared based on a few sales over asking price.

The Peninsula and South Bay have regained most of their post-bubble losses, while Contra Costa and Alameda counties have a long way to go.

Interest rate increases will eventually put downward pressure on Bay Area prices, warned Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C.

None of us knows what will happen to us in the future, but if you’re not moving (to the Bay Area) with the expectation you will be there a long time, you very likely are going to be a loser,” Baker said.

I’ve discussed this problem over and over again. Rising rates make financeable loan balances smaller. Smaller loans means buyers can’t bid as high, and unless incomes rise to make up the difference, house prices will languish as interest rates creep higher.

But for now, we are rapidly reflating the old bubble and pushing prices back to the limits of affordability as quickly as possible.

California Home Prices Up Most in 33 Years, Realtors Say

By Nadja Brandt – Jun 17, 2013 12:00 PM PT

The median price for an existing single-family home jumped to $417,350 in May, up 32 percent from a year earlier. …

Parts of California, including the San Francisco Bay area, have “extremely low housing inventory,” leading to the increase in prices… The median price in San Francisco surged 28 percent from a year earlier to $947,260, breaking a previous record set in May 2007.

So the recovery is here, right?

It’s official: Housing has recovered

Jeff Reeves — May 30, 2013, 7:01 a.m. EDT

Another week, another round of favorable housing news. So let’s stop dithering and call this race.

Housing has won. The real estate bears have lost.

Of course, whether you’re a skeptic who hates this Federal Reserve-driven recovery or simply one of those cautious types who don’t like to act hastily, it’s easy to scoff at this notion.  …

You think?

This is not to say housing will go nowhere but up. The easy-money policies at the Federal Reserve are great now, fostering low interest rates, but tightening in 2014 or 2015 will hurt mortgage demand down the road. And while the stock market lately may make us believe there is no such thing as down, it’s natural to see some drawbacks on the road to recovery.

But any future dips won’t derail housing.

Thanks for that assurance. I feel comfortable enough to go buy a house now….

People looking for affirmation find writing like this useful because it panders to their confirmation bias.

Credit isn’t as easy to come by as it was in the go-go days of the early 2000s, so borrowers are less likely to lose their homes and bloat inventories again.

Also, the mortgages are stable, fixed-rate conventionally amortizing mortgages.

And even if banks do lighten up their standards, many consumers won’t be as eager to take on crushing mortgages or home equity loans after being burned by the downturn.

He obviously doesn’t understand Ponzi thinking. 30% or more of the borrowers who got burned are Ponzis who will take every penny of free money given them — assuming lenders are stupid enough to do that again.

Throw in the fact that it remains more expensive to rent than own in most markets, and you have plenty of reasons to think the gains in home prices and real estate sales will stick. … let’s stop debating whether or not housing is in a recovery.

It is. Case closed.

There you have it. Rest assured all is well in housing. … (From 2006)

The market is Hunky Dory

The asking price on today’s featured property is less than 20% above its 1997 purchase price. Does that sound like a market recovery to you?

The former owners left a lot of money in the walls here. Their final mortgage balance was only $320,000 plus a $50,000 HELOC. Surely this would have appraised for much more than this.

It’s also unclear why they let this house go to auction. They likely had equity and could have sold it and obtained a check. Perhaps they had personal problems and just ignored the property. For whatever reason, Fannie Mae might make a profit on this sale.

[idx-listing mlsnumber=”OC13113408″ showpricehistory=”true”]

30481 HUNKY DORY Ln Trabuco Canyon, CA 92679 

$409,900    ……..    Asking Price
$345,000    ……….    Purchase Price
9/15/1997    ……….    Purchase Date

$64,900    ……….    Gross Gain (Loss)
($32,792)    …………    Commissions and Costs at 8%
============================================
$32,108    ……….    Net Gain (Loss)
============================================
18.8%    ……….    Gross Percent Change
9.3%    ……….    Net Percent Change
1.1%    …………    Annual Appreciation

Cost of Home Ownership
——————————————————————————
$409,900    ……..    Asking Price
$14,347    …………    3.5% Down FHA Financing
4.02%    ………….    Mortgage Interest Rate
30    ………………    Number of Years
$395,554    ……..    Mortgage
$107,560    ……….    Income Requirement

$1,893    …………    Monthly Mortgage Payment
$355    …………    Property Tax at 1.04%
$0    …………    Mello Roos & Special Taxes
$85    …………    Homeowners Insurance at 0.25%
$445    …………    Private Mortgage Insurance
$0    …………    Homeowners Association Fees
============================================
$2,779    ……….    Monthly Cash Outlays

($415)    ……….    Tax Savings
($568)    ……….    Principal Amortization
$20    …………..    Opportunity Cost of Down Payment
$122    …………..    Maintenance and Replacement Reserves
============================================
$1,938    ……….    Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$5,599    …………    Furnishing and Move-In Costs at 1% + $1,500
$5,599    …………    Closing Costs at 1% + $1,500
$3,956    …………    Interest Points at 1%
$14,347    …………    Down Payment
============================================
$29,500    ……….    Total Cash Costs
$29,700    ……….    Emergency Cash Reserves
============================================
$59,200    ……….    Total Savings Needed
[raw_html_snippet id=”property”]