Jul102014
July housing market update: prices creeping up again
Unexpectedly low mortgage interest rates allow buyers to raise their bids and push house prices higher on stagnant incomes.
In my opinion, the housing market has been boring lately, as prices have been flat, and sales volumes are low. The market is in a new “normal” pattern of low inventory, low demand, and low sales volume. The lack of volatility makes for a wonderfully boring housing market.
We all dance around one big question: is it a good time to buy?
Housing market is a ‘crapshoot’
By Heather Long @byHeatherLong July 7, 2014: 1:55 PM ET
The housing market is a “crapshoot” now, according to one of America’s leading real estate experts.
Karl “Chip” Case is an economist whose name is synonymous with home prices. He is co-creator of the much watched S&P/Case-Shiller home price indexes with Bob Shiller, who won the Nobel Prize in economics last year.
“You’ve got much more negative vibrations in the housing surveys about homeownership than we ever had before,” Case told CNNMoney. “I think it’s because people got hosed. They thought that housing prices will never go down. That’s just bull — you know what.“
Is a large amount of negative sentiment a contrarian indicator?
He calls the real estate market “segmented” these days. It’s no longer a guarantee that housing prices will go up across the country. That only happens in some places at some times.
The market has been segmented with move-up property sales moving more briskly than first-time homebuyer sales; however, the lack of first-time homebuyers starting to weaken the move-up market. Further, the change in the supply-demand balance indicates it is no longer a seller’s market.
The demand side of the equation will also be key. Will millennials actually purchase homes? Will foreign buyers keep coming?
Millennials will not return to the housing market in large numbers until 2019.
“The Chinese are coming over here with millions and billions of dollars, and they want to spend it on assets that tend to hold their value. And at least the theory is that housing does. But it is far from what it was in 2004,” Case notes.
The deflating Chinese real estate bubble could destabilize the world economy because it may turn current buyers into desperate sellers.
The advice Case gives to first-time homebuyers is familiar to most. Be sure you can afford the house and don’t expect a quick profit.
“If you’re not buying it for the long haul, don’t buy because there’s a good chance you’ll have to sit through some down cycles. But when it goes, it’s very nice,” he says.
There are good reasons to be cautious, but the timing still favors buying over renting for long-term holds.
July Housing Market Update
Low mortgage interest rates may have saved the spring selling season. Sales volumes are low due to a combination of high prices and weak job growth, but unexpectedly low interest rates have allowed buyers to raise their bids and price prices up slightly, breaking the months of flat pricing.
The YoY numbers still show substantial gains, but I use a six-month moving average to smooth out the volatility, so the percentage change numbers are comparing Jan-June 2013 to Jan-June 2014. Prices were still rising rapidly in early 2013. I expect to see the YoY numbers consistently drop down to about 3% to 5% for the year come December of 2014.
The cost of ownership and the cost of renting is largely unchanged, creeping up slightly over the last year.
I postulated the new mortgage rules would prevent future housing bubbles by banning affordability products. The best evidence of this phenomenon is the decline in sales volumes and recent flattening of prices at the limit of affordability. Will this limit be durable? Will lenders find a way to circumvent the protections built into the system and inflate another housing bubble?
Higher prices have priced out marginal buyers, which is why sales volumes are lower this year; however, the market was previously undervalued, so higher prices have merely restored the pricing balance in the market. Despite concerns we may be in a new bubble — we are certainly working to reflate the old one — we are not yet in a housing bubble, and affordability is reasonable based on historic norms.
LA County shows a similar pattern to Orange County. The YoY appreciation in LA County based on the $/SF measure is amazing.
Despite the dramatic rally in prices, the market is still not overvalued.
Since the market is not overvalued, it is highly rated.
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Housing Market Report
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Speaking of “creeping up”
July 10 2014 8:54 AM EDT
Gold: 1343, +18
Also, considering today’s financial landscape/dynamics in-play, should a
homespeculative commodity really be considered a long-term hold? The banks (insiders) certainly don’t think so.Was all the bearishness of a few months ago a contrarian sign of a bottom?
The irony of this post is priceless. el O pontificates about the long term viability of homes as speculative commodities immediately after pumping THE speculative commodity of the 21st century. Gold was in a bubble that was just as inflated and that crashed just as hard as the much-touted housing bubble, and yet the sadistic gold lovers keep coming back for more pain. Sad really.
Dude, you just turned a simple “gold was creeping up” in price today observation into a diatribish™ dramatic but comedic irony. LOL, your most hilarious post to-date.
gold is down because:
A) a bull market takes the stairs up and the elevator down. this consolidation is shaking out the leveraged, weak hands
and
B) every jackass has been duped into believing the economy, and thus real estate, has recovered.
gold is in a bull market correction, the duration being extended due to false signals of recovery. good luck sir once we venture back to reality.
Is non-QM lending the future of housing?
Let’s hope not. That’s how bubbles are inflated.
Lenders are starting to looking into the unchartered territory of non-QM lending, seeing that it’s been over six months since the CFPB Qualified Mortgage requirements went into effect. And while it’s not vast, there is a definite demand.
Growth in the non-conforming market is needed since there is little new product development taking place with the agencies, said Chris Garagusi, vice president of mortgage capital markets product manager at BOK Financial Mortgage (BOKF).
“As such, there is a continued need to develop non-conforming products that fit specific borrower needs (QM and non-QM),” he said.
He also noted, “As agency [Fannie and Freddie] guarantee fees have increased over time, the pricing spreads between conforming and non-conforming have compressed from historical levels and in some instances non-conforming pricing is actually better than conforming pricing.”
There is currently $50 billion estimated in non-QM volume origination a year, which should create a significant net demand for private label mortgage-backed securities and whole loans, according to Ying Shen and Richard Mele, research analysts with Deutsche Bank [DB].
However, they don’t expect non-QM volume to rise significantly above the $600 billion mark, and instead, given the dominance of GSE and FHA/VA and the exemption under the ATR/QM rules, the non-QM market is expected to be small.
Both also expect that non-QM loans will more likely be originated for prime high net-worth homeowners, which is what lenders are doing.
“Most of our expansion with non-agency products has been in the jumbo arena. We continue to evaluate non-conforming product opportunities in the marketplace and expect to bring several to market in the near future,” Garagusi said.
Several commenters were certain the taper was fake or that it would never end. What do we make of them tapering even faster?
FOMC considers ending taper in October
Rather than continue its steady $5 billion a month reduction, the Federal Reserve is debating having the final reduction come in a single $15 billion per month reduction, or in a $10 billion reduction followed by a $5 billion reduction, according to the June Federal Open Market Committee meeting minutes.
With that timing the final reduction would occur in October.
The meeting minutes explained that they are hearing members of the public ask if this could be an option, and meeting participants don’t seem to have a problem with it.
This is a decision that would depend on the committee’s evolving assessments of actual and expected progress toward its objectives.
“In light of these considerations, participants generally agreed that if incoming information continued to support its expectation of improvement in labor market conditions and a return of inflation toward its longer-run objective, it would be appropriate to complete asset purchases with a $15 billion reduction in the pace of purchases in order to avoid having the small, remaining level of purchases receive undue focus among investors,” the minutes said.
However, the committee cautioned that the program is not on a preset course, but if it does continue as planned, it will likely be completed by the end of this year.
Meanwhile, the committee decided to continue to taper, and beginning in July, it will add to its holdings of agency mortgage-backed securities at a pace of $15 billion per month rather than $20 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $20 billion per month rather than $25 billion per month.
The federal funds rate will maintain the current 0 to 1⁄4 percent target range.
“Belgium” better step up their Treasury purchases, or this party is over.
The housing market is going to go from “not a bubble” to “WTF just happened” if rates go up.
the fed is playing with fire. at some point, probably not this time around, they will lose control of the bond market and then we realize the depression we have been delaying.
It’s inevitable.
With the economy still weak, the only reason I can see they are accelerating the taper is because they are worried about losing control of the bond market. Obviously, they don’t believe it’s inevitable — they could be wrong — but that’s what they believe.
A question with an obvious answer.
Is wage stagnation keeping homebuyers away?
Home price increases are outpacing wage growth
Perhaps the reason buyers are staying away from the housing market is because they simply can’t afford it.
At least, that’s what one report suggests. In Trulia’s Price Monitor for June, Trulia’s chief economist Jed Kolko compares the rise in asking prices with the rise (or lack thereof) of wages in the 100 largest metro areas.
The results are a bit troubling for those who think they should be earning more money.
According to Trulia’s data, in the ten markets where asking prices have risen the most year-over-year, wages have barely increased. In Riverside-San Bernardino, California, asking prices rose 16.9% from June 2013 to June 2014. Wages in that area only rose by 0.6% from 2012-2013, according to recently released full-year 2013 wage data from the Bureau of Labor Statistics’ Quarterly Census of Employment and Wages.
In Atlanta, asking prices rose 15.7% while wages only rose 0.8%. In Bakersfield, California, asking prices rose 13.9% while wages actually dropped by 0.3%.
“In fact, average wages per worker rose less than 1% in 2013 in all but one of the 10 metros with the largest price increases,” Kolko said. “Nationally, asking prices (year-over-year in June 2014) rose faster than wages per worker (year-over- year in 2013) in 95 of the 100 largest metros.”
In four of the biggest boom-and-bust markets of California and the Southwest, price gains have all but ceased.
“In Phoenix, Las Vegas, Sacramento and Orange County, price gains have skidded to a stop or gone into reverse in the past quarter after posting gains of more than 20% year-over-year in June 2013,” Kolko said. “Although these four markets all still have average or above-average year-over-year price increases in June 2014, their slowdowns or reversals in the most recent quarter foreshadow a continued deceleration in year-over-year gains.”
If incomes are stagnate (or declining), you can’t have a sustainable increase in housing prices without the expansion of debt or foreign purchases. That’s where we are with Orange County housing.
When the next stage stage of this ponzi scheme hits, private debt destruction will rule … and the assets that this debt supports will decline in a major way. Those communities that have been the most dependent to debt and foreign investment (THINK ORANGE COUNTY) will be demolished. Meanwhile the clock ticks on the greatest economic imbalance since 1929.
Lee in Irvine, as in THE Lee in Irvine from the old Lansner blog?
Holy s*it dude – once the govt created a bottom and Lansner pulled the plug on his blog, you bought just like the rest of us former bears did.
Its now 5 years later, and you are STILL renting??? Not sure what to say – actually yes I do…
LOLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLL RIBSLPITTER!!!!
Several former Lansner readers post on this blog now. Under what name did you used to post? I was Liar Loan.
Haha,
I hope you come by and post again. We’re keeping the housing conversation going here.
“We’re keeping the housing conversation going here.”
We’re still keeping this convo open because this issue is still alive and has by no-means gone away.
The next stage of this ponzi scheme will result in new equity owners.
the fat lady has yet to sing indeed Lee.
Perhaps your answer is here:
China Fuels Surge in Foreign Purchases of U.S. Housing
Foreign purchases of U.S. real estate jumped by 35% last year, and the Chinese led the way, according to a survey released Tuesday.
Chinese buyers have become the largest source of foreign cash in the U.S. residential real estate market, accounting for nearly one in four dollars spent by foreigners on American housing last year, the National Association of Realtors said in its annual survey of international property sales.
China accounted for $22 billion in international sales for the 12 month period ending March 2014, or 24% of all foreign sales, up from $12.8 billion, or 19%, during the year-earlier period.
Total international property sales rebounded last year to $92.2 billion, according to the NAR’s estimates, up from $68.2 billion in 2013 and $82.5 billion in 2012. The total represented around 7% of the market for all U.S. sales of previously owned homes during the same period.
In recent years, American real-estate markets have been viewed alternately as a safe haven and a bargain amid concerns over geopolitical instability or unsustainable asset values abroad.
Sellers starting to perceive the change in the market
As the housing recovery downshifts from last year’s pace, the latest survey of real estate agents by national brokerage Redfin finds homebuyers and sellers are having trouble getting on the same page with each other and with the new shape of the market.
Examining a number of markets nationwide, Redfin’s quarterly survey showed house sellers continue to lose their market advantage, with only 24 percent of agents agreeing with the statement “Sellers have all the power.” In the first quarter, that share was above one-third of agents.
Most sellers don’t seem to have gotten the memo, though, with 40 percent still planning to list their homes above market value even as sales figures continue to fall compared to last year and home price increases level off.
“Typically it takes seller six to nine months to adjust to a price change, but this latest shift is longer,” said Redfin chief economist Nela Richardson. “Prices have moved down and then up so much over the past five years that it’s even more difficult for sellers to have a realistic baseline for what their homes are worth in the current market.”
Redfin cautioned sellers against overpricing homes in May, especially as shoppers regain leverage in the market. In fact, 58 percent of Redfin agents now say sellers have unrealistic expectations about the value of their homes compared to 49 percent last year.
While slowly improving inventory levels may still push some buyers into more aggressive offers, as Richardson explains, “The demand side of real estate is moving from ‘please take my offer’ to ‘take it or leave it as you please.'”
Wow. I almost forgot about this blog. Mainly because this is the new normal and nothing will change. We will not see another price collapse. We could see another bubble IF lenders are free to give away loans again. But until then I think cA will continue to just slowly rott away. All the buying from the cash or borrowers who bought back in 2011-12 will NEVER SELL. Why would they? They practically have no costs on those properties.
I’m sorry, but until DoddFrank is gone, there really is nothing to discuss on this site. Hat tip for being so consistent. But if you want a spectacle, start watching the housing market in Austin. That town is booming. It will be interesting to see if that city will be able to handle the 40% growth.
All of the tech hubs, including Austin, are booming right now.
Real estate will always be an obsession in California, and we will continue to monitor it here.
Irvine Renter 09-07-2014, 17:04
I’m with BenShalom on this one, although it is nice to see Mellow Ruse write bearish comments 😉
Just because homes are overvalued doesn’t mean prices will drop right away. It’s still going to take a catalyst of some kind to set off home price declines. Normally that catalyst is a good strong recession with significant job losses. Right now the opposite is happening.
Still, does this mean you will be retracting your blog post accusing me of being Kool-aid intoxicated? 🙂
I was wondering if you forgot your dose of kool-aid yesterday… 😉
LOL! +1
Perhaps his recent revert to SN Pale-Ale’s has had a counter effect on the daily dosage 😉
His mix is called a Pale-Aid.
JK mellow ruse some of the stuff you say is OK. I like that you keep the gold bugs in check. better hope this recovery has legs
“…The advice Case gives to first-time homebuyers is familiar to most. Be sure you can afford the house and don’t expect a quick profit…”
Not sure why that’s advice solely for first-time buyers – seems like sage advice for all buyers. I also think a rule-of-thumb here is required. If you’re telling people to be sure they can afford the house they want to buy, then provide some guidance on what “afford” means. Otherwise, they’ll just listen to a mortgage originator.
I think about this a lot, both in terms of what I think I can “afford” and what I think others believe they can “afford” (especially in Irvine). Is it reasonable to assume your household income will be constant and grow, at least above the inflation rate? At higher income levels, isn’t income more volatile? There are some years where you’ll make a lot more, and some less. Leaving one job for another could swing your household income dramatically, up or down.
It seems the most accurate constraint/rule-of-thumb is to limit your total housing cost to a certain percentage of your average gross income you reasonably expect to continue for the next decade-plus. So then, what is that number (assuming a 30-year fixed rate)? 31% is too high for my comfort. The most I’m comfortable with is 25%. Are people buying $1m+ Irvine homes today with front-end ratios well beyond 31%?
Another way of seeing this is in returns for rental when treasury rates are dismally low. Say a $500k house can rent for $2200 per month in OC or 26.4k per year for an un adjusted return of 5% a year. Maintenance can be 1% per year so around 5k so the net is 4% (if the land lord rent it under the table and avoid paying taxes). If you claim it as income, you can deduct many expenses off anyway so the tax is probably minimal maybe .5%. So the net is 3.5% or about the same as the 30 year treasury rate. The kicker here is the ability to raise rent down the road as well as the appreciation in land prices. This is much better in owning treasury knowing that there is always a risk of default (even when it has never been done) and is easier to cash out. This is like a dividend paying stock with increasing dividend.
Don’t think housing can go up? Inflation will make sure that it does as we never have any extended period of deflation in the history of the world (Dark Ages maybe).
Your analysis of the alternative investment in treasuries is right on. I think many investors are buying real estate, despite the paltry returns, for exactly the reasons you describe. Further, when interest rates go up, the value of treasuries will go down. Real estate may or may not go down depending on what’s happening with jobs and wages. Real estate is a better bet right now.
Forgot taxes which is another 1% deducted of the returns. However, when you sell the tax is much less than other investments plus is will not be a huge factor in CA moving forward thanks to Prop 13.
But if inflation goes up and wages are stagnant, then the price of essentials increases and there is less budget for monthly payments meaning less buyers at current prices.
That’s why you have families already sharing house, young adults living with parents, working people subleasing, plus other arrangements to afford rent. Yet prices continues to go up. Eventually prices will get too high and the correction will come. But the question is how much more it must go up before the correction comes since there isn’t any catalyst on the horizon right now. There’s still room on the disposable income to cut such as car payment, electronics, cable, pilate, 24hr fitness etc…When government debt level goes even higher, than the rich will start to run away from bond causing rates to go up but Real Estate prices won’t drop much because they already own a lot of it and wanting to own more to avoid the risk of default in bonds or bail ins from banks. So the average joe will end up renting since the rich is parking their capital in someplace they perceived as ‘safe’.
The little man is being screwed both ways, first by the FED than second by the rich. That is life.
I’m really starting to view real estate investment as more of a job than an investment. The amount of time I see people spending either being a landlord or communicating with property managers and tenants is vast compared to other investments. Once viewed as a job the hourly rate doesn’t seem attractive at all until it is scaled up quite a bit beyond renting a house or two.
Not quite the same as buying a bond.
+1 astute. Ever try babysitting a derelict adult losers’ version of Melrose Place?
This just shows how overvalued RE is. The speculators continue to push prices up. The ZIRP koolaid flows. Everyone is banking on We never reached capitulation. People will despise real estate once again. permanent plateaus do not exist.
Is this a good place to invest?
Cynk Surges 36,000% as Buzz Builds for 1-Employee Company
http://www.bloomberg.com/news/2014-07-10/cynk-surges-36-000-as-buzz-builds-for-1-employee-company.html?cmpid=yhoo
The financial world has become obsessed with Cynk Technology Corp. (CYNK), a stock that sold for a few pennies for most of its existence before exploding more than 36,000 percent to give it a market value exceeding $6 billion.
Cynk supposedly operates a social network — one that appears to have no members, no revenue, no assets and only one employee. The stock climbed as much as 49 percent to $21.95 earlier today in over-the-counter trading on volume of more than 380,000 shares before erasing its gain to close down 5.5 percent to $13.90.
Every tech entrepreneur’s dream….
Modern day Tulips & Mississippi bubble all rolled into one. Greed and lust in their finest hour. Funds have their own speculative pet peeves and this is one of them. I don’t even think speculation is the right word, madness is more like it.