National home prices reach housing bubble peak nine years later
Restoring peak housing prices required record low mortgage rates during a period of weak growth and a falling home ownership rate.
It’s time to celebrate! National home prices reached the peak of 2006. Surviving homedebtors are regaining equity, surviving lenders have collateral backing behind the bad debt they’ve preserved for the last decade, and new homeowners are stretched to the max to repay the bad debts of previous generations, albeit at lower rates.
Since the housing market peaked in 2006, the powers-that-be resisted the price decline with a variety of government relief programs, and most importantly, record low mortgage rates. The recession caused by the 2006-2009 housing market crash left many people unemployed and underemployed, removing their demand from the housing market, and millions of foreclosures caused the home ownership rate to plummet — not the conditions one would expect to cause a robust price rally in house prices.
However, house prices did go up — a lot. When the market manipulations finally worked in 2012, house prices went nearly vertical. While economic fundamentals were slowly improving in the background, there was no significant fundamental support for the rally that reflated the housing bubble, certainly not a level of economic improvement commensurate with the dramatic increase observed in prices.
The entire rally was fueled by record low mortgage rates engineered by the federal reserve. 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, and 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.
Existing-home sales also reach highest pace in 8 years
Thanks to rising demand and shrinking supply, the median existing-home price for all housing types reached an all-time high in June.
According to the latest data from the National Association of Realtors, the median existing-homes sales price rose to $236,400, which exceeds the previous peak median sales price set in July 2006 of $230,400. …
Despite record prices, existing-home sales also reached their highest pace in more than eight years.
Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 3.2% to a seasonally adjusted annual rate of 5.49 million in June from a downwardly revised 5.32 million in May.
Sales are now at their highest pace since February 2007 (5.79 million), have increased year-over-year for nine consecutive months and are 9.6% above a year ago (5.01 million).
Those are good numbers. A steady increase in both sales volumes and prices are a clear sign of an improving market.
Logan Mohtashami said, “One of my 2015 housing predictions was that we would see 5%-10% total growth in mortgage purchase applications due to the low bar set last year.” He got that right.
Lawrence Yun, NAR chief economist, said that buoyed by June’s solid gain in closings, this year’s spring buying season has been the strongest since the crisis began.
“Buyers have come back in force, leading to the strongest past two months in sales since early 2007,” Yun said. “This wave of demand is being fueled by a year-plus of steady job growth and an improving economy that’s giving more households the financial wherewithal and incentive to buy.”
Not really, but that’s certainly how the realtors will spin the data.
“Limited inventory amidst strong demand continues to push home prices higher, leading to declining affordability for prospective buyers,” said Yun.
When the housing market bottomed, prices were undervalued, but the price rally from 2012 removed the excess affordability from the market, and in tight-supply markets like Coastal California, house prices are inflated to the degree possible with record low mortgage rates.
“Local officials in recent years have rightly authorized permits for new apartment construction, but more needs to be done for condominiums and single-family homes.”According to NAR’s report, the percent share of first-time buyers fell to 30% in June from 32% in May, …
This is a problem (See: Reflating housing bubble pricing out first-time homebuyers)
NAR President Chris Polychron said that Realtors are reporting “drastic imbalances” of supply in relation to demand in many metro areas — especially in the West.
“The demand for buying has really heated up this summer, leading to multiple bidders and homes selling at or above asking price,” Polychron said. “Furthermore, tight inventory conditions are being exacerbated by the fact that some homeowners are hesitant to sell because they’re not optimistic they’ll have adequate time to find an affordable property to move into.”
The demand is not the problem or the story. The oft ignored truth is that a significant percentage of normal supply is caught up in Cloud Inventory.
All-cash sales dropped to the lowest share since December 2009, reaching just 22% of transactions in June, down from 24% in May and 32% a year ago.
Back in 2012 and 2013 when inventory depletion was even more significant, all-cash buyers ruled the market. Single-family rental investors began pulling back in 2014, and by mid 2015 the flow of cash slowed further, and some rich oligarchs began liquidating their holdings.
Distressed sales, which are foreclosures and short sales, fell to 8% in June (matching an August 2014 low) from 10% in May, and are below the 11% share a year ago.
House prices depend on bank policies toward delinquent borrowers, so lenders are forgoing distressed property sales in favor of loan modifications, denying short sales, and tolerating squatters.
“June sales were also likely propelled by the spring’s initial phase of rising mortgage rates, which usually prods some prospective buyers to buy now rather than wait until later when borrowing costs could be higher,” Yun concluded.
realtors expound shoddy analysis to create a false sense of urgency, and the rising-rate bogeyman is the manipulation technique currently in vogue.
Now that we’ve reached the peak, what happens next?
In Summer of 2014, B of A predicted the reflated mini-bubble would peak in 2016.
I recently asked Is Coastal California housing at the peak of another bubble? I don’t think so.
I believe the Loan modification entitlement will be rescinded as prices near the peak. This will help bring the missing supply back to market if prices move higher.
The problem is that Potential buyers can’t afford peak prices at higher interest rates. When interest rates go up, sales volumes will fall, and house prices may follow.
It’s not unusual to see inflated prices move higher: that’s how bubbles form. It’s entirely possible prices will rally from here, but I rather doubt it. The math favors a plateau as more inventory comes to market at the same time rising mortgage rates make the large balances of today harder to finance. Perhaps fundamentals will catch up as the job market improves, but that will take a while. In the meantime, expect prices to remain near housing bubble peaks for the foreseeable future.