Nov212013
California housing recovery or bubble?
Are we witnessing a new sustained housing recovery in California, or are we witnessing a new housing bubble? Some housing bulls postulate the dramatic increase in prices springs from sound fundamentals. Rents and incomes increased, unemployment dropped, and distressed property sales returned to pre-crisis levels. Some housing bears posit the dramatic increase in prices feigns the signs of market health while the patient is still very sick. Prices moved up far faster than rents and incomes (nearly 10 times faster), unemployment lingers, distressed properties lurk in the shadows temporarily removed by lender can-kicking, and the demand depends on fickle investors and artificial government programs and federal reserve stimulus, both temporary measures.
Debates concerning fundamentals aside, whether or not you consider current market action indicative of a recovery or a bubble depends largely on what yardstick you use to measure value. The reports I generate use current owner cashflow and a comparison to current rents to establish value. This number incorporates real estate prices, rents, and most importantly, interest rates to establish value. It’s susceptible to swings in financing costs, and it can be distorted by manipulative federal reserve interest rate policies. Another method of valuation considers historic relationships of price-to-income and price-to-rent. Those measures fail to consider the impact of interest rates on affordability, so when interest rates are low, these measures claim prices are overvalued when in reality, the market may be at an equilibrium with current costs.
The longer term view of value depends on what you believe will happen with interest rates in the future. My methodology says today’s values correspond to the stable relationship between interest and rents. The competing methodology says prices are overvalued because current interest rates are so low. If interest rates revert to their long-term mean over the next few years, house prices will decline, and current valuations will appear bubbly in retrospect. However, if interest rates revert slowly over the course of another decade or more, this slow reversion in rates will not cause a price decline, and today’s valuations will not look so bubbly in retrospect.
So is the market fairly valued or overvalued? It depends on the yardstick of value you believe most appropriate.
In either case, whether interest rates move up slowly or quickly, at some point, interest rates will rise to their historic norms. Whether reversion to the mean happens quickly or slowly, house prices will not appreciate as quickly over the next decade or more unless something dramatic happens with wages, and given the high rate of unemployment, wage inflation doesn’t seem a likely prospect.
Report: Homes Looking Overvalued in Coastal California
By Nick Timiraos — November 6, 2013, 9:05 AM
Home prices appear to be overvalued in parts of coastal California and could soon eclipse their bubble-era peaks given recent rates of price inflation, according to a report released Wednesday by Fitch Ratings.
The report estimates that home prices nationally have increased 13% over the last year, leaving prices 17% above a so-called “sustainable home price,” according to the ratings agency, though there’s considerable variation geographically.
The Fitch model looks at traditional drivers of home values, including incomes and rents, to impute a “sustainable” price for a given metro area. Cities where price indexes rise above those levels are considered overvalued, and cities where the indexes fall below are undervalued.
Their methodology excludes the impact of interest rates on financing. Their estimate of value mirrors the yellow line in the chart above. My method that includes the impact of interest rates forms the green line above. Since interest rates are so low, my estimation of value exceeds than theirs.
Home prices in the San Francisco Bay Area are around 30% overvalued by this metric, having risen 20% over the past 12 months, the largest increase for the area in the last 10 years, writes Stefan Hilts, a director at Fitch. At the current pace of growth, San Francisco prices will be at their peak by early next year. In nearby San Jose, Calif., prices are just 11% below peak and are on pace to hit a new record in around six months. …
“When an expectation of rising rates is coupled with rising prices, there could be increased pressure on the housing market that could reverse recent [price] gains,” said the report.
Coastal California hit the affordability ceiling already. This makes Coastal California very susceptible to the impact of rising interest rates, more so than other markets.
Affordability Ceiling
Lenders don’t set out to inflate housing bubbles. The pressures on lenders to obtain business prompts them to expand loan programs and develop “innovative” loan products in order to keep sales volumes up when prices reach the limit of affordability. Sellers could always rely on lenders to arm borrowers with dangerous loans to finance ever-higher asking prices. That will not be the case in the future.
The result of the new regulations will be a much more rigid ceiling on affordability. Borrowers will be required to document their income, and that income will be applied to amortizing loans with a reasonable debt-to-income ratio. They can either afford the property or they can’t. Their bids will be limited.
If borrowers don’t have the ability to raise their bids due to limits on financing, then future housing markets will be very interest rate sensitive. Rising interest rates will lower the affordability ceiling if salaries don’t rise to compensate.
Fitch has the most realistic view of the future of housing. The stimulus being applied by the federal reserve to bring the laggards up will inflate bubbles in the strongest markets. Coastal California is likely to look like the pink line in the graphic below whereas Riverside County will look like the teal line. As the weakest markets recover, the fed should taper the housing stimulus. This will lower prices in those markets like Coastal California bumping up against the affordability ceiling while beaten down markets like Riverside County continue to appreciate.
Trulia uses a method of evaluating prices similar to Fitch.
Bubble Watch: Home Prices Simmering, Not Bubbling
Despite rapidly rising over the past year, home prices are 4% undervalued in the fourth quarter of 2013. Although prices look more than 10% overvalued in Orange County and Los Angeles, prices look undervalued in 83 of the 100 largest metros.
Trulia’s Bubble Watch reveals whether home prices are overvalued or undervalued relative to their fundamental value by comparing prices today with historical prices, incomes, and rents. The more prices are overvalued relative to fundamentals, the closer we are to a housing bubble – and the bigger the risk of a future price crash. …
Prices Far From Bubble Territory
We estimate that home prices nationally are 4% undervalued in the fourth quarter of 2013 (2013 Q4), which means we’re nowhere near another housing bubble. To put this in perspective, prices were as much as 39% overvalued in 2006 Q1, at the height of last decade’s bubble, then dropped to being 15% undervalued in 2011 Q4. One quarter ago (2013 Q3) prices looked 6% undervalued; one year ago (2012 Q4) prices looked 13% undervalued (see note at end of post). This chart shows how far current prices are from a bubble:
Does Trulia’s bubble chart look familiar to you? I produce a similar one.
Bubbling Local Markets: Orange County and Los Angeles
At the metro level, home prices are above their fundamental value in 17 of the 100 largest metros. Most of these overvalued metros are only slightly so: of the 17 overvalued metros, just two – Orange County and Los Angeles – look at least 10% overvalued. (Austin rounds up to 10% but is actually slightly below.) Several California metros also stand out for having both overvalued prices AND sharp price increases, including Orange County, Los Angeles, Oakland, and Riverside-San Bernardino.
I think they are wrong about Riverside and San Bernardino (See: Inland Empire housing markets are still extremely undervalued)
Top 10 Metros Where Home Prices are Most Overvalued
# U.S. Metro Home prices relative to fundamentals, 2013 Q4
Year-over-year change in asking prices, October 2013
1 Orange County, CA +13%
23.4%
2 Los Angeles, CA +12%
22.5%
3 Austin, TX +10%
11.7%
4 Oakland, CA +7%
29.6%
5 Riverside–San Bernardino, CA +7%
26.9%
6 Houston, TX +6%
13.9%
7 San Jose, CA +6%
19.1%
8 San Francisco, CA +5%
15.6%
9 Honolulu, HI +5%
2.9%
10 San Antonio, TX +4%
11.1%
Note: positive numbers indicate overvalued prices; negative numbers indicate undervalued, among the 100 largest metros. Click here to see the price valuation for all 100 metros: Excel or PDF.
If house prices are overvalued, then buyers won’t be able to afford them. If that’s the case, then sales volumes should begin to “unexpectedly” drop.
Watch out! Worrisome housing signs appear in West
Published: Wednesday, 20 Nov 2013 | 2:24 PM ET
By: Diana Olick | CNBC Real Estate Reporter
They say all real estate is local, but the West has more recently been an indicator of what is to come for the rest of the nation. It was the first region to crash in the mid-2000’s and the first to show signs of recovery toward the end of the last decade. Now the tides have turned again.
Sales of existing home sales nationally fell 3.2 percent in October from the previous month, but in the West they were down 7 percent. The West was also the only region to see a year-over-year decline in home sales.
Our sales volumes dropped off because we were the first market to hit the affordability ceiling. (See: Mounting evidence of housing market’s extreme sensitivity to mortgage interest rates)
“In the West region there is a significant shortage of inventory, so you have buyers who are looking for the right home unable to find it and unwilling to commit,” said Lawrence Yun, chief economist for the National Association of Realtors.
That’s spin. Buyers are not unwilling to commit. That implies a significant number of fence-sitters who merely need to be manipulated into action. Buyers are unable to commit because they don’t have the resources to afford the higher prices.
“But because of the inventory shortage, one is still seeing strong price increases in the West.” …
That’s truth. The manipulation of MLS inventory is exactly what’s causing prices to rise.
While home prices in California, and across the nation, are still well below their peaks of the housing boom, there is a major difference for home buyers today: credit. Mortgage rates may be lower on the 30 year fixed, but that wasn’t the product used during the boom. Adjustable rate loans with no down payment requirement and 1 percent “teaser” rates were popular. Those are gone today. Now, most loans are fixed rate products that require larger down payments and higher credit scores.
“Bottom line, on a monthly payment basis and relative to income needed to qualify for a loan, a house in California is far more ‘expensive’ than from 2004 to 2008, even though house prices are not back to peak levels,” said Mark Hanson, a California-based housing analyst. “Put another way, it costs a lot more today to pay for a house using a mortgage than it did from 2004 to 2008. Thus, if 2004 to 2008 was a “bubble,” then this must be, too.”
My math doesn’t show this to be the case.
It is clearly much less expensive on a monthly payment basis to own a house today than it was from 2004 to 2008.
Investors may be putting some properties back on the market again in Phoenix, eager to take advantage of higher prices, but those same higher prices are crimping demand. If this is an indicator of what is to come in California, that is a clear red flag.
If this anecdote is backed up with facts and data, this is a disturbing new trend. It’s quite possible this is happening.
When I was negotiating a deal with a large private equity fund, as one of the principals, my compensation was based partly on the ROI of the venture. Return on investment is maximized by either making more money or by making money faster. If the principals of the ventures holding these properties no longer believe the cashflow returns or future appreciation are going to increase their return on investment — and ROIs are probably maxed out right now — then speedy liquidations maximize the ROI of the venture and their own compensation.
If enough fund managers decide to liquidate, they may stampede for the exit while ROI is still good. This won’t push prices back to where they started because managers will quit liquidations when they hit certain ROI thresholds, but it could push prices down from where they are today. Further, the reduced demand and increased supply could completely change current market dynamics.
The rest of the nation did not see the same dramatic swings as most Western markets, but the supply, demand and pricing dynamics are similar. Prices are up over 12 percent nationally and inventories are down across the nation. For those predicting the national housing market over the next six months, watching the West is a good idea.
In all likelihood, our prices will flatten over the winter on low sales volumes, and both prices and volumes will pick up during the spring. How much depends on investor activity and mortgage interest rates at the time. If investors aren’t excited about the high prices — and they likely won’t be — then mortgage interest rates better be low, or the spring rally simply won’t materialize.
[idx-listing mlsnumber=”OC13230882″]
8112 HOLT St Buena Park, CA 90621
$350,000 …….. Asking Price
$163,000 ………. Purchase Price
3/4/1992 ………. Purchase Date
$187,000 ………. Gross Gain (Loss)
($28,000) ………… Commissions and Costs at 8%
============================================
$159,000 ………. Net Gain (Loss)
============================================
114.7% ………. Gross Percent Change
97.5% ………. Net Percent Change
3.5% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$350,000 …….. Asking Price
$12,250 ………… 3.5% Down FHA Financing
4.39% …………. Mortgage Interest Rate
30 ……………… Number of Years
$337,750 …….. Mortgage
$94,666 ………. Income Requirement
$1,689 ………… Monthly Mortgage Payment
$303 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$73 ………… Homeowners Insurance at 0.25%
$380 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$2,446 ………. Monthly Cash Outlays
($344) ………. Tax Savings
($454) ………. Principal Amortization
$20 ………….. Opportunity Cost of Down Payment
$108 ………….. Maintenance and Replacement Reserves
============================================
$1,775 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$5,000 ………… Furnishing and Move-In Costs at 1% + $1,500
$5,000 ………… Closing Costs at 1% + $1,500
$3,378 ………… Interest Points at 1%
$12,250 ………… Down Payment
============================================
$25,628 ………. Total Cash Costs
$27,200 ………. Emergency Cash Reserves
============================================
$52,828 ………. Total Savings Needed
[raw_html_snippet id=”property”]
[raw_html_snippet id=”newsletter”]
The affordability ceiling is taking a hit in the over night, look at the 10 year US Treasury Yield
Here
If it ever snowed again in LA, I’m pretty sure CHP would have to bar drivers from getting on the freeway. Last time it snowed was 1948.
There was a brief snowfall in Huntington Beach in the late 80’s.
Yes, and it hit Malibu a few years ago above 1,500.
But was a large total
I’ve talked to people that lived here during that storm. This year feels like an El Nino year.
If the the sun is entering a another cooling cycle, it might just happen again.
Here
Based on what happened today. I’m staying home if it snows.
The link didn’t work. Here’s the picture in 1948
http://www.pinterest.com/pin/231231762090694245/
Here must have been street cars in LA in 1948
[…] – Epoch Times October home prices up in Palm Beach, Broward counties – Sun Sentinel California housing recovery or bubble? – O.C. Housing News Fed’s Instant Message Is More Wait and See – Bloomberg […]
Upcoming Mortgage Rules And Low-Quality Inventory Are Weighing On Home Sales
Earlier this morning we saw that existing home sales fell 3.2% in October to an annualized pace of 5.12 million units.
Lawrence Yun, NAR chief economist, pointed out that sales had fallen in part because of erosion in purchasing power and low inventory that were causing home prices to climb.
Deutsche Bank’s Joseph LaVorgna pointed out that the “quality” of existing inventory also weighed on sales.
But he attributed the fall in existing home sales to rising mortgage rates as well. The 30-year fixed rate stands at 4.35%, according to the latest Freddie Mac survey, but mortgage rates have been running up since May and the 30-year was as high as 4.58% in August.
Finally, NAR and LaVorgna pointed to the impact of the upcoming Qualified Residential Mortgage rules that “will require a lot more time, documentation and scrutiny to process loans,” according to NAR.
“Lenders may be hesitating in order to ensure compliance with the new measures which take effect in January of next year,” said LaVorgna. “In general, lending standards for anything other than prime mortgages remain relatively restrictive.
“In general, lending standards for anything other than prime mortgages remain relatively restrictive.”
Isn’t that how it should be? Do we want marginal borrowers with spotty credit to have an easy time getting through underwriting?
Of course agents do, but as a taxpayer who is backing these loans, would you rather the standards be loose or tight? I prefer tight.
Is Tighter Credit for the Better?
It’s no secret underwriting standards have tightened in recent years, and while many decry the heightened standards for making homeownership less accessible to some Americans, CoreLogic economist Sam Khater pointed out in a report released Wednesday that heightened standards are undoubtedly impacting delinquency rates for the better.
“While there has been much consternation about underwriting being too tight in the context of forthcoming mortgage regulations, one underappreciated outcome has been the very good performance of mortgages during the last few years,” Khater said in an article titled “Tight Credit Results in Flawless Performance,” which was part of CoreLogic’s most recent MarketPulse.
“Tighter credit results in flawless performance,” Khater said.
The serious delinquency rate, which includes mortgages 90 or more days past due, in foreclosure or REO, stands at 5.4 percent as of July, according to CoreLogic.
Sales of Existing Homes Slip for Second Straight Month
October saw existing-home sales decline for the second straight month as low inventory propped up prices, the National Association of Realtors (NAR) reported Wednesday.
Total existing-home sales—completed transactions of single-family homes, townhomes, condominiums, and co-ops—fell 3.2 percent from September to October, coming out to a seasonally adjusted annual rate of 5.12 million. Compared to last year, sales were still up 6.0 percent, marking the 28th consecutive month of year-over-year improvement.
“The erosion in buying power is dampening home sales,” said NAR chief economist Lawrence Yun. “Moreover, low inventory is holding back sales while at the same time pushing up home prices in most of the country. More new home construction is needed to help relieve the inventory pressure and moderate price gains.”
The national median existing-home price for all housing types was $199,500, up 12.8 percent annually.
Well, a price bounce manufactured by inflating the money supply, suppressing rates and subsidizing demand does NOT equate to sustainable recovery, and the biggest bubble of all is in the money; so the ‘bulls’ who’re buying into opportunities of the past will be the ones who suffer the consequences.
But can’t they sustain the policies which manufactured the recovery forever? And doesn’t that make it real?
I suspect the answer to both is no, but I also think they can sustain this illusion for a very long time.
So far, it appears that the huge majority of the infalted money supply is ending up as excess reserves at the Fed, thereby negating any price inflation effect. Some say that this can only continue for so long, but so far I do not see what will stop it.
Systemic financial crisis is NOT voluntary. Or is it??
Debt Serf America.
Millennials Wary of Borrowing, Struggling With Debt Management
Young people are becoming warier of borrowing — but they’re also getting worse at paying bills.
Despite aggressive courting by credit-card companies, young adults ages 19 to 29 — the so-called Millennial generation — have around 1.5 credit cards on average, fewer than the 2 cards of Generation-X borrowers (ages 30 to 46) and 2.7 cards of Baby Boomers (ages 47 to 65), according to an analysis of data provided by Experian, a credit-reporting firm.
Millennials carry a credit-card balance of $2,700 on average, below the national average of $4,500 and the roughly $5,300 level for people ages 30 to 65, though this is partly due to lower limits, says Experian, which sampled its consumer credit database.
Total debt among young adults actually dropped in the last decade to the lowest level in 15 years, separate government data show, with fewer young adults carrying credit-card balances and one in five not having any debt at all.
And yet, Millennials appear to be running into more trouble when paying their bills — whether on credit cards, auto loans, or student loans.
Millennial borrowers are late on debt payments roughly as much as older Gen-X borrowers, Experian’s data show. Millennials also use a high share of their potential borrowing capacity on cards, just like Gen-Xers, meaning they’re as likely to max out on cards.
Since Millennials tend to have fewer assets than Gen-Xers and other generations, as well as shorter credit histories, they end up with the worst average credit score — 628 — of any demographic group.
“Put another way, it costs a lot more today to pay for a house using a mortgage than it did from 2004 to 2008. Thus, if 2004 to 2008 was a “bubble,” then this must be, too.”
What about incomes? Are incomes the same today, as they were in 2004? Mine sure isn’t, and neither is my wife’s. Let’s say you wanted to buy a $1M home in 2004 and you made 125k total household income at that time. Your front-end DTI would be 38% with a 2% teaser rate, with 20% down. If you have been getting 4% raises over the last 10 years, your household income is now 1.48*125k=185k in 2014 (typical for a mid-career, two-professional household). This results in a DTI of 33% at 4.5% 30yrFRM for the same $1M house.
With all due respect to Mark Hanson, he is performing a cost-benefit analysis without the benefit of considering the benefit.
While it’s true that most people haven’t been getting 4% raises, many have. Those are the people who are buying. As long as inventory is matched to buyers with the present ability to buy based on income growth, then prices remain stable. Since the prime coastal California areas, like Orange County, aren’t building more housing units, demand in prime areas is far outpacing supply.
Interest rates, like rents, can only rise in proportion to the rise in average incomes. If incomes are stagnant, then rates will be too. If incomes rise quickly, then home buyers can afford to pay more to rent the money from the bank to “buy” the house. The seemingly unaffordable double-digit mortgage rates in the 70s were made affordable by the double-digit yoy income growth. 10% raises for a decade make 10% interest rates seem reasonable. Similarly, 4% raises make 4% rates seem reasonable.
I don’t see anything on the horizon indicating that a nascent economic expansion is in the offing. This means that rates will remain low, unless and until income growth justifies rate growth. As IR has repeatedly stated, buyers are indeed rate sensitive.
This doesn’t just mean that prices have a ceiling, but that rates have a ceiling as well. If sellers can’t lower their prices, and banks aren’t doing short sales or foreclosures, then how will rates rise without driving driving buyers out of the market?
Banks are a volume business. They make their money a penny at a time multiplied by whatever leverage they can get away with. They want the most loans at the highest rate they can get while maintaining their regulatory capitalization minimums. This means their is an optimization point between the rate of the loans and the number of loans in any given economic environment.
When rates rose this summer, sales volumes fell, and price growth slowed. Rates then fell after the central bank decided that the economy still sucks, and they won’t be able to squeeze any more pennies from mortgagees without severely impacting their sales volumes. Prices can’t rise, but neither can rates.
What we are left with is price and rate growth shadowing income growth. If incomes stagnate, or fall, rates and prices have to fall (See Japan). If incomes rise, then rates and prices can rise in tandem.
“…While it’s true that most people haven’t been getting 4% raises, many have…”
I think the focus on the median income (locally, statewide, nationally) obscures the fact that households below the median have had a rough 20+ years while households above, and especially in the top 10%, have done very well. This could help explain how so many million dollar homes sell in Irvine. Of course, everyone here understands that the high-end market needs the low-end market to do well for move-ups to occur at a healthy rate…
Yes! We are now Japanese! In a globally tech connected economy Americans will see thier incomes drop for a long time. With no move up market from the millenials or peak buyers stuck in homes forget housing. This is stagflation at its finest!
The good news: everything will be cheaper.
The bad news: everything will be cheaper.
The rich are the only thing keeping the economy going now.
Mortgage Applications Plummet 13%
Mortgage application volume declined once again for the week ending November 15, the Mortgage Bankers Association (MBA) reported in its Weekly Mortgage Applications Survey.
The survey’s Market Composite Index declined 2.3 percent on a seasonally adjusted basis; unadjusted, the index fell 13 percent week-over-week. The week’s results include an adjustment to account for the Veteran’s Day holiday.
Refinance volume decreased 7 percent compared to the previous week. The refinance share of total mortgage activity dropped to 64 percent from 66 percent.
Adjusted, the Purchase Index climbed 6 percent from the week prior. On an unadjusted basis, purchase volume was down 8 percent week-over-week and ended up 3 percent lower than the same week last year.
MBA’s measure of interest rate averages was mixed. The average contract interest rate for a 30-year fixed-rate mortgage increased slightly to 4.46 percent following the release of October’s strong jobs report; however, points fell to 0.38 from 0.44 (including the origination fee), bringing the effective rate down from the previous week.
Hmmm….
The week’s results include an adjustment to account for the Veteran’s Day holiday.
Which number do you believe?
“Adjusted, the Purchase Index climbed 6 percent from the week prior. On an unadjusted basis, purchase volume was down 8 percent week-over-week“
I don’t pay much attention to any of the weekly noise, but I enjoy the banter about it.
Many of the developers selling in Pavilion Park believe the build-out will be complete within a year. Is this possible? I know it’s what they hope, and many of the sales people add the caveat “if all goes well.” There has been so much high-end development in that area of Irvine. Haven’t all of the households that want (and can afford) a new $900k+ house bought in Woodbury, Portola, Stonegate, Laguna Altura, etc.?
The first phases in Pavilion Park appear to have sold well, but now there are many homes available in Phase 2 in the $900k+ developments. Does that answer the question? How long before they start offering sub-3% 30-year fixed rates to entice buyers?
The S&P 500 is 75% Overvalued: GMO
U.S. stocks are grossly overpriced, according to asset management firm Grantham Mayo Van Otterloo (GMO) & Company, which estimates fair value for the S&P 500 Index at 1,100 – or almost 40 percent below current levels.
In a quarterly letter published on Monday, Ben Inker, co-head of global asset allocation at GMO said the expected rate of return on the stock market index is minus 1.3 percent per year, adjusted for inflation, for the next seven years.
“[The] U.S. stock market is trading at levels that do not seem capable of supporting the type of returns that investors have gotten used to receiving from equities,” Inker wrote in a report titled “Breaking News! U.S. Equity Market Overvalued!”
“Combining the current P/E [price-to-earnings ratio] of over 19 for the S&P 500 and a return on sales about 42 percent over the historical average, we would get an estimate that the S&P 500 is approximately 75 percent overvalued,” he said.
The letter came as the S&P 500 – which has risen 26 percent year-to-date – cleared 1,800 for the first time ever on Monday. However, the index failed to close above the key psychological level after comments by activist investor Carl Icahn sparked caution among investors.
Speaking at the Reuters Global Investment Outlook Summit, Icahn said he could see a ‘big drop” in stocks because earnings at many companies are driving more by low borrowing costs rather than strong management.
In the same letter, Jeremy Grantham, co-founder and chief investment strategist of the firm, who is well-known for his prediction of asset bubbles, said prudent investors should already be reducing their equity bets and their risk level in general.
“One of the more painful lessons in investing is that the prudent investor or ‘value investor’ if you prefer almost invariably must forego plenty of fun at the top end of markets,” he said.
I was forwarded this entire report. The second half of the report was an in-depth discussion of QE and housing. It was very will written.
The first part of the report where they go into their methodology for valuation of the equities markets made my eyes roll back in my head.
Underwater insurance, as millions of homeowners emerge for air
Fast-rising home prices brought more borrowers up from underwater in the third quarter of this year than at any time since the housing recovery began. In the quarter, 1.4 million borrowers came into a positive equity position, and nearly 5 million have recovered since the crash.
“We should feel good that we’re moving in the right direction, and at a fast clip,” said Zillow Chief Economist Stan Humphries.
We are not, however, out of the woods. Twenty-one percent of all homeowners with a mortgage, or nearly 11 million borrowers, still owe more on their loans than their homes are worth, though that is down from a peak of 31 percent early last year, according to Zillow.
And at 39 percent, the “effective” negative equity rate—borrowers who have less than 20 percent equity in their homes—is still staggering. To buy a new house, most homeowners need at least 20 percent equity to pay all the needed expenses, including today’s high down payments.
“Negative equity will remain a factor for years to come and must be considered part of the new normal in the housing market,” Humphries said. “Short sales will remain a persistent feature of the market as many homeowners remain too far underwater for reasonable price appreciation alone to help.”
Negative equity has been one of the greatest barriers to a full and robust housing recovery. Sale inventories are painfully low nationwide because so many homeowners don’t have the equity to move up (or even down). That lack of listings has depressed sales and pushed prices higher—good for the equity dilemma but bad for potential buyers.
As with all real estate, some markets are suffering more than others. Las Vegas, Atlanta and Orlando, Fla., have the highest negative equity rates, while San Jose, Calif., Denver and San Francisco have seen the biggest drops in negative equity.
The recovery, along with the realization that home prices can in fact fall nationally, has given rise to a new insurance to protect homeowners against negative equity. Underwater Mortgage Protection (UMP), from Kansas-based AmTrust Financial Services, will launch in three states in December and should be available nationwide within a year.
“Our product fills a significant gap that was needed in the marketplace,” said Matthew Kayton, vice president of the real estate insurance group at AmTrust. “We will be there to help consumers if they end up in a situation where life happens to them and they need to sell, and they might be in a down market.”
http://wallstreetonparade.com/2013/11/fed-minutes-reveal-a-dangerous-power-grab-by-new-york-fed/
I’ve heard it said that you don’t seize power but that you accumulate it quietly in the background.
They use every “crisis” and fear to gain more power.
The False Housing Recovery of 2013 and How it Unraveled
Housing Recovery? It never existed. Since the start of the publication of the Smaulgld blog back in April this year we questioned whether there was a housing recovery. Yesterday we learned from the National Association of Realtors that pending home sales in the month of September were down 5.6%. Pending home sales in September 2013 were lower than September 2012.
September’s pending home sales were the lowest in 29 months. It was the fourth straight month of lower pending home sales.
Those addicted to claiming there is a housing recovery would like believe that the plunge in pending home sales is a temporary blip on the recovery road and blamed the government shut down in October for September’s poor results.
Blaming September’s lower pending home sales on the government shutdown in September is like blaming poor December Christmas holiday sales on inclement weather in January. The real estate recovery fantasy narrative goes like this- “Back in September while people were gainfully employed and flush with cash, they became petrified that the government might shut down the Lincoln Memorial, so they immediately curtailed their home buying plans. Now that that the monuments have reopened, we expect home buyers to return in full force in October.”
The reality is, as we have said all along, there never was a housing recovery. There was only a real estate market with higher prices for a while driven, not by an increase in first time home buyers, but rather from institutional investors taking advantage of historically low interest rates engendered by the Federal Reserve’s quantitative easing (QE) multi trillion dollar money printing scheme.
Once the Fed started talking about “tapering” QE earlier this year, interest rates rose causing an exodus of many institutional investors from the housing market. These investors are now focused on renting the homes they bought recently, a large portion of which are vacant. This highlighted that the housing recovery was not an organic event, driven by an improving economy but rather a housing price bubblet driven solely by the Fed’s artificially low interest rates that the average person was not in a position to take advantage.
While Trulia was predicting a multi year housing recovery, we were saying there was only an illusion of a housing recovery propped up by artificially low interest rates and that illusion would soon be shattered.
I want to believe!
Potential Impacts of Lower Conforming Loan Limits
In the November edition of CoreLogic’s e-magazine MarketPulse, Kathryn Dobbyn looks at the potential impact of lower conforming loan limits on the mortgage market. These limits, which set maximum amounts for conforming loans purchased or guaranteed by Freddie Mac and Fannie Mae (the GSEs) and are generally followed for loans guaranteed by FHA and the VA, were raised temporarily to a maximum of $729,000 in certain “high cost” areas by the American Recovery and Reinvestment Act (ARRA) in 2009. When that act expired in late 2011 and after much debate the limits rolled back to a maximum of $626,500 in high cost areas and $417,000 in the rest of the country, limits established by the Housing and Economic Recovery Act of 2008 (HERA). The limits are updated annually based on median home prices at the county level.
The updates to loan limits are usually published in November and this year the debate has heightened as the Edward J. DeMarco, acting director of the Federal Housing Finance Agency, regulator and conservator of the GSEs, has announced he intends to lower the limits and had met considerable blowback from housing industry groups. Dobbyn looks at the prevalence of the jumbo conforming mortgages – those falling between $417,000 and $625,500 – to see what might be the impact of eliminating this category in areas of the country where it currently exists.
First, she found that only 110,000 of these mortgages have been originated nationwide this year – 1.72 percent of all mortgage originations. Loans used for home purchases totaled 47,000 and there were 63,000 refinances. Looking only at the 15 states where 50 or more such originations occurred she found only a few where they were widely used. By percent of originations the District of Columbia had the highest incidence at 18 percent although that translates to just over 2,000 loans. Sixty percent of all jumbo conforming mortgages in the U.S., 68,000 loans, were originated in California but they constituted less than 10 percent of California’s total mortgage lending.
The current left wing administration has a dream to cap home prices … they think this is just social justice. After all, they think anyone with any income level should be able to live in any zip code they want. So, they think they can manipulate home prices down by cutting back on loan limits.
Wrong. All that will happen is these loan limit cuts will reduce new home supply, and that will eventually cause home prices rocket higher. So, I am all for it. Go ahead. Cut back the loan limits. Watch the new housing supply slow to a trickle. Then, watch the bidding wars break out for my properties. Make my day.
how will lowering loan limits cause prices to skyrocket?
Not sure how you are looking at it, but the way i see it, the amount of buyers will be reduced, thus creating less demand for houses with prices above the limits.
If we look back at history and facts (who wants to do that, though) I would think we would all agree housing was actually more affordable when loan limits and credit lending were tighter…fewer qualified buyers meant less competition which in turn kept prices reasonable for those with the discipline to save the down payment and also made the monthly payments quite manageable. Prices did not begin to get crazy until the idea that everyone should be able to buy a home, then as credit was extended to people who in all reality should have needed to save more and make more money prior to buying they created competition, thus raising prices.
I feel as though you are right in that not everyone should be guaranteed the right to buy a home just because they live in the USA, however, I belive tighter lending is a step in the right direction toward reigning in housing porices to affordable levels again and not somethign that you have to time correctly, otherwise are committing financial suicide.
Thank you for your thoughtful comment. I also hope we get back to a housing market where prices are affordable and people don’t have to obsess about timing the market. Tightening loan standards and reduced government subsidies are the right moves to achieve that end.
Lending standards are far tighter now than they were in 2007, But, many beach cities are hitting new highs, and other beach cities are just below all time highs. How did this happen? The tighter lending standards resulted in less new homes being built. Add some population growth. Less supply + more demand equals higher prices. Econ 101.
Bottom line is attempted price controls usually backfire.
They’re baaaaaack…
Quant Giant RenTec Has Best Month Ever In October Thanks To… SHORTS
For all purists still stuck in a world in which humans are the most efficient allocators of capital, and where, under Ben Bernanke’s centrally-planned New Normal, shorting stocks has become blasphemy, the following table showing the monthly return of quant giant RenTec’s chief equity fund open to the outside world, the Renaissance Institutional Equities Fund (RIEF B), whose AUM has ballooned to $8.7 billion in the past few years, will come as a shock. Because the quant strategy-driven fund, which does not look at fundamentals but purely at technical relationships and quant arbs, just posted its best month in history in October returning 8.65% nearly doubling the 4.60% return of the broader market.
But the truly stunning aspect of RenTec’s October performance is that it was not driven by a highly levered beta position (2x leverage on the S&P would do it easily) which is how virtually everyone else does it (a strategy that works great as long as the market is going higher), but instead thanks to that nearly forgotten aspect of a “hedge” fund’s exposure – shorts.
http://www.zerohedge.com/news/2013-11-21/quant-giant-rentec-has-best-month-ever-october-thanks-shorts
You could have invested in SPY since this funds inception and done just as well. Looking on the bright side, that does make them better than most hedge funds.
Trulia: The parents are moving in…
Thanksgiving is quickly approaching, ushering in a season filled with friends, family and food. But this year, in many households, extended family has to go no farther than the dining room table to meet up with their loved ones.
There has been an increase in multi-generational living over the last few years, which affects the need for multi-generational households, a recent Trulia blog explained:
The last few years have seen an increase in multigenerational living. Young adults became far more likely to live with their parents during the recession than before and haven’t really started to move out. On the other side of the life cycle, seniors – specifically adults 65 and older – are also more likely to live with relatives than in the recent past. That means fewer Americans today need to go “over the river and through the woods” to see Grandma and Grandpa for Thanksgiving than they did 20 years ago.
However, the pending future of your in-laws living with you depends heavily on whether your elders were born in the U.S. or abroad.
According to Trulia, 25% of foreign-born seniors live their parents, compared to only 6% of native-born seniors.
But just because your parents were born out of the country does not mean they are about to move in. Taking it a step further, the likelihood of them living with you also greatly varies by the country of birth.
India, Vietnam and Haiti rank as the top three countries for the share of seniors living with relatives at 47%, 44% and 41%, respectively.
Your rental parity graph above is just not correct. Anyone following that graph would have not porchased a home before 2005 … If I followed the relationship, I would have missed the investment opportunity of a lifetime.
The problem is your graph does not consider expected rent increases in calculating the parity. In the late 80s, you could rent a home in Newport Heights for less than $1000 per month. Now, you are looking at $3500 per month … rapidly approaching $4000. Your graph failed to consider rental inflation, and that is where it went way wrong. If you adjusted the calculation to include expected inflation on the rent, as well as expected inflation on the home prices, homes were a screaming buy. I think they still are.
The rental parity graph is calculated correctly. People who purchased homes when prices were higher than rents paid far more to own than they would have paid to rent.
Considering the potential for increase is exactly the kind of thinking that caused the housing bubble, which is the main reason I don’t do it. People were convinced that 2006 was a great time to buy because 5 to 10 years of rising rents and continued double-digit home price appreciation justified the huge ownership premium. It was the kind of foolish thinking that caused people to put themselves into a negative cashflow situation just prior to house prices dropping 40%. Most of those people ended up as foreclosures.
You were fortunate that your tiny bastion was spared the worst of the housing bubble. I can’t see how buying properties with a huge negative cashflow can work long term, but you seem to think it’s a good idea. I think the unsustainable trends toward every higher rents and every higher coastal prices will end. When it does, we will see if you are still excited about those investments.
I only know that me and the others like me who bought properties in beaten down markets with great cashflow have much better than you have over the last few years. I’ve made money while holding properties whereas you lost money. Further, my properties are up 40% or more whereas yours are up about 20%. Yes, it takes 10 of mine to equal 1 of yours, but percentage increase is scalable, and my family owns a lot of properties.
On wall street, every financial model always included a reasonable amount of inflation. If you put inflation into your model, it would give very different answers. It would show large time frames when buying makes sense.