Jan272016
House prices could fall and the cost of home ownership could still go up
Lower house prices due to higher mortgage rates still result in a higher cost of home ownership.
Everyone shopping for a home wants to see lower prices. For most products, paying less for it means the buyer has more money available to purchase other goods and services, but with houses this isn’t necessarily the case. Most people borrow money to buy a house — a great deal of money, often 80% to 96.5% of the purchase price. In fact, the cost of borrowing money is largely what determines how much someone can borrow and thereby bid to buy a house. (See: Your neighbor’s debt creates your home equity)
When mortgage rates go up, the cost of borrowing will increase, and unless wages rise considerably, the cost of borrowing will increase faster than wages go up. (See: Will rising wages offset the impact of rising mortgage rates?) If the cost of borrowing rises faster than wages, then future buyers will not be able to borrow the large sums today’s buyers can borrow; thus home price appreciation will slow (or perhaps even reverse). It’s entirely possible that buyers to wait to buy later may pay less money, but will that provide them any real benefit?
Some potential homebuyers remain on the sidelines hoping today’s reflated housing bubble prices will come down. The people sitting on the sidelines believe lower prices will bring with it a lower cost of ownership, but it won’t work out that way. Even if prices fall due to rising mortgage rates, the cost of ownership will continue to rise.
In the real world, particularly in Coastal California where supply is tight, people borrow to the maximum limit allowable to obtain the highest quality of housing they can. There is no excess affordability to provide any buffer to the shock of rising mortgage rates.
When mortgage rates finally start to rise, people will still continue to borrow to the limit of their income, so the cost of ownership will not fall. In fact, the cost of ownership will continue rising with wages, so the housing market will continue to endure high inflation.
Perhaps all-cash buyers will reap the benefits of lower house prices, but not necessarily. If house prices fall due to higher interest rates, all-cash buyers will pursue other investment opportunities providing higher risk-adjusted returns than residential real estate. So while all-cash buyers may get a better deal, they may not want to buy houses because they can find superior returns elsewhere.
What we may see over the course of several years is weak or falling home prices and a rising cost of ownership, the worst of both worlds in residential real estate. In the meantime, mortgage interest rates are still below 4%, and housing is starting 2016 strong.
Home Prices Rise, Aided by Strong Hiring Growth
By THE ASSOCIATED PRESS, JAN. 26, 2016
WASHINGTON — Home prices in the United States increased at a faster clip in November, propelled by solid hiring growth, low mortgage rates and a shortage of houses on the market.
The Standard & Poor’s/Case-Shiller 20-city home price index rose 5.8 percent from a year ago, after a 5.5 percent pace in October, according to a report on Tuesday. …
Home values nationwide have nearly
recoveredreflated from their July 2006 peak, as the real estate market has slowly recovered from the housing crash that set off the recession. But several metro areas have fullyreboundedreflated from the downturn. Four of them — Dallas, Denver, San Francisco and Portland, Ore. — have either matched or eclipsed their highs. And Charlotte, N.C., is less than 1 percent below its previous high. …
(See: Irvine home prices surpass housing bubble peak)
More Americans have been able to buy homes as employers have added 2.7 million jobs and borrowing costs remain low. But the number of available listings has fallen 3.8 percent from a year ago, causing tight inventories that have sent prices up.
The rising home values and limited selection could ultimately deter sales growth in 2016. …
The challenges caused by rising home values have been offset by falling mortgage rates in recent weeks.
How long can that continue? Will mortgage rates keep falling forever? (See: Mortgage interest rates may not go up, housing may prosper in 2016)
The mortgage buyer Freddie Mac said the average rate on a 30-year fixed-rate mortgage declined to 3.81 percent last week, from 3.92 percent a week earlier. Rates have historically averaged 6 percent, meaning that interest expenses are relatively low.
Will rates eventually revert to the mean? Probably, but it may take a very long time.
If the housing bubble burst is caused by rising mortgage rates, future homebuyers may pay a lower price, but they won’t enjoy a commensurate lower cost of ownership due to rising mortgage rates.
I became well-known for advising people to wait out the deflation of the housing bubble of the 00s, so if I believed lower prices would benefit anyone, I would advise waiting, but that’s not the case today. The conditions during the last bubble were different in a good way for buyers. That housing bubble was going to deflate because millions of foreclosures flooded the market with supply and lowered both the price and the cost of ownership. That won’t happen during the deflation of the reflation recovery (aka housing stagflation) because lenders won’t flood the market with supply, and mortgage rates will go up, not down.
If buyers have no reason to expect a lower cost of ownership, they gain no real benefit from waiting. Perhaps waiting reduces their risk of taking a loss at resale, but it does nothing to make owning any cheaper.
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“…lower prices will bring with it a lower cost of ownership, but it won’t work out that way…”
Another factor almost never discussed is are holding costs, i.e. the costs of property taxes, insurance, HOA dues, maintenance and the like.
Its just stunning sometimes to hear others excitedly talk amount leveraging themselves up with a $2mm loan, but totally forgetting that they are facing a $20K+ annual bill for property taxes alone. Almost no one I know properly budgets a cash reserve for big-ticket maintenance items such as roof replacement or outside paint.
Additionally, I have heard many stories from homeowners who live in ‘nicer’ neighborhoods such as Turtle Rock or Balboa Island who do none of their own maintenance, but instead always call an outside plumber or electrician. While some plumbers, electricians, etc. are honest and ethical, others will jack up their service charges simply because it is assumed those who live in the ‘nicer’ areas are automatically assumed to be very wealthy.
Overall, I believe that the true cost of home ownership is close to 3-5% of the purchase price/year.
No wonder then, why many who are automatically assumed to be really rich are in reality up to their eyeballs in debt.
People take on $2M loans and don’t budget for property taxes….
….. come on man, get real
Why are surprised at the level of stupidity of some people? Have you not seen many people do really stupid things???
I think most people don’t budget for the true cost of housing, which is why I went through so much effort to show it on the properties here.
IMO, the worst part is the mentality that when the time comes, the owner will just borrow the money to perform any necessary repairs. Rather than budget and save for an expense they know is coming, the chose to wait and borrow money when the time comes. Rather than earning interest and paying cash, they borrow money and pay interest.
Further, most people completely ignore all costs of ownership and sales when they try to figure out how much the “made” owning a property. If they buy a property for $500,000 and sell it for $600,000, they believe they “made” $100,000. However, they forget about the years of taxes, insurance, and maintenance, and the ignore the sales and closing costs.
“…I think most people don’t budget for the true cost of housing…”
Exactly my point in examples cited above.
I think the basic issue is that we all live in a instant gratification society.
Its all about the now. Gimme, Gimme, Gimme.
Most especially true in this area. Orange County is incredibly wealthy by anybody’s standards. We are all lucky to be able to live here, but its really easy to lose sight of that fact.
Peer pressure to ‘keep up’ can be intense to say the least.
Another classic example of inadequate budgeting by individuals is getting caught up in the emotion of buying a new high end vehicle and the “how much a month” mentality, without thinking about the gigantic leap in insurance and often fuel /maintenace costs lurking around the corner.
I am sure many fellow readers know of folks who have made that mistake. In other words, buying that ‘Vet because the car salesmen told me “I deserve it”, wasn’t such a great idea after all.
Not that some real estate agents would use the same tactics! <:{
“However, they forget about the years of taxes, insurance, and maintenance, and the ignore the sales and closing costs.”
Don’t forget upgrades! Even in a new house with a two-year warranty on everything, you’re spending tens of thousands to finish the house. I’m maintaining records of every dollar spent here. You could spend $20K-$100K on landscaping alone in the first year. Have a few closets re-worked, that’s another $10K-$35K. Have storage racks installed in the garage, along with cabinets, that’s another $5K-20K. Add built-ins (desks, bookshelves, media center), and you’re spending thousands more.
You’ll also spend money on new furniture and decor, but presumably you can take this with you to the next house (not fixtures). So I won’t tack that on to the cost of the house.
The landscaping is the big number almost nobody who buys a new house budgets for properly. They might think they are paying a certain amount, but when you consider the house is not complete until it’s landscaped, the true acquisition cost is higher than what’s recorded in the public record.
Your numbers are certainly plausible, depending on the level of upgrades. At the high end of the range, this is more of a luxury item. Spending that amount isn’t really necessary.
Minimal landscaping can be done initially followed by adding a few plants each year. I don’t know if builders still throw in the front yards and sprinkler systems. If you are willing to wait a few years for plants to grow in, then costs can be minimized.
5K for storage racks and cabinets in the garage is a LITTLE HIGH, and 20k better include a hydraulic lift system, or two. The ceiling racks are $150-300 each, and shelves and brackets will run about $40/8ft.
Here are my costs for the first two years:
sprinkler parts: $50
carpet cleaning: $300
insulation: $200
interior painting: $4700
alarm system: $450
upgrade door locks: $650
renovate guest bath: $2000
mulch: $400
3 ceiling fans: $750
water softener: $800
plumbing: $500
1 curtain/rod and 1 blind: $600
garage organization: $250
LED lights: $300
mower: $250
edger: $100
other landscape tools: $300
total: $12,600
Spread over 2 years, it isn’t that bad, but it is an additional cost that has to be accounted for. I figure that I’ll keep spending this amount as long as I own the home.
If the upgrades are done right, they add value to the house and make it easier to sell if you need to. So, yes they are an expense, but they are also an investment. Plus the upgrades, particularly the organizational ones, allow you to keep your sanity as the kid’s stuff takes over.
If you buy a new house, you are going to spend a lot more, since they basically deliver an empty house. We also minimized our spending on furnishings. It’s nice to have the open space with young kids. And spending 10’s of thousands on dining and living room sets that are going to be Crayola canvas can be delayed.
Sympathize on the kids stuff taking over. Watch it because it happens real fast. It took over in our rental and we scaled it back majorly moving into our bigger house last year. So much so that most of the toys are in the garage, gone or on their way out.
On the topic of move in costs after we moved in last May. We probably spent a good 8K last year on interior paint, shutters, new sofa, whole house fan. Truthfully though, alot of that we did spend because I got a nice side job with extra income. Probably would have spent half under normal circumstances.
Still agree on the fact that keeping the house nice and making little additions is hugely beneficial over the long run.
And there are hidden costs on the move in people don’t account for.
The only way to know how rich/poor someone is, is to see their financials (cashflow statement and balance sheet). You can see who’s living richly easily.
“…The only way to know how rich/poor someone is, is to see their financials (cash flow statement and balance sheet)…”
Absolutely correct.
It’s a real dilemma, as so much data published is actually one or two levels of indirection removed from actual individuals. (ie census data averages, 3rd party aggregators, NAr reports, etc).
A personal pie-in-the-sky wish: It would be really revealing to have a team of forensic accountants collect data from a statistically significant number of households in the O.C. area.
My *hunch* (based only on observation) is that a large fraction of all households are in reality living beyond their means.
In fact, I believe that a large fraction of all households don’t even know the true state of their *own* finances, either through lack of interest, or by deliberate head-in-the-sand choice.
We see stories in the MSM media all the time about households who can’t understand why they have $50K in credit card debt or are suddenly facing foreclosure. Witness the number of payday loan companies in business or radio ads offering to lend money to pay off existing debt with another pile of debt.
“My *hunch* (based only on observation) is that a large fraction of all households are in reality living beyond their means.”
I think that’s fair, nationally and locally. The average home-buyer/refinancer is at a 25% front-end DTI and a 39% back-end DTI. That front-end isn’t bad. The question is, will that back-end ever decrease? Will you always have car payments that push your back-end to the high 30s? If your back-end DTI is pushing 40% for the foreseeable future, you’re living beyond your means.
I think it may be even more prevalent in Southern California because there is so much pressure to keep up with the Joneses.
A bankruptcy attorney who reads the blog frequently told me the problem with excessive debt is far worse in OC than anyone suspects, but then again, he does see the worst of the worst as they implode.
Based on the thousands of HELOC abuse stories I ran back in the day, it’s fair to say living beyond one’s means is pretty common, even in Irvine.
Especially in Irvine.
I don’t have data to prove it, but I bet Newport Beach is even worse. Intermingled with all the real wealth is a great many pretenders.
There are definitely a lot of posers that hang out in Newport Beach, although I don’t know what percentage of them actually live there. I spent my college years working as a valet parking attendant in NB and dealt with these individuals on a daily basis. Some of them were genuinely fun people to be around despite being posers, but others were just straight douchebags. After four years of dealing with drunken a-holes with major attitudes, I had my fill and moved on to better things.
The difference between Newport Beach and Irvine is that Newport has a good number of truly wealthy individuals that live there, some for many decades, and I think the proportion is much smaller in Irvine. Almost nobody lived in Irvine prior to 1980. Irvine is what upper middle class workers aspire to, and I think Newport Beach is what the truly wealthy aspire to. Hence, I think there are more overstretched people in Irvine with larger salaries to support their debt service, but minimal assets.
Hmm, anecdotal, but, there are a dozen homes on my street and there might be one house with a car that’s $50K+ new. There are a lot of older mini-vans and cars whose current value would be sub-$15K.
I wonder what people in Irvine put away in retirement savings. I posed this question in talkirvine. I think if you look at how much a person puts into their retirement accounts, it will give you the best idea of how they do with their finances…
Running several companies I saw the data, once you get above $100K in income most people are maxing out the 401K in the OC.
Even at $80K you start to see at least 10% going in
I’ll add that this was for engineering / tech companies
There are plenty of old mini vans and old hondas and toyotas driving around million dollar neighborhoods in Irvine
Irvine homeowners generally seem to consider their home an investment that will out-perform other options. Maybe they’re generally wiser than most people, and understand how cars burn income/wealth?
Totally agree…it’s also a cultural thing.
They have seen in action how even a 3% yoy increase over time on real estate (something they need anyway) yields wealth in California.
I know several wealthy asian business owners who won’t put a dime in the stock market and view real estate as the more stable asset class.
To your point… maybe they are wiser… it seems to work
I often wonder how some people purchase big ticket items like expensive homes, vacations and cars with modest salaries. Even though they may look wealthy, I suspect when you look into their financials, the numbers will show they have little net worth.
They use debt to purchase those items. Many luxury cars are leased which makes payments much lower. They also put the minimum down on their homes to qualify and use credit cards and helocs for vacations.
They also do not bother maxing out retirements accounts which gives them additional funds since social security and medicare will take care of them down the road right?
totally agree. I really think that people likely do not max out their retirement accounts.
Id love to see some data on this if it is available.
The next time prices will fall in prime areas of CA is during the next recession…. as per usual. That’s when prices decline in prime CA.
I would expect the cost of ownership would go down during that period.
The question is how much higher will prices go before the next recession.
If there are fewer competing buyers, and if those buyers are making less money, then house prices could drop. However, recessions are usually greeted with lower interest rates that tend to offset the diminished buying power of the depleted buyer pool.
In the past, prices dropped in recessions primarily due to foreclosures adding supply to a depressed market. In our era of endless can-kicking, that probably won’t happen again.
What happens if we go into a recession within the next year and are already at the bottom of interest rates?
Honestly home mortgage interest rates are only so low because of government subsidies supporting them. Nobody in their right mind would loan the public 30 year money at such low rates without government guarantees on the money. All the risk of mortgages is priced out by the government.
If the government were to remove its supporting guarantee from housing finance, the result would be higher borrowing costs and lower house prices as the market adjusted. Of course, they know that too, so I consider it unlikely this support will be removed any time soon. It’s been 8 years now, and we are no closer to reforming the GSEs and home finance than when the disaster started.
It’s because the incumbent home owners FAR outnumber the people actively looking to buy. This causes the problem where the politicians will seek to inflate housing as much as possible. It satisfies the largest portion of their voter base and increases revenues at the same time.
Long Tail of Distress Seen in REO Increase
IRVINE, CA—A recent increase in bank REOs shows that the US housing industry is still dealing with the distressed inventory from the last housing crisis, but the market is still on the path to health, RealtyTrac’s VP Daren Blomquist tells GlobeSt.com. As we recently reported, according to the firm’s most recent national foreclosure report, defaults, repossessions and auctions during 2015 were down 3% from 2014 and 62% from the peak in 2010, but bank repossessions increased in 2015 following four consecutive years of decreases. Some of the biggest increases in REOs were in New Jersey (up 226%), New York (up 194%), Texas (up 115%), North Carolina (up 108%), and Pennsylvania (up 61%). We spoke exclusively with Blomquist about this trend and what it means for the housing industry.
GlobeSt.com: What does the increase in bank REOs indicate about the housing industry today?
Blomquist: The increase in REOs indicates the US housing industry is still dealing with the long tail of distress from the last housing crisis. At the same time, given the relative strength of the housing market, we don’t believe this increase in REOs will push the market off the path to health.
GlobeSt.com: Which group of buyers ends up taking possession of these homes from banks the most?
Blomquist: In most markets, these REOs are highly distressed homes that have been neglected for some time. That means the most likely buyers are real estate investors willing to take on problem properties.
GlobeSt.com: How do you expect REO numbers to trend moving forward?
Blomquist: I would expect to see continued elevated levels of REOs for at least the first half of 2016 before those numbers finally turn a corner and head lower, assuming no other big shock to the economy or housing market that would trigger a new wave of foreclosures.
GlobeSt.com: What else should our readers know about REOs?
Blomquist: While the recent rise in REOs are a burr in the saddle of the lending industry and most definitely are impacting individual local markets negatively, at the high level these are a blip on the radar of the housing recovery compared to the tsunami of REOs we saw back in 2009 and 2010.
First-time buyers slowly returning to housing market, data show
realtor spin and wishful thinking on display
First-time home-buying levels, in the doldrums since the 1980s, are slowly starting to improve.
Sales of existing homes climbed 14.7% in December, the National Association of Realtors said Friday, and the share of first-time home buyers in the last month of 2015 topped 32%, up from 30% a month earlier and 29% in December of 2014. It was the highest share of first-time buyers since August of 2015.
“Much of this year’s growth has indeed been powered by first-time buyers and particularly Millennial first-time buyers,” said Realtor.com chief economist Jonathan Blowing Smoke, in an email to MarketWatch. Smoke said that about 35% of all mortgages purchased in 2015 were by 25 to 34 year olds, according to an analysis by Realtor.com and OptimalBlue.
First-time buyers , he said, were also helped in 2015 by federal government efforts to lower mortgage insurance premiums on FHA loans as well as allowing Fannie Mae and Freddie Mac, the biggest purchases of mortgage debt, to buy loans that have as little as a 3% down payment.
“Strong job growth in recent years and young renters’ overwhelming interest to own a home should lead to a modest uptick in first-time buyer activity in 2016,” said Lawrence Yun, the chief economist with the National Association of Realtors.
But even though first-time home buyers are beginning to creep back into the market, the numbers still have a 1980s feel to them. Overall in 2015, first-time buyers were just 30% of the market, only up slightly from 2014 and 2013, when the share was 29%. Historically, about 40% of overall home buyers are first timers, the NAR said.
To find a lower share of first-time home buyers than those in the past three years, the NAR said, you’d have to go back all the way to 1987.
“First-time buyers were for the most part held back once again in 2015 by rising rents and home prices, competition from vacation and investment buyers and supply shortages,” said Yun in Friday’s release.
Crushing student debt levels have also hurt the ability of younger buyers to save for a down payment .
“With a median amount of student loan debt for all buyers at $25,000, it’s likely some younger households with even higher levels of debt can’t save for an adequate down payment or have decided to delay buying until their debt is at more comfortable levels,” Yun said in November.
Only the wealthy are building homes — and they’re bigger than ever
And they aren’t first-time homebuyers
When it comes to a dream house, bigger is still better.
The average size of a house that started construction last year hit a record 2,721 square feet, according to the National Association of Home Builders, citing data from the U.S. Census Bureau.
Forty-nine percent of those homes have four or more bedrooms; 38% have at least three full bathrooms. And 24% have a garage that can fit at least three cars. The average sales price: $351,000.
It isn’t that all Americans, in general, are clamoring for huge homes. Rather, it’s mainly the wealthy that are building right now, and they’re building big—skewing the overall average.
Meanwhile, buyers between the ages of 25 and 34 are basically absent from the new-home market. Roughly 15% of Americans this age lived with their parents last year, pointed out Rose Quint, assistant vice president, survey research for economics and housing policy at the NAHB. In fact, for a full decade, homeownership has fallen among young Americans, those who are more likely to buy a smaller new home. (Or, more likely, purchase an existing home.)
“Their share has to come back [to new home buying] before they will impact those [home size] numbers,” Quint said. Despite measures intended to loosen mortgage credit for first-time buyers, including a 3% down payment program for conventional mortgages and lower mortgage insurance premiums for Federal Housing Administration-backed mortgages, these young buyers were still largely missing last year.
So, for now, there is a “disconnect between the home that would be built if everyone was in the market and the homes that are actually being built,” Quint said.
The rising income of first-time homebuyers
http://www.inman.com/2016/01/07/rising-income-first-time-homebuyers/
Lending practices during the housing boom opened a brief window of opportunity for people who couldn’t previously afford it to become homeowners. That window has closed, and the ability to transition into homeownership is gradually becoming the privilege of a narrower group of first-time buyers that is more financially select.
During the housing boom, mortgage lending was available to people with a broad range of incomes. Since the bust, first-time buyers have grown more financially select.
During the last decade’s housing boom, it became much easier to obtain a mortgage, and many people who previously couldn’t buy a home grasped the opportunity. In 2005 the annual number of first time home buyers in the U.S. hit an all time high of 3.2 million, but by 2008 it fell below 2 million and remains below that level to this day. The relative absence of first-time buyers from the current housing recovery should worry us because it can dampen the housing recovery, but also because of its social implications.
The important thing to understand is that fluctuations in the number of first-time buyers go hand-in-hand with changes in their nature: when buying a home gets more challenging it is the least financially able who drop out of the race first, and vice versa.
…
This is a situation in which the glass is half full and half empty. Given the role of irresponsible lending practices in bringing about the housing boom and bust, it is a good sign that the current cohort of first-time buyers is more financially robust. At the same time, the notion that homeownership is slipping out of reach for a growing share of the population is an uncomfortable one, especially if the trend continues. Do we really want homeownership to become a privilege rather than a choice?
I say “yes” ownership should be a privilege bestowed to those with the financial discipline to sustain it. The stricter lending standards that require fiscal prudence are a huge step forward.
What we need it more buyers who have the necessary discipline to sustain home ownership. Simply giving loans to unqualified borrowers doesn’t serve them or the broader market.
We also need to minimize other barriers to home ownership. I like that FHA requires a minimal down payment and has a relatively low loan limit. People must demonstrate enough fiscal discipline to save for a small down payment, but it doesn’t take 15 years like it would to buy with 20% down.
Rents rising, home prices up, yet Millennials continue to be priced out of the housing market: Homeownership rate not tracking gains in prices.
Millennials as a group defined by an age range, are one of the largest cohorts of people right alongside baby boomers. Millennials have already reached their prime house humping age range but somehow, the homeownership rate in this category is not moving. The thought was that Millennials would soak up all the excess demand and continue to push prices upwards. In reality, what has kept prices up is artificially low interest rates, investors buying, and a low supply of property out in the market. Many Millennials are forced to rent or to live at home with their parents well into adulthood. Controlling biology has worked out nicely that new households tend to be smaller so many adults can just move back into their childhood room and have tasty tacos with their parents. The end result is that the housing market is moving for many different reasons beyond household formation. In fact, major household formation has come in the form of rentals since the Great Recession ended.
Institutional buyers pulled out of the market dramatically in 2015. This is big money talking here. This isn’t some one-off example but real data. If real estate was such a sure bet don’t you think institutional real estate buying would continue to go on with all of their research? Certainly they have the money to buy additional properties if they like.
The stock market correction is also going to impact real estate especially in tech mania areas like San Francisco. You always get the “well prices continue to rise” but just look at the crap you can buy for inflated prices. Go for it and sink your money into these places to chase your dream of owning overpriced and poorly built properties.
Millennials continue to be priced out because their wages are simply not keeping up with changes in the overall market. This is the end outcome of having higher home prices courtesy of investors and low interest rates but slamming the door on the upcoming generation. So guess what? That generation will simply move back in with baby boomers. Typically the folks cheering for this are house humpers that live in inflated crap shacks thinking this is somehow good. It is interesting that some of these people also email me and rail against a market that is pricing out their kids. You can’t have it both ways. But markets reverse rather quickly as we have seen with stocks. Real estate can edge lower slowly but people forget historical events and of course, this time is different.
Once Millenials hit 40 they’ll either be hitched with kids looking for the american dream… or sent out to pasture.
When rent is only 25-35% of typical income, rents can go up faster than incomes. Landlords are great at stealing raises.
Today’s consumer price index change: tomorrow’s residential rents
The consumer price index (CPI) for Los Angeles rose 2.0% from December 2014 to December 2015. Slightly better than some parts of the state and slightly worse than others. The most recent CPI data shows San Diego’s CPI rose by 2.4% and San Francisco’s CPI rose by 3.2% over the previous year. 2% annual inflation is a rate sufficiently neutral to ward off deflation and induce consumer spending. In turn, spending keeps employment at optimum levels to support a constant housing demand.
Los Angeles’ low CPI growth exerts downward pressure on near-term rents and home prices in the region. However, this is complicated by high demand for rentals and overly restrictive zoning on new multi-family construction. Slow growth in both wages and new construction is why Los Angeles residents spend so much of their income on rent.
San Francisco’s higher 3.2% rise portends a parallel rise in rents over the next year or two. Further, if rental vacancies decrease then expect to see a greater rise in rents until multi-family construction rises to meet demand. Rents tend to hold tight in their increases to CPI movement and personal income levels, while asset prices (homes and securities) are driven by wealth levels of personal cash reserves and ability to borrow.
http://journal.firsttuesday.us/wp-content/uploads/CPI-LA5-e1453414356590.png
The effect CPI has on buyer purchasing power is the index’s most significant aspect for real estate professionals. Here, it is the inextricable link between personal income and CPI that influences home prices.
Buyer purchasing power is determined by changes in:
mortgage rates (which change erratically from day-to-day); and
average income (which changes gradually).
Personal income for homebuyers generally adjusts upward in response to rising costs of living — CPI. This is so an employee’s standard of living doesn’t slip from year to year as they spend to consume the same level of goods and services.
The recent exception was the combined 2008 recession and financial crisis, followed by the elongated bumpy plateau recovery. During the recovery, average income slipped (though the incomes of those that remained employed generally rose). Most areas of the state didn’t catch up to pre-recession average income levels until 2012. That’s not considering the 2% annual rate of inflation for the intervening six years.
With reduced incomes, homebuyers are unable to qualify for as much mortgage principal as in years past. Thus, they need lower mortgage rates if they wish to qualify for the same mortgage amount. Luckily for homebuyers after the 2008 recession (and by the Fed’s design), mortgage rates were at historical low nominal rates until mid-2013.
Going forward, as the era of rising interest rates takes hold, homebuyers are going to need higher incomes to keep up the current dollar level of individual borrowing. Otherwise, home prices are expected to trend downward.
However, today’s briefly low mortgage rates are sustaining buyer purchasing power. Thus, home prices are likely to remain high, even increasing through 2016 and not dropping again until mid- to late-2017.
Case-Shiller: Home prices can’t offset struggling economy
Although home prices continued to increase, boding well for the economy, it’s still not strong enough to offset some of the trouble spots.
Home prices recorded a 5.3% annual increase in November 2015 versus a 5.1% increase in October 2015, reported the latest S&P/Case-Shiller U.S. National Home Price Index, covering all nine U.S. census divisions.
The 10-City Composite escalated 5.3% in the year to November compared to 5.0% previously, while the 20-City Composite’s year-over-year growth hit 5.8% versus 5.5% reported in October.
On a monthly basis and after seasonal adjustment, the national Index, along with the 10-City and 20-City Composites, all increased 0.9% month-over-month in November.
http://www.housingwire.com/ext/resources/images/editorial/BS_ticker/PDF/May2015/Chart13.png
“Home prices extended their gains, supported by continued low mortgage rates, tight supplies and an improving labor market,” said David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices. “Sales of existing homes were up 6.5% in 2015 vs. 2014, and the number of homes on the market averaged about a 4.8 months’ supply during the year; both numbers suggest a seller’s market.”
Blitzer added that while a consumer portion of the economy is doing well, like housing and automobile sales, other parts of the economy are not faring as well. “Businesses in the oil and energy sectors are suffering from the 75% drop in oil prices in the last 18 months. Moreover, the strong U.S. dollar is slowing exports. Housing is not large enough to offset all of these weak spots,” he said.
Buyer Beware: 5 Things Sellers Try To Hide
You don’t need to be a private eye to uncover problems in your new home.
You’ve finally found a house that checks all the boxes, so now it’s time to make an offer, sign on the dotted line, and book the movers, right? Not so fast. That dream home for sale in San Francisco, CA, can turn out to be a real nightmare if the seller failed to disclose a cracked house foundation or pest infestation, and you fail to notice until after closing. Here are five things sellers commonly try to hide during the sales process, and the questions you can ask to suss out the truth.
1. Leaks
2. Pests
3. “Emotional defects”
4. Issues with the roof or foundation
5. Age of home systems
Get an inspection.
RBS hit by almost $3.6 billion in charges
These stories make me feel warm and fuzzy inside
Royal Bank of Scotland Group PLC on Wednesday warned it would slump to yet another full-year loss after it put aside GBP2.5 billion ($3.59 billion) to cover a slew of regulatory issues, including a looming settlement with U.S. authorities over the sale of mortgage-backed securities.
The 73% U.K. government-owned bank is continuing to trudge through a range of legal problems built up over the years. The provisions detailed Wednesday will show up in its full-year 2015 earnings expected late next month.
In an unscheduled update to investors, RBS said it would set aside an extra GBP1.5 billion to cover litigation surrounding the sale of toxic mortgage-backed securities in the U.S.
RBS said it would take a further GBP500 million provision to cover the wrongful sale of insurance product Payment Protection Insurance, which was widely sold to people who didn’t need it. U.K. authorities have set a proposed deadline in 2018 for compensation claims and RBS expects higher customer claims in the lead up to this.
The bank is also writing down the value of its private bank by GBP498 million over concerns about its future profitability because of low interest rates and higher tax rates.
“We’ve always been open about the scale of past issues facing RBS,” Chief Executive Ross McEwan said in a statement.
The U.K. government last year began to sell down its stake in RBS at a huge loss. Since then RBS’s share prices has fallen making future sales even more unpalatable, with uncertainty over the size of fines and restructuring continuing to irk investors.
The World’s Favorite New Tax Haven Is the United States
Last September, at a law firm overlooking San Francisco Bay, Andrew Penney, a managing director at Rothschild & Co., gave a talk on how the world’s wealthy elite can avoid paying taxes.
His message was clear: You can help your clients move their fortunes to the United States, free of taxes and hidden from their governments.
Some are calling it the new Switzerland.
After years of lambasting other countries for helping rich Americans hide their money offshore, the U.S. is emerging as a leading tax and secrecy haven for rich foreigners. By resisting new global disclosure standards, the U.S. is creating a hot new market, becoming the go-to place to stash foreign wealth. Everyone from London lawyers to Swiss trust companies is getting in on the act, helping the world’s rich move accounts from places like the Bahamas and the British Virgin Islands to Nevada, Wyoming, and South Dakota.
“How ironic—no, how perverse—that the USA, which has been so sanctimonious in its condemnation of Swiss banks, has become the banking secrecy jurisdiction du jour,” wrote Peter A. Cotorceanu, a lawyer at Anaford AG, a Zurich law firm, in a recent legal journal. “That ‘giant sucking sound’ you hear? It is the sound of money rushing to the USA.”
Rothschild, the centuries-old European financial institution, has opened a trust company in Reno, Nev., a few blocks from the Harrah’s and Eldorado casinos. It is now moving the fortunes of wealthy foreign clients out of offshore havens such as Bermuda, subject to the new international disclosure requirements, and into Rothschild-run trusts in Nevada, which are exempt.
The stampede to the ‘landlords’ exit door will NOT be an inflationary event.
http://ei.marketwatch.com//Multimedia/2016/01/27/Photos/NS/MW-EE058_robot__20160127095503_NS.jpg?uuid=f226ce16-c505-11e5-9ebf-0015c588e0f6
The history of automation has shown that as each job is replaced, it frees up a worker for another more complex and more productive job than the one lost.
That was true until ~March of 2000
https://research.stlouisfed.org/fred2/series/CIVPART
Much of that can also be explained by demographics. The baby boom generation that’s starting to retire is being replaced by the much smaller generation X. Stack a deep recession on top of that, and the labor participation rate was bound to drop. As Millennials enter the workforce, this rate should begin to climb — unless your thesis is correct and automation is truly to blame.
RAY DALIO: The 75-year debt supercycle is coming to an end
http://www.businessinsider.com/ray-dalio-ft-opinion-long-term-debt-2016-1
When Ray Dalio talks, people tend to listen.
Dalio is one of the most successful hedge fund managers of all time, founder of the $82 billion (£57.1 billion) Bridgewater Pure Alpha fund.
He’s worried that one of the fixed constants of economics — the ability of central banks to stimulate economic growth through lowering the cost of debt — is coming to an end.
In an op-ed article for the Financial Times published this week, Dalio said (emphasis ours):
We are seven years into the expansion phase of the business/short-term debt cycle — which typically lasts about eight to 10 years — and near the end of the expansion phase of a long-term debt cycle, which typically lasts about 50 to 75 years.
What I am contending is that there are limits to spending growth financed by a combination of debt and money. When these limits are reached, it marks the end of the upward phase of the long-term debt cycle. In 1935, this scenario was dubbed “pushing on a string.”
Dalio says risk premia — the return of risky assets such as bonds compared with cash — are at historically low levels.
This makes it harder for central banks to keep pushing up the prices of these assets with loose monetary policy, such as low interest rates and quantitative easing, because there is less incentive, or yield, to compensate investors for taking the risk on debt.
Here’s Dalio again:
As a result, it is difficult to push the prices of these assets up and it is easy to have them fall. And when they fall, there is a negative impact on economic growth.
When this configuration exists — and it is also the case that debt and debt service costs are high in relation to income, so that debt levels cannot be increased without reducing spending — stimulating demand is more difficult, and restraining demand is easier, than is normally the case.
This debt fatigue could go some way to explaining why central banks are still locked into near-zero interest rates, seven years after the financial crisis that prompted their fall. In this scenario too, central banks would be powerless to stop the next financial crisis or recession with inflationary tactics.
But, worryingly, central banks would be powerless to stop the next financial crisis or recession with inflationary tactics in Dalio’s scenario.
Dalio made the comments in the Financial Times in the week LCH Investments crowned him as the most successful hedge fund manager ever, dethroning George Soros.
Dalio’s $82 billion (£57.1 billion) Bridgewater Pure Alpha fund generated $3.3 billion (£2.3 billion) in net gains for investors in 2015, according to the report. The fund, founded in 1975, has made $45 billion (£31.3 billion) in profit over its lifetime. Soros’ Quantum Endowment Fund, which began in 1972, has made $42.8 billion (£29.8 billion).
This is where I believe he is wrong. There is no shortage of capacity in the economy holding back growth. Crashing asset prices may hinder capacity growth, but it has no direct impact on the underlying economy. If we were capacity constrained, he would be right, but that’s not where we are right now.
It’s all about demand though. The economies struggle due to a lack of demand.
If asset prices fall, reducing equities of individuals, and then cause them to spend less, that’s a problem. There’s no point in inflating asset prices though, because props create downside risks, and hold back equity spending.
People are worried about their economic futures, thus they save more and spend less.
Any step towards a safer or more certain future for individuals is a step in the right direction.
Bash Bernie all you want, but universal healthcare and free public university tuition would do wonders to stoke spending in this country.
Universal healthcare (Medicare available to all citizens) would probably be very good for the economy, just not for many medical professionals. Crazy conservative extremists like Dave Ramsey would rail against it, even though this would be THE BEST thing that could happen to potential entrepreneurs and small business folk, whom Ramsey lionizes on a daily basis (apparently us low-lifes working for larger corporations aren’t “who runs this country/economy”).
Taxpayer-provided public university tuition has a chicken-and-egg problem. If we eliminated tuition at all public universities beginning Fall semester 2016, that would be great for eighteen year olds just starting college; but what about everyone who finished at a public university before this? Is that fair?
It’s similar to dramatic changes in the tax code. These changes can deliver huge benefits to some lucky enough to have their timing match the benefit (0% estate tax one year, and 45% the next). We should try to make dramatic changes that treat everyone as fairly as possible.
The tuition reduction could be phased in over a number of years. But yes, it would still be unfair to those stuck with student loans.
And I know what you mean about dramatic changes. The foreign profit repatriation temporary exemptions for business are the worst.
A lot of very prominent economists are in agreement with this general theme.
Low interest rates and low returns on investments are here to stay.
Demand cannot rise until the savings glut ends. Lack of returns on investments forces people to save more for retirement, exacerbating the savings glut.
Every way out is painful. Expect sluggish economies to be the norm for a long time.
I’ve never bought into the savings glut idea. We don’t have an excess of saving, we have an excess of capital due to all the money created by our financial system. The more debt we create but both the banking system and the shadow banking system frees up capital for other uses, but when you run out of other uses, returns necessarily fall. We need to remove some of the debt and liquidity from the system for capital to have any real value. The federal reserve is designed to ensure we never run out of capital, so returns just keep getting lower and lower, until we hit the zero bound.
Excess capital is only excess because supply exceeds demand.
When times are good businesses make capital investments to meet the expected demand. When the demand doesn’t come (or falls off a cliff), the companies are left with excess supply, and have no need for more capital investment.
The federal reserve exists to flood the market with supply and make sure there is never a shortage. Only if inflation gets out of control does the federal reserve do anything to curb the supply of money.
Flooding the market with a supply of money would send inflation spiraling out of control under normal circumstances.
Has the US ever been in a liquidity trap before?
I wonder if Perspective picked up on this tacit endorsement of cash as an investment:
Dalio says risk premia — the return of risky assets such as bonds compared with cash — are at historically low levels.
Cash deserves a place in your portfolio, but when someone glibly says “cash is king,” it suggests “liquidate every investment and hold it in cash until further notice.” This is silly.