Nov202015
What’s different about the latest housing bubble?
Housing bubble 2.0 is built on stable, fixed-rate mortgages applied to verified wages rather than unstable affordability products applied to borrower lies.
The Great Housing Bubble of the 00s was inflated by mortgage affordability products such as option ARMs that allowed borrowers to obtain mortgages more than double the size they could afford using a 30-year conventionally-amortizing mortgage. These toxic mortgage products proved unstable, evidenced by millions of defaults.
Lenders followed their standard loss mitigation procedures and foreclosed on delinquent borrowers and resold the resulting real estate owned (REO). Since there were so many of these properties, the MLS supply swelled, and lenders liquidated their inventory at fire-sale prices. House prices were crushed.
In 2012 banks went “all in” betting on success of loan modifications. By changing from a policy of foreclosure to one of endless and repeated loan modifications, banks managed to dry up the MLS inventory and force the few active buyers to concentrate their bidding activity on a much smaller number of houses. This bidding pressure combined with low interest rates that allow buyers to increase their bids forced prices to go up sharply, which is exactly what the banks wanted.
From March 2012 to July 2013, prices rose steeply in most markets as lenders were successful in manipulating house prices. So successful that they recently began ramping up their foreclosure operations again to cash in on higher resale home prices.
So while incomes barely budged from 2006 to 2015, the house prices that were a sign of a massive bubble are now stable and supportable. So what is the difference?
Just like the Great Housing Bubble, the reflation rally of 2012-2013 was fueled by mortgage debt. Yes, cash borrowers were more prevalent, but cash buyers aren’t the majority of the market, and rarely do they set market prices. The financed buyer is still king, and mortgage debt still sets market pricing.
There is one and only one difference that separates the previous, unstable price bubble from the current, stable reflation rally. This time, the loan terms are stable.
What’s Different about the Latest Housing Boom?
Reuven Glick, Kevin J. Lansing, and Daniel Molitor, November 16, 2015
After peaking in 2006, the median U.S. house price fell about 30%, finally hitting bottom in late 2011. Since then, house prices have rebounded strongly and are nearly back to the pre-recession peak. However, conditions in the latest boom appear far less precarious than those in the previous episode. The current run-up exhibits a less-pronounced increase in the house price-to-rent ratio and an outright decline in the household mortgage debt-to-income ratio—a pattern that is not suggestive of a credit-fueled bubble.
They are right for the wrong reasons. Valuation alone isn’t the key to market stability. It’s the loan terms that really matter.
Starting in the early 2000s, … An accommodative interest rate environment combined with lax lending standards, ineffective mortgage regulation, and unchecked growth of loan securitization all helped fuel an overexpansion of consumer borrowing. An influx of new homebuyers with access to easy mortgage credit helped bid up house prices to unprecedented levels relative to rents or disposable income. The run-up, in turn, encouraged lenders to ease credit further on the assumption that house prices would continue to rise. …
(See: Housing bubble’s defining delusion: real estate only goes up)
But when the various rosy projections failed to materialize, the housing bubble burst, setting off a chain of defaults and financial institution failures that led to a full-blown economic crisis. The Great Recession, which started in December 2007 and ended in June 2009, was the most severe U.S. economic contraction since 1947 as measured by the peak-to-trough decline in real GDP.
After peaking in March 2006, the median U.S. house price fell about 30%, finally hitting bottom in November 2011. Since then, the median house price has rebounded strongly and is nearly back to its pre-recession peak. In some parts of the country, house prices have reached all-time highs. This Economic Letter assesses recent housing market indicators to gauge whether “this time is different.”
Alarm bells in your bullshit detector should be sounding.
We find that the increase in U.S. house prices since 2011 differs in significant ways from the mid-2000s housing boom. The prior episode can be described as a credit-fueled bubble in which housing valuation—as measured by the house price-to-rent ratio—and household leverage—as measured by the mortgage debt-to-income ratio—rose together in a self-reinforcing feedback loop. In contrast, the more recent episode exhibits a less-pronounced increase in housing valuation together with an outright decline in household leverage—a pattern that is not suggestive of a credit-fueled bubble.
They use two partial indicators to express the same idea I distill into one indicator. When I compute the cost of ownership for a house or for an entire market, I use both rent and the cost of borrowing money to calculate the ratio of the cost of ownership to the cost of rent. It takes into account the impact of changing interest rates, making it a far more robust indicator of market health.
The latest boom is different
When viewing any substantial run-up in asset prices, history tells us that the phrase “this time is different” should be met with a healthy degree of skepticism. Still, the increase in the median house price since 2011 appears to differ in significant ways from the prior run-up. …
An important lesson from history is that bubbles can be extraordinarily costly when accompanied by significant increases in borrowing. On this point, Irving Fisher (1933, p. 341) famously remarked, “over-investment and over-speculation are often important; but they would have far less serious results were they not conducted with borrowed money.”
The purpose of Dodd-Frank was to ensure the stability of our financial system. The problem exposed by the housing bust was that speculation with borrowed money with little or no loss reserves can imperil the banking system. Without a robust banking system serving as a financial intermediary, the entire economy can grind to a halt.
While I still believe the bankster bailouts did NOT save us from the second Great Depression, we still need a viable banking sector for our economy to function. Nationalization and recapitalization was a better alternative, IMO, but that isn’t the road we traveled.
Advocates of leaning against bubbles point out that excessive run-ups in asset prices can distort economic decisions, including employee hiring, contributing to imbalances that may take years to unwind…. the housing bubble of the mid-2000s had a profound impact on employment. … given that housing booms and busts can have significant and long-lasting effects on employment and other parts of the economy, policymakers and regulators must remain vigilant to prevent a replay of the mid-2000s experience.
There is still instability in the housing market. While the loan terms are stable, the interest rates applied to these terms may not be. As interest rates rise, housing becomes less affordable, and with affordability products effectively banned, lenders don’t have the tools available to them to support inflated house prices.
As interest rates rise, house prices may fall because future buyers simply won’t be able to finance today’s high prices.
It’s highly unlikely we will see many defaults because conventionally amortizing fixed-rate mortgages make for stable mortgage payments. And even in the unlikely event we do see a large number of mortgage defaults, banks will merely kick the can again and ride out any recessionary weakness.
As I recently noted, Orange County housing will never be cheap again. Or as Irving Fisher once said, “We have reached a permanently high plateau.”
I trust I won’t be as wrong as he was….
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High house prices reducing cash sales
Cash sales accounted for 31.7 percent of total home sales in August 2015, down from 34.9 percent in August 2014. On a month-over-month basis, the cash sales share increased by 0.8 percentage points in August 2015 compared with July 2015. The cash sales share typically increases month over month in August, but due to seasonality in the housing market, cash sales share comparisons should be made primarily on a year-over-year basis.
The cash sales share peaked in January 2011 when cash transactions accounted for 46.5 percent of total home sales nationally. Prior to the housing crisis, the cash sales share of total home sales averaged approximately 25 percent. If the cash sales share continues to fall at the same rate it did in August 2015, the share should hit 25 percent by mid-2017.
Oh the irony…
What’s quite comical is the fact that many people are parking their value-losing, soon to be worthless cash in RRE while anticipating a point in time ahead where those same ‘holders’ can get their hands back on that worthless cash.
Good to see you again.
So the really bearish scenario is falling real estate and a falling dollar. That would make foreign holders of US real estate very unhappy.
Thx, good to be back. I think 😉
Yes, and the other bearish scenario for many foreign holders of US RE pertains to those ie., who sold Yuan at home to borrow USD and paid cash to buy in places like Irvine, but have to service said USD loan in Yuan. They’re being crushed right now.
IR was a little worried at your extended absence, but I knew you would be back in good time. Ol’ timers like us don’t just stop blogging overnight without so much as a ‘goodbye’. Let’s see I’ve been at this nine years now, and you a similar length of time. I started reading the Lansner blog in October 2006 after I noticed prices falling on my ill-advised condo purchase and trying to gain a better understanding of what was going on.
I trust you were just busy working on your plantain crop these past few weeks. 😉
Astute! Not only plantains, but existing mango, papaya, banana, avocado, lemon, lime, orange and maracuya trees scattered around the prop. And don’t forget the coconut palms.
Happy Thanksgiving to you and the family.
Rand Paul’s Call to Deny Housing Assistance to Syrian Refugees Violates the Fair Housing Act
Senator Rand Paul was doing so well. He’s been one of the few GOP members willing to talk sensibly about mass incarceration, and among even fewer Republicans able to speak about it in racial justice terms. The REDEEM Act that he’s currently co-sponsoring with Senator Cory Booker of New Jersey would allow people who’ve been convicted of low-level drug offenses to become eligible for certain federal welfare benefits.
But now, Paul seems to be moving in a different direction, coming out against offering public benefits to Syrian refugees coming to the U.S. He has proposed an amendment to spending bills for the U.S. Department of Transportation and the Department of Housing and Urban Development that would block Syrian refugees from receiving housing assistance when they arrive.
“Make no mistake, we have been attacked in the past by refugees or by people posing as refugees,” said Paul in introducing his bill Wednesday. “The two Boston bombers were here as refugees. They didn’t take very kindly to what we gave them—education, food, clothing, and they chose to attack our country.”
That is a mistake. The two brothers, Tamerlan Tsarnaev and Dzhokhar Tsarnaev, responsible for the bombing at the Boston marathon in 2013, were not refugees. They were the sons of an asylee, a much different designation that allows immigrants fleeing persecution to enter and settle in the United States, though under different terms than those used for refugees.
It’s not Paul’s only mistake in this call. Said the U.S. Senator from Kentucky, “My amendment says this that we’re not going to bring them here and put them on government assistance. … My amendment would end the housing assistance for refugees in order to send a message to the President the people have spoken, we are unhappy with your program.”
It would also send the message that the federal government is willing to violate the constitution to defy President Barack Obama’s orders to accomodate Syrian refugees.
“To make housing available to some people and not others based solely on their national origin not only flies in the face of fairness, it also is a clear violation of federal Fair Housing law,” said Cashauna Hill, executive director of the Greater New Orleans Fair Housing Action Center.
His presidential campaign is a little baffling. Presumably, you either run because you think you can win, or you run because you want to influence your party’s politics. For him, that would mean carrying the mantle of libertarian-ism that his father carried in previous elections.
If you watch him in the debates he does illustrate some libertarian principles, but he does it in such a half-hearted way that is completely lacking in passion, that I don’t know what he’s trying to accomplish. Maybe he feels that if he doesn’t overemphasize the libertarian ideology that it will make him more palatable to mainstream Republicans, but I don’t think that’s working at all.
Right now he feels like an enigma. Are you a libertarian? If not, what are you? Since I pretty much identify as a libertarian and can’t figure him out, that’s got to be bad news for his campaign. I should be one of his core supporters, but I haven’t been impressed at all.
I think his only support are the hardcore Ron Paul supporters that see Rand as the standard bearer for his father’s legacy.
P.S. Irvine Renter’s comment about compassionate conservatism being dead yesterday was interesting in light of the 47 Democrats that voted in favor of the bill to vet Syrian refugees more closely. The House now has enough votes to override a Presidential veto on this issue.
This initiative isn’t a reflection of politics in the Democratic party. Any Democrats in tight races will pander until the emotional pressure passes.
Most of my friends from High School fall somewhere between the Right and the extreme Right, and based on what I’ve seen in my Facebook feed over the last week, it’s pretty clear where the anti-muslim refugee paranoia comes from.
True dat. National security tends to be a conservative issue, and xenophobia tends to be a far right issue.
And self destructive pathological altruism tends to be a left issue
Rate-Rise Bets Heat Up After Fed Minutes
If investors weren’t convinced that the Federal Reserve is ready to move in December, they should be now.
Minutes from the Fed’s October meeting, released Wednesday afternoon, showed that “most participants” thought the conditions for raising rates would be met at the central bank’s next meeting. And that a “number of participants” highlighted various reasons why the Fed should avoid delaying tightening.
Importantly, the minutes also included several new signals, giving investors the reassurance they wanted, that after the Fed does up rates, the subsequent path of tightening is likely to be shallow and gradual.
The Fed could “spook financial markets” if officials decide to hold steady in December, said Mark Cabana, U.S. rates strategist at Bank of America Merrill Lynch in New York. “Investors would wonder: ‘What did the Fed know that I don’t?'”
Ever since that last great jobs report, the 10Y UST has been trading 20-25 bps higher.
88% of economists thought rates were going to rise in October, and they were wrong. Back then investors were betting against the economists. This time around, everyone seems to think rates will rise.
Anyone want to go on record with a prediction?
Short-term rates up 25bps in December. Long-term rates level as foreign investments flock to higher rates (see 2004-6) and Fed continues to roll over maturing securities keeping demand for bonds high despite rising prices.
Inflation paradoxically rises in the first quarter of next year as consumers respond in relief rally as businesses are forced to finally raise wages thanks to tightening labor market (yes, October employment report was that good). Energy prices rise as consumer confidence increases fuel usage, reversing deflationary trend.
GDP growth remains subdued as a strong-dollar-induced fall in net exports offsets rising domestic spending. The Fed holds off on further rate increases due to concern over tepid GDP growth.
Stock prices rise as revenue growth exceeds wage growth thanks to rising consumer spending and higher employee productivity, thanks to raises. Business investment rises in response to increased consumer confidence effect on sales.
Stock buybacks slow as debt financing becomes more expensive and companies near their treasury stock limits. Strong corporate profits are either reinvested in the company or paid out as dividends to shareholders. These dividends further fuel consumer spending.
Tax revenues rise as monetary velocity gets up off the mat. Federal spending is restrained by balance of power between Congress and the Administration. Some call it gridlock… I call it government at its best. California takes all the additional sales and payroll revenue and gives every government employee a 10% raise.
Record El Nino results in water prices rising even hirer. Legislature levies carbon tax on burrito sales due to high methane content. ACLU sues in response claiming disparate impact.
Lawmakers Aggressively Push GSE Reform Act
U.S. Senators Bob Corker (R-Tennessee) and Mark Warner (D-Virginia) have introduced a bipartisan amendment to the Transportation, Housing and Urban Development, and Related Agencies Appropriations Act (H.R. 2577) in an effort to spur substantive and structural housing finance reform, according to an announcement from Corker.
The amendment, known as the Jumpstart GSE Reform Act, was introduced by Corker, Warner, Senator Elizabeth Warren (D-Massachusetts), and Senator David Vitter (R-Louisiana) in September and offered on Thursday by Corker and Warner as an amendment to H.R. 2577. The Jumpstart GSE Reform Act prohibits the sale of Treasury-owned preferred shares in Fannie Mae and Freddie Mac without approval from Congress, and also prohibits increases in guarantee fees charged by the GSEs from offsetting non-housing related government spending.
“Although the FHFA is taking important steps to de-risk Fannie Mae and Freddie Mac, taxpayers will continue to be on the hook for a future bailout if Congress does not produce legislation to transform our housing finance system,” Corker said. “There is overwhelming consensus that congressional action is needed, and it is hard to imagine that anyone would ever want to harm taxpayers and return to the failed model of private gains and public losses. While comprehensive reform is my preference, this amendment will ensure the future of Fannie and Freddie will be determined by Congress.”
That same quartet of Senators originally introduced the Jumpstart GSE Reform Act in March 2013. Three months later, in June 2013, Corker and Warner also introduced a bill to wind down the GSEs and replaced them with a new government agency with a private backstop, transferring much of the mortgage risk from taxpayers to the private sector.
“As my colleagues and I reintroduce this broadly bipartisan legislation, momentum is certainly building to ensure that Fannie Mae and Freddie Mac are not turned loose to wreak havoc on the economy and taxpayers in their current form,” Vitter said. “I’m confident that when it reaches the floor, there will be an overwhelming show of bipartisan support for this common sense, reform legislation.”
Fannie Mae Forecasts Economic Growth Despite Global Headwinds
Optimistic bullshit that ignores reality
Economic growth is expected to move upward in the fourth quarter following a disappointing third quarter, according to Fannie Mae’s Economic & Strategic Research (ESR) Group.
The research shows that economic growth for all of 2015 is projected to reach 2.2 percent, with a another increase in 2016 to 2.4 percent. The ESR Group attributes the growth spurt to solid consumer spending growth, an uptick in construction activity, and growing home sales and prices. These positive economic condition should offset global headwinds.
However, Fannie Mae reported that a strong U.S. dollar and weak global growth will likely continue to place negative pressure on manufacturing and exports in the near term.
He continued, “An uptick in average hourly earnings and low unemployment numbers in the October jobs report are contributing to a positive outlook for consumer spending. In addition, recent data suggesting that consumers are becoming more comfortable using their credit cards and that banks are loosening lending standards amid rising demand for consumer loans bodes well for future growth.”
In terms of the housing market, Fannie Mae says that “recent housing and mortgage news has been mixed.”
Housing starts rebounded in September to more than 1.2 million units, following two months of declines, the report showed. Meanwhile permits and new home sales both decreased in September. Existing home sales did well in September, almost returning to July’s expansion best, while pending home sales fell.
“Despite mixed housing and mortgage market data, our forecast for housing activity is little changed over the past several months,” Duncan said. “The supply of existing homes remains lean amid slowing new single-family construction, putting significant upward pressure on home prices. While this helps boost home equity, it hurts affordability, especially for potential first-time homebuyers.”
“Meanwhile, we expect mortgage rates to rise only gradually through next year, and an improving income trend should help support affordability. We foresee total home sales improving further in 2016, albeit at less than half of the 8.0 percent increase expected this year,” he said.
Senator Bob Menendez postures and panders
U.S. Senator Bob Mendendez (D-New Jersey) has written a letter to FHFA Director Mel Watt seeking answers regarding Freddie Mac’s failure to meet two lending goals for low-income buyers in 2014.
Menendez, Ranking Member of the Senate Subcommittee on Housing, Transportation, and Community Development, cited preliminary findings in the FHFA’s annual housing report. The Senator noted that Freddie Mac had failed to meet its single-family low- and very low-income home purchase goals last year and asked Watt what the agency is going to do to make corrections in these two areas.
“This means that fewer low-income households were able to secure homeownership opportunities in 2014,” Menendez said. “At a time when access to mortgage credit remains tight, particularly for those low-income and minority households, it is more important than ever that the GSEs meet the affordable housing goals.”
The national homeownership rate has been on the decline since peaking at 69 percent in 2004; during the summer of 2015, it dropped to its lowest level in nearly 50 years, 62.4 percent. It recently increased—for the first time in two years—up to 64.5 percent, although that is still the lowest homeowership rate in the country since 1994.
“Homeownership is a critical tool for lower income and minority families to build wealth [and] for many…, their home is their singular source of equity,” Menendez said. “In communities where lending and access to credit is inadequate, many families rely on the equity in their homes to start a small business, to pay for a child’s higher education, or to finance the care of an elderly parent. Affordable housing goals continue to play a crucial role in facilitating access to credit for underserved markets, and I urge you to hold the GSEs accountable for any failures to meet such goals.”
[Infographic] New York and California led nation in highest down payments
http://www.housingwire.com/ext/resources/images/editorial/BS_ticker/PDF/Nov2015/downpayment.jpeg
Both New York and California on average require more than a 20% down payment for the average 30-year, fixed-rate conventional loan, a new report from Lending Tree found.
Overall, the report found that average down payment percentages for conventional 30-year, fixed rate purchase mortgage offers increased to an average of 17.63% in the third quarter, slightly up from 17.34% in the previous quarter and 16.29% a year ago.
Similarly, the average down payment amount also grew to $48,924 quarter-over-quarter, surging from $44,204 last quarter.
On the other side, the report said the average down payment on an Federal Housing Administration mortgage in the second quarter was 7.99%, or $15,391, which is marginally up from the previous quarter.
“During the third quarter, the housing market thrived in certain markets as consumer demand outweighed supply,” said Doug Lebda, founder and CEO of LendingTree.
“In competitive housing markets, homebuyers will often bolster their buying credentials by offering a larger down payment. Not only could this improve a buyer’s chances of securing the home, but could also help avoid delays in closing, create built-in equity and generate lower monthly payments,” added Lebda.
Bernanke: I’m not really a Republican anymore
Ben Bernanke has publicly broken ranks with the Republican party.
In one of the more revealing passages of his just-published book The Courage to Act, the former chairman of the US Federal Reserve lays out his experience with Republican lawmakers during the twin financial and economic crises that dominated his term as the head of the world’s most important central bank. Continual run-ins with hard-right Republicans—such as noted Fed critic Ron Paul, the former Texas congressman—gradually pushed him away from the party that first put him in charge of the Fed in 2006. (He was nominated for the job by president George W. Bush, for whom Bernanke served as head of the White House Council of Economic Advisors.)
“[T]he increasing hostility of the Republicans to the Fed and to me personally troubled me, particularly since I had been appointed by a Republican president who had supported our actions during the crisis. I tried to listen carefully and accept thoughtful criticisms. But it seemed to me that the crisis had helped to radicalize large parts of the Republican Party,” Bernanke writes on page 432.
While arguing that Democrats “suffered their own delusions, especially on the far left,” the former Princeton economics professor said he had “lost patience with Republicans’ susceptibility to the know-nothing-ism of the far right. I didn’t leave the Republican Party. I felt that the party left me.”
He later concludes: “I view myself now as a moderate independent, and I think that’s where I’ll stay.”
Los Angeles housing takes a U-turn
After seeing the highest September sales pace in six years, Los Angeles housing fell into a deep sleep in October.
Home sales fell 0.4 percent compared with October 2014, according to CoreLogic. This is the first time in nine months that monthly sales have not been higher compared with a year earlier.
“Southern California home sales lost steam in October, dipping more than usual from September,” said Andrew LePage, research analyst with CoreLogic. “Sales remain constrained by a tight inventory of homes for sale and lower affordability.”
Tight inventory kept home prices on the rise. The median Los Angeles home price rose 5.8 percent from a year ago to $490,000. While higher mortgage rates are hitting housing now, these October sales are based on contracts signed in August and September, when rates were lower. It may be that strong sales in the first half of this year pulled demand forward.
“Flat is the new black,” said Madeline Schnapp, director of economic research for California-based PropertyRadar, a software and analytics company. “Sales posted healthy increases in the first half of 2015 relative to 2014 but beginning in July, sales weakened as rising prices began to meet resistance from prospective buyers. That scenario is unlikely to change anytime soon.”
Rising mortgage rates not quelling housing demand
Higher interest rates aren’t holding back demand for mortgages – either to purchase or refinance.
A composite index of mortgage applications compiled by the Mortgage Bankers Association rose 6.2% last week, the industry group said Wednesday. Purchase applications jumped 12%, and refinances were up 2%. A non-seasonally adjusted index of purchase applications was 19% higher than the same week a year ago.
Mortgage application activity has been jumpy in recent weeks as lenders and borrowers adjusted to a new regulation. But several measures are showing demand for housing remains sturdy. Sales of existing homes jumped 5% in September, running at the second-fastest pace since 2007, the National Association of Realtors said last month.
Low inventory is still holding back more robust activity in housing, NAR said. It’s also driving prices higher and making purchases more challenging for first-time buyers.
Last week, the average loan size for purchase applications hit $301,200, the highest ever.
Housing analysts have worried about the impact of higher interest rates on the market. When rates surged in mid-2013 on comments from then-Federal Reserve Chairman Ben Bernanke about the end to central bank stimulus, housing struggled.
But last week’s jump in applications came even as rates rose during the week. The 30-year fixed-rate mortgage touched 4.18%, the highest since July. That helped nudge refinancing’s share of all mortgage activity down to 58.6%, from 59.8%. The share of mortgage activity represented by adjustable rate loans also dipped, to 6.3%.
Q: What’s different about the latest housing bubble?
A: Not much other than the targeted sector(s) to blame the next financial crisis on are different; Same as it ever was! ie.,
loan brokers with the same subprime/predatory habitudes that led to the 08 housing crisis merely bailed on housing to set-up shop elsewhere… such as in student, auto and small business loan arenas.
As a result— and the math/liabilities being what they are in those arenas– the next financial crisis will be A LOT bigger and much more destructive than the one housing was blamed-on.
Do you hear that??
It’s the sound of inevitability.
Your answer isn’t in response to the question.
nor was your
rebuttaldeflection in response to my statement that followed my answer 😉The entire subprime auto business model relies on the chip that turns the motor off if they don’t pay. The resurgence of auto sales and the proliferation of subprime auto loans owes everything to this chip. Unfortunately, I see a legislative revolution coming spearheaded by advocates for these subprime borrowers. If this chip is banned or its use curtailed, it will devastate both the auto industry and the subprime auto lenders.
I agree with everything said but disagree with the analysis. Any financial model for housing that does not include income is flawed. Rent is not the bedrock of prices as rent has to be sustained by income. E.g. Rent figures for LA city are just plain wrong because of rent control. New rentals are at least 1 standard deviation over the mean rent and often higher. This is not sustainable without income increasing into historically impossible levels. I think for the majority of the USA the analysis is conclusions are correct and we will have deflation due to high interest rates instead of a pop. But for the most overheated areas (and you know who you are!), I hear a POP! coming.I agree this is not the same bubble but all bubbles pop, just in different ways.
BUT, you could be right, because according to Zillow, it is impossible for prices to go down! There is simply no option for it on Zillow’s rent vs. buy calculator!
The rate the “home’s value will grow for the first few years after buying”, can not be negative, it’s impossible! And to top it off, it is possible to have 10% growth rates during that time!
http://www.zillow.com/rent-vs-buy-calculator/
How exciting!
I love LA!
Rent versus buy calculators are a joke. They oversimplify the math in ways that always bias them toward buying, which is why realtors love them.
I’ve always resisted looking at calculations that fantasize about future values. Invariably, people overestimate future growth in their favor, and even small changes in the projected rate of appreciation can have a huge impact on value.
I agree that rent increases need to be sustained by income, and in Coastal California where supply is restricted, rent has increased faster than income. Unfortunately, without increased supply or out-migration, the sky-high rents and resale values can be sustained by a lack of inventory. High wage earners compete with each other for available housing, and the lowest rungs on the property ladder end up doubling or tripling up to make ends meet; many leave the state.
Again, totally agree with everything BUT
Point 1: Why are we assuming there is not increased inventory through building in Coastal California?
. . . in Manhattan where supply may be restricted somewhat, density is already pretty high, costs are high.
. . . in San Francisco where supply may be restricted somewhat less, density is high, but if Manhattan is like a 50 decker, San Francisco is a double decker.
. . . in the East Bay, there is a HUGE amount of land that can be built up
Both of those situations are somewhat limited by peninsulas horizontally. Coastal Southern California is like the East Bay, it has no such boundaries.
. . . in Southern Coastal California: Still more land available, and near infinite increases in urban areas with development friendly politicians who are going to have some EXTREME pressures put on them to favor affordable housing. “The sky is the limit” for further development. Current prices support huge increases in urban building. Of course there are not huge increases in the amount of building, because housing builders want to do the least amount of effort for maximum profit (see Irvine Company). Of course why would you invest and have to work hard when you can invest in free money i.e. real estate and make 10% returns EVERY year? BUT, the longer prices stay ridiculously high AND the longer appreciation no longer occurs, money will flow in to building and they will find a way to build.
Until LA hits population densities approaching that of Manhattan, no way is supply in any way theoretically restricted. If we are talking OC style Single Family Homes, these are somewhat restricted, but OC keeps on “finding” new land like their “Great Park” Aka Great Development. If we are talking housing, no constraint. Population growth rate for LA is 1%. Doesn’t seem like it would be very hard at all to hit that number for total # of increased housing units. All that LA needs to meet that goal is people with a lot of money (mmm check) and a lot of labor (mmm check). I don’t have the data, but I do see developments in LA and would not be surprised if the rate of housing growth equals population growth. I.E. any housing shortage is man made and not based upon technical reasons.
Point 2: Re: poorer families are doubling and quadrupling up. I think this is a misconception. Yes density increases, but people in urban areas, people get as pissed off with their relatives and roommates as anybody else. The fact is that these pressures have been there for a long time already. The outpacing of price appreciation above the rest of the USA (whose price appreciation is driven by low interest rates) cannot be accounted for by density compression. LA was already compacted, and if anything, had less capacity to compact in the face of the latest housing price run up. So no, increases housing compression cannot explain price appreciation without income appreciation.
What can explain it is cash buyers and high income earners. But what are the cash buyers going to do with those houses when the Ponzi scheme ends? Pay property tax and no income? Turn their houses into “Luxury Living” rentals in the ghetto? I have some examples of this I am watching right now. I am very curious how it is going to turn out. But I do know the inevitable conclusion. The price for housing will eventually meet the income levels of its residents.
Point 3: Local biases are forming opinions. The crazy guy who says things are overpriced and the crazy guy who says his home price is stable could BOTH BE right if they are in different areas. The guy who says his overpriced costal California home is still the best investment IN THE FUTURE is just plain nuts if he expects his buyers to ever need a loan.
PREDICTION: USA, in general, low low lowwwwww appreciation <1%. USA! USA! USA! LA and other bubble areas POP!!!
“POP”? If you’re gonna make extreme predictions, you need to place a specific number next to it. Will LA/OC decline 10%, 20%, 50%? Will it take a couple years? More? Will it ever return to current price levels?
25-30% in REAL terms.
I don’t think I need to, but since I like you . . .It’s like the Price Is Right, all I have to do is say they will decline to beat Irvine Renter 🙂
If I had to guess I would say LA appreciation should have matched USA appreciation. LA neighbothoods are 6-44% overappreciated according to that method with a city average of 25% overappreciated. So on average 25% decline in relation to average USA prices. Assuming USA is flat, that’s on average a 20-25% decrease from todays dollars the next few years. E.g if we have 25% inflation next year and housing prices stay flat, my prediction is correct.
I’m glad to see you post here. Other than el O, I don’t have any housing bears regularly posting in the astute observations.
The NY Times calculator is the most robust, and it allows for as much as 5% annual price declines. However, tweak one or two of your assumptions and you can find a strong BUY NOW result. Tweak them slightly the other way and you can find a strong NEVER BUY EVER result.
http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0
I entered my figures and the assumptions I’m working with today. I expect to live in the house for fifteen years. I assume the price will increase 2%, matching inflation at 2%. With those assumptions, I’d need to rent it for half of its current rental rate, for renting to be a better option than buying it.
If prices decrease every year for fifteen years at a 4% rate, meaning its value is cut nearly in half by year fifteen, it’s a break-even decision according to this calculator.
Buy and hold…
The fun result is assuming 5% annual growth in price. With that assumption, the result is “Buying is better, even if you could rent for free.”
Yeah, in my mind that’s the big flaw with the NYT calculator. It asks for all these inputs but when it comes down to it, only about two of the inputs decide the outcome – future price appreciation and future stock market returns. Well, those two things are completely unknowable which renders the calculator output meaningless.
I agree that it’s still fun to play with and see the outcome of different inputs, but basing a buy decision on it would be ill-advised.
This one is much better.
If I put in historic rates of housing and S&P 500 (neither will make par next 5 years, but whatever, have to put in something) I have $4300 a month to rent to the ABSOLUTE minimum standard I would buy in LA right now, $550K.
For 4.3K I can rent what would seem to be a palace compared to the 550k “fixer” in a “yet to be gentrified” area.
Just to bring everyone to reality, I currently pay 1.9k per month in rent in West LA (44%). I’m immune to rental price swings but I don’t think we’ve been to far from market rates since we’ve been there.
My rent to buy calculator says “don’t move”. Not a healthy condition to facilitate a healthy market. Housing IS NOT a market economy.
Housing opinions seem to be very similar to political opinions – If you have one, it’s extreme. When I talk to people about how crazy house prices are in SoCal, and I agree they are “too high,” I seem to hear one of two extreme arguments:
1) Houses are the best investment you can make. My return will be better than anything else in which I’d invest; or
2) Prices are way too high. They must come down. Nobody can afford these prices.
There is little analysis. It’s mostly a gut feeling being shared. I was talking to a guy yesterday who had a strong # 2 opinion, yet he had no idea what ATR is nor how the risky loans to risky borrowers have been curtailed.
And a lot of times it comes down to existing owners that think prices are great vs. non-owners that believe they should come down.
And the few, like me, who are buying and think the value of my new house has a 80% probability of being within 10% +/- from its current price a decade from now, and a 95% probability of being within 20% +/-.
The largest difference between bubble 2.0 and bubble 1.0 is that accounting standards have been suspended for 2.0. This has allowed banks to control inventory.
The housing recovery is an illusion as much as the economic recovery.
“There is one and only one difference that separates the previous, unstable price bubble from the current, stable reflation rally. This time, the loan terms are stable.”
Another difference is this time, there is no securitization. So the US taxpayer is explicitly on the hook for all losses.