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How Low Will Housing Prices Go?

Now that Housing Bubble #2 Is Bursting… How Low Will It Go?

Unless the Fed is going to start buying millions of homes outright, prices are going to fall to what buyers can afford.

There are two generalities that can be applied to all asset bubbles:

1. Bubbles inflate for longer and reach higher levels than most pre-bubble analysts expected

2. All bubbles burst, despite mantra-like claims that “this time it’s different”

The bubble burst tends to follow a symmetrical reversal of very similar time durations and magnitudes as the initial rise. If the bubble took four years to inflate and rose by X, the retrace tends to take about the same length of time and tends to retrace much or all of X.

If we look at the chart of the Case-Shiller Housing Index below, this symmetry is visible in Housing Bubble #1 which skyrocketed from 2003-2007 and burst from 2008-2012.

Housing Bubble #1 wasn’t allowed to fully retrace the bubble, as the Federal Reserve lowered interest rates to near-zero in 2009 and bought $1+ trillion in sketchy mortgage-backed securities (MBS), essentially turning America’s mortgage market into a branch of the central bank and federal agency guarantors of mortgages (Fannie and Freddie, VA, FHA).

These unprecedented measures stopped the bubble decline by instantly making millions of people who previously could not qualify for a privately originated mortgage qualified buyers. This vast expansion of the pool of buyers (expanded by a flood of buyers from China and other hot-money locales) drove sales and prices higher for six years (2012-2018).

As noted on the chart below, this suggests the bubble burst will likely run from 2019-2025, give or take a few quarters.

The question is: what’s the likely magnitude of the decline? Scenario 1 (blue line) is a symmetrical repeat of Housing Bubble #2: a retrace of the majority of the bubble’s rise but not 100%, which reverses off this somewhat higher base to start Housing Bubble #3.

Since the mainstream consensus denies the possibility that Housing Bubble #2 even exists (perish the thought that real estate prices could ever–gasp–drop), they most certainly deny the possibility that prices could retrace much of the gains since 2012.

More realistic analysts would probably agree that if the current slowdown (never say recession, it might cost you your job) gathers momentum, some decline in housing prices is possible. They would likely agree with Scenario 1 that any such decline would be modest and would simply set the stage for an even grander housing bubble #3.

But there is a good case for Scenario 2, in which price plummets below the 2012 lows and keeps on going, ultimately retracing the entire housing bubble gains from 2003.

Why is Scenario 2 not just possible but likely? There are no more “saves” in the Fed’s locker. Dropping interest rates to zero and buying another trillion in MBS won’t have the same positive effects they had in 2009-2018. Those policies have run their course.


Among independent analysts, Chris Hamilton is a must-read for his integration of demographics and economics. Please read (via Zero Hedge) Demographics, Debt, & Debasement: A Picture Of American Insolvency if you want to understand why near-zero interest rates and buying mortgage-backed securities isn’t going to spark Housing Bubble #3.

Millennials are burdened with $1 trillion in student loans and most don’t earn enough to afford a home at today’s nosebleed prices. When the Fed drops the Fed Funds Rate to zero, it doesn’t follow that mortgage rates drop to zero. They drop a bit, but not enough to transform an unaffordable house into an affordable one.

Buying up $1 trillion in sketchy mortgages worked in 2009 because it bailed out everyone who was at risk of absorbing huge losses as a percentage of those mortgages defaulted. The problem now isn’t one of liquidity or iffy mortgages: it’s the generation that would like to buy homes finds they don’t earn enough, and their incomes are not secure enough, to gamble everything on an overpriced house that chains them to a local economy they might want to leave if opportunities arise elsewhere.

In other words, the economy has changed, and the sacrifices required to buy a house in hot markets at today’s prices make no sense. The picture changes, of course, in areas where 2X or 3X a typical income will buy a house, and 1X a pretty good income will buy a house.

Unless the Fed is going to start buying millions of homes outright, prices are going to fall to what buyers can afford. As China’s debt bubble implodes, the Chinese buyers with cash (probably not even cash, just money borrowed in China’s vast unregulated Shadow Banking System) who have propped up dozens of markets from France to Vancouver will vanish, leaving only the unwealthy as buyers.

The only question of any real interest is how low prices will drop by 2025. We’re so accustomed to being surprised on the upside that we’ve forgotten we can surprised on the downside as well.

Source: by Charles Hugh Smith | Of Two Minds


US Home Price Growth Weakest Since 2012


“A decline in interest rates in the fourth quarter was not enough to offset the impact of rising prices on home sales,” 



US Housing Starts Crashed In December



Year-over-year, housing starts tumbled 10.9% – the biggest drop since March 2011…



Debt Among Millennials Rockets Past $1 Trillion


“Student loans make up the majority of the $1,005,000,000,000″, a massive handicap on ability to mortgage a home purchase at today’s prices.

Home Ownership at 48-year low


Home ownership is at a 48-year low, driven in part by a shocking pattern of foreclosure that put 9.4 million out of their homes during the recent recession, according to a Harvard survey.

In its “State of the Nation’s Housing 2016,” Harvard said that “the U.S. homeownership rate has tumbled to its lowest level in nearly a half-century.”

Figures from the St. Louis Fed showed a home ownership rate of 63.5 percent. The last time it was lower was in 1967.

The Harvard Joint Center on Housing Studies report put a focus on foreclosures.

“A critical but often overlooked factor is the role of foreclosures in depleting the ranks of homeowners. Indeed, CoreLogic estimates that more than 9.4 million homes (the majority owner-occupied) were forfeited through foreclosures, short sales, and deeds-in-lieu of foreclosure from the start of the housing crash in 2007 through 2015,” said the report.

The report also noted that the number of people using at least 30 percent of their income for housing rose, as our Joseph Lawler reported this week. It said, “40.9 million Americans, both homeowners and renters, spend more than 30 percent of their income on housing, including 19.8 million who spend over half of their income for housing.”

At the same time, said Harvard, the drive for the American Dream has been braked by low incomes, higher prices and bad credit.


“Just as exits from homeownership have been high, transitions to owning have been low. Tight mortgage credit is one explanation, with essentially no home purchase loans made to applicants with subprime credit scores (below 620) since 2010 and a sharp retreat in lending to applicants with scores of 620–660 compared with the early 2000s. And given that the homeownership rate tends to move in tandem with incomes, the 18 percent drop in real incomes among 25–34 year olds and the 9 percent decline among 35–44 year olds between 2000 and 2014 no doubt played a part as well.”

by Paul Bedard | Washington Examiner



Wanted: Licensed Contractors To Build In-house Marijuana Grow Rooms

People want to grow at home, but it’s not always safe


Grow closets could become the new hot amenity in home construction

Medical marijuana is legal in more than 20 U.S. states, and places like Colorado, Washington, Oregon, Alaska and Washington, D.C., have decriminalized recreational marijuana use for adults over the last few years. Marijuana advocates say this has led to an expanding industry in the home remodeling business: creating rooms in homes in which to grow pot.

But finding a contractor who would be willing to put a “grow room” into a home was nearly impossible until recently. Such rooms need, among other things, high-voltage metal halite electric lamps, high-capacity intake and exhaust fans to maintain carbon dioxide and oxygen levels, along with the proper heavy-duty electrical wiring and plumbing in a suitably-sized room.

“No contractor would touch stuff like this a year ago,” said Eli Bilton, the chief executive of the Attis Group, an online marijuana supply company in Portland, Ore. “They didn’t want to be on a job site where cannabis plants were around,” he said.

So people who wanted to build a grow room had to learn how to do it themselves, or pay somebody to do work without the proper permits.

Fire investigators say grow rooms in homes, especially those built by amateurs without licensed contractors are a hazard. Some operations contain 800 to 1,000 pot plants in a 2,500 square foot home. Post legalization, many amateur pot growers continue to rig their homes with unsafe grow rooms while hoping to get rich quickly, said Bilton. “They don’t engineer and design correctly,” he said.

A single home of that size could produce enough pot in a year to net as much as $1.5 million once it’s harvested and sold according to Victor Massenkoff, an arson investigator with the Contra Costa County Fire Protection District in Pleasant Hill, Calif., about 20 miles east of San Francisco. California accounts for nearly half of the sales of pot in the U.S., according to ArcView, a San Francisco-based marijuana industry research firm.

Dave Perry, a property loss insurance lawyer from Littleton, Colo., said the increased use of electricity is the primary cause of most fires, as most home growing operations need as much as 600 amps of power, where a typical home only uses about 200 amps of power. And without a licensed electrician, a house could be rewired improperly, resulting in an overload. In Colorado, a year after marijuana was legalized in 2012, there were 20 marijuana-related fires, which jumped to 32 in 2014, and 50 in 2015, according to Perry.

Even more dangerous is the spread of something called hash oil or “honey butane oil,” which is a super concentrated oil containing 95% tetrahydrocannabinol, or THC, the drug that creates the high in marijuana. A one-inch vial of honey butane oil can sell on the streets for as much as $4,000 and cost as little as $100 to produce. But the drug needs large amounts of highly flammable butane to produce and has led to explosions and fires in homes when the butane finds an ignition source in a home like a pilot light, says Massenkoff.

Still, experienced contractors who work within the building code and permits process are beginning to build grow rooms in high-end developments, which can cost up to $2,000 to complete.

Bilton says that in Oregon many licensed contractors will build grow rooms now that marijuana is legal. “It’s becoming part of our culture here in Portland,” he said. “You’re more likely to know somebody who’s involved in the growing industry so it’s more acceptable now,” he said.

For example, in Washington, D.C., after voters in the District approved an initiative in November 2014 that legalized recreational marijuana use for adults beginning this February, Eric Hirshfield, a real estate developer, is adding grow closets to some of his condominium projects.

Hirshfeld said he used a licensed electrician to beef up the wiring for the lighting and the exhaust fans as well as plumbers to ensure the proper drainage. He also ensures that the closets are built small enough to hold just six plants, the maximum allowed by D.C. law.

“I like to include a unique amenity in each of my condo projects like a wine cooler or a dog washing station and this year the grow closet is the hot amenity for 2015,” Hirshfield said in an interview. “It’s a sign of the times,” he said.

by Daniel Goldstein in Marketwatch

Buying A Home With A Boyfriend, Girlfriend, Partner, Or Friend

by Dan Green

According to the National Association of REALTORS®, 25% of primary home buyers are single. Some of these non-married buyers, statistics show, buy homes jointly with other non-married buyers such as boyfriends, girlfriends or partners.

If you’re a non-married, joint home buyer, though, before signing at your closing, you’ll want to protect your interests.

Different from married home buyers, non-married buyers get almost no estate-planning protection on the state or federal level which can be, at minimum, an inconvenience and, at worst, result in foreclosure.

Non-Married Buyers Should Seek Professional Advice

The video clip referenced above is from 2007 but remains relevant today. It’s a four-minute breakdown which covers the risks of buying a home with a partner, and the various ways by which joint, non-married buyers can seek protection.

The process starts with an experienced real estate attorney.

The reason you’re seeking an attorney is because, at minimum, the following two documents should be drafted for signatures. They are :

  1. Cohabitation Agreement
  2. Property Agreement

The Cohabitation Agreement is a document which describes each person’s financial obligation to the home. It should include details on which party is responsible for payment of the mortgage, real estate taxes and insurance; the down payment made on the mortgage; and necessary repairs.

It will also describe the disposition of the home in the event of a break-up or death of one party which, unfortunately, can happen.

The second document, the Property Agreement, describes the physical property which you may accumulate while living together, and its disposition if one or both parties decide to move out.

A well-drafted Property Agreement will address furniture, appliances, plus other items brought into the joint household, and any items accumulated during the period of co-habitation.

It’s permissible to have a single real estate attorney represent both parties but, for maximum protection, it’s advised that both buyers hire counsel separately. This will add additional costs but will be worth the money paid in the event of catastrophe or break-up.

Also, remember that search engines cannot substitute for a real, live attorney. There are plenty of “cheap legal documents” available online but do-it-yourself lawyering won’t always hold up in court — especially in places where egregious errors or omissions have been made.

It’s preferable to spend a few hundred dollars on adequate legal protection as compared to the costs of fighting a courtroom battle or foreclosure.

Furthermore, a proper agreement will help keep the home out of probate in the event of a death of one or both parties.

Mortgages For First-Time Home Buyers

Many non-married, joint home buyers are also first-time home buyers and, for first-time home buyers, there are a number of low- and no-down payment mortgage options to put home ownership more within reach.

Among the most popular programs are the FHA mortgage and the USDA home loan.

The FHA mortgage is offered by the majority of U.S. lenders and allows for a minimum down payment of just 3.5 percent. Mortgage rates are often as low (or lower) than comparable loans from Fannie Mae or Freddie Mac; and underwriting requirements are among the loosest of all of today’s loan types.

FHA loans can be helpful in other ways, too.

As one example, the FHA offers a construction loan program known as the 203k which allows home buyers to finance construction costs into the purchase of their home. FHA home buyers have financed new garages, new windows, new siding and new floors via the 203k program.

FHA loans are also made with an “assumable” clause. This means that when you sell a home with FHA financing attached to it, the buyer of the home can “assume” the existing mortgage at its existing interest rate.

If mortgage rates move to 8 percent in 2020, you could sell your home to a buyer with an assumable FHA mortgage attached at 4.50%.

USDA loans are also popular among first-time home buyers.

Backed by the U.S. Department of Agriculture, USDA loans are available in many suburban and rural areas nationwide, and can be made as a no-money-down mortgage.

USDA mortgage rates are often lower than even FHA mortgage rates.

Domestic and business partnerships sometimes end unhappily. Engagements end and partnerships sour. Nobody intends for it to happen, but it does. It’s best to expect the best, but prepare for the worst.

All parties should seek equal legal protection in the event of a break-up.

Single Family Construction Expected to Boom in 2015

https://i0.wp.com/s3.amazonaws.com/static.texastribune.org/media/images/Foster_Jerod-9762.jpgKenny DeLaGarza, a building inspector for the city of Midland, at a 600-home Betenbough development.

Single-family home construction is expected to increase 26 percent in 2015, the National Association of Home Builders reported Oct. 31. NAHB expects single-family production to total 802,000 units next year and reach 1.1 million by 2016.

Economists participating in the NAHB’s 2014 Fall Construction Forecast Webinar said that a growing economy, increased household formation, low interest rates and pent-up demand should help drive the market next year. They also said they expect continued growth in multifamily starts given the nation’s rental demand.

The NAHB called the 2000-03 period a benchmark for normal housing activity; during those years, single-family production averaged 1.3 million units a year. The organization said it expects single-family starts to be at 90 percent of normal by the fourth quarter 2016.

NAHB Chief Economist David Crowe said multifamily starts currently are at normal production levels and are projected to increase 15 percent to 365,000 by the end of the year and hold steady into next year.

The NAHB Remodeling Market Index also showed increased activity, although it’s expected to be down 3.4 percent compared to last year because of sluggish activity in the first quarter 2014. Remodeling activity will continue to increase gradually in 2015 and 2016.

Moody’s Analytics Chief Economist Mark Zandi told the NAHB that he expects an undersupply of housing given increasing job growth. Currently, the nation’s supply stands at just over 1 million units annually, well below what’s considered normal; in a normal year, there should be demand for 1.7 million units.

Zandi noted that increasing housing stock by 700,000 units should help meet demand and create 2.1 million jobs. He also noted that things should level off by the end of 2017, when mortgage rates probably will  rise to around 6 percent.

“The housing market will be fine because of better employment, higher wages and solid economic growth, which will trump the effect of higher mortgage rates,” Zandi told the NAHB.

Robert Denk, NAHB assistant vice president for forecasting and analysis, said that he expects housing recovery to vary by state and region, noting that states with higher levels of payroll employment or labor market recovery are associated with healthier housing markets

States with the healthiest job growth include Louisiana, Montana, North Dakota, Texas and Wyoming, as well as farm belt states like Iowa.

Meanwhile Alabama, Arizona, Nevada, New Jersey, New Mexico and Rhode Island continue to have weaker markets.