Tag Archives: housing bubble

CNBC: Home Sellers Are Slashing Prices At The Fastest Rate In Over Eight Years

The housing market indicated that a crisis was coming in 2008.  Is the same thing happening once again in 2018? 

For several years, the housing market has been one of the bright spots for the U.S. economy.  Home prices, especially in the hottest markets on the east and west coasts, had been soaring.  But now that has completely changed, and home sellers are cutting prices at a pace that we have not seen since the last recession.  In case you are wondering, this is definitely a major red flag for the economy.  According to CNBC, home sellers are “slashing prices at the highest rate in at least eight years”…

After three years of soaring home prices, the heat is coming off the U.S. housing market. Home sellers are slashing prices at the highest rate in at least eight years, especially in the West, where the price gains were hottest.

It is quite interesting that prices are being cut fastest in the markets that were once the hottest, because that is exactly what happened during the subprime mortgage meltdown in 2008 too.

In a previous article, I documented the fact that experts were warning that “the U.S. housing market looks headed for its worst slowdown in years”, but even I was stunned by how bad these new numbers are.

According to Redfin, more than one out of every four homes for sale in America had a price drop within the most recent four week period…

In the four weeks ended Sept. 16, more than one-quarter of the homes listed for sale had a price drop, according to Redfin, a real estate brokerage. That is the highest level since the company began tracking the metric in 2010. Redfin defines a price drop as a reduction in the list price of more than 1 percent and less than 50 percent.

That is absolutely crazy.

I have never even heard of a number anywhere close to that in a 30 day period.

Of course the reason why prices are being dropped is because homes are not selling.  The supply of homes available for sale is shooting up, and that is good news for buyers but really bad news for sellers.

It could be argued that home prices needed to come down because they had gotten ridiculously high in recent months, and I don’t think that there are too many people that would argue with that.

But is this just an “adjustment”, or is this the beginning of another crisis for the housing market?

https://www.zerohedge.com/sites/default/files/inline-images/2018-09-22_6-12-11.jpg?itok=ytb_mJRX

Just like a decade ago, millions of American families have really stretched themselves financially to get into homes that they really can’t afford.  If a new economic downturn results in large numbers of Americans losing their jobs, we are once again going to see mortgage defaults rise to stunning heights.

We live at a time when the middle class is shrinking and most families are barely making it from month to month. The cost of living is steadily rising, but paychecks are not, and that is resulting in a huge middle class squeeze.  I really like how my good friend MN Gordon made this point in his most recent article

The general burden of the American worker is the daily task of squaring the difference between the booming economy reported by the government bureaus and the dreary economy reported in their biweekly paychecks. There is sound reason to believe that this task, this burden of the American worker, has been reduced to some sort of practical joke. An exhausting game of chase the wild goose.

How is it that the economy’s been growing for nearly a decade straight, but the average worker’s seen no meaningful increase in their income? Have workers really been sprinting in place this entire time? How did they end up in this ridiculous situation?

The fact is, for the American worker, America’s brand of a centrally planned economy doesn’t pay. The dual impediments of fake money and regulatory madness apply exactions which cannot be overcome. There are claims to the fruits of one’s labors long before they’ve been earned.

The economy, in other words, has been rigged. The value that workers produce flows to Washington and Wall Street, where it’s siphoned off and miss-allocated to the cadre of officials, cronies, and big bankers. What’s left is spent to merely keep the lights on, the car running, and food upon the table.

And unfortunately, things are likely to only go downhill from here.

The trade war is really starting to take a toll on the global economy, and it continues to escalate.  Back during the Great Depression we faced a similar scenario, and we would be wise to learn from history.  In a recent post, Robert Wenzel shared a quote from Dr. Benjamin M. Anderson that was pulled from his book entitled “Economics and the Public Welfare: A Financial and Economic History of the United States, 1914-1946”

[T]here came another folly of government intervention in 1930 transcending all the rest in significance. In a world staggering under a load of international debt which could be carried only if countries under pressure could produce goods and export them to their creditors, we, the great creditor nation of the world, with tariffs already far too high, raised our tariffs again. The Hawley-Smoot Tariff Act of June 1930 was the crowning folly of the who period from 1920 to 1933….

Protectionism ran wild all over the world.  Markets were cut off.  Trade lines were narrowed.  Unemployment in the export industries all over the world grew with great rapidity, and the prices of export commodities, notably farm commodities in the United States, dropped with ominous rapidity….

The dangers of this measure were so well understood in financial circles that, up to the very last, the New York financial district retained hope the President Hoover would veto the tariff bill.  But late on Sunday, June 15, it was announced that he would sign the bill. This was headline news Monday morning. The stock market broke twelve points in the New York Time averages that day and the industrials broke nearly twenty points. The market, not the President, was right.

Even though the stock market has been booming, everything else appears to indicate that the U.S. economy is slowing down.

If home prices continue to fall precipitously, that is going to put even more pressure on the system, and it won’t be too long before we reach a breaking point.

Source: by Michael Snyder | ZeroHedge

***

The Real Estate Soufflé
January 30, 2006

We have a decidedly nuanced view of Real Estate: While not neccessarily a bubble, it has been the prime driver of the economy since rates were slashed to half century lows 3 years ago.

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Yet Another Sign The Housing Cycle Has Peaked

The early stages of a housing cycle are fun for pretty much everyone. Homeowners see their equity start to rise and feel smart for having bought, home seekers have to pay up, but not too much, and fully expect their new home to keep appreciating. People with modest incomes feel a bit of pinch but can still afford to stick around.

But later on the bad starts to outweigh the good. Existing homeowners still enjoy the ride but would-be buyers find themselves priced out of their top-choice neighborhoods. And residents who aren’t tech millionaires find that they can no longer afford to live where they work. Consider the plight of a teacher or cop pretty much anywhere in California these days:

Housing prices drive Davis teachers out of town. Legislators could give them a break from parcel taxes.

Drew Barclay has a master’s degree in education and three years of experience as an English teacher, but, like most new teachers in Davis, he can’t afford to live there.

Instead, Barclay, 31, shares a rental in Sacramento that costs him $950 a month — about 40 percent of the $2,550 he brings home each month after taxes.

He is so certain that he won’t be able to qualify for a loan for a home in Davis on his $47,000 annual salary that he hasn’t bothered to house hunt. The median price for a house in the city in March was $682,500, according to tracking firm CoreLogic. Renting also is prohibitive, with the average rent in Davis about $2,500 a month, according to Zillow, a real estate website.

Davis Joint Unified officials hope to get a little help from state legislators. Last week, the state Senate voted 24-8 to waive the annual school district parcel tax of $620 for teachers and other employees of the Yolo County school district.

Davis school board member Alan Fernandes said that about two-thirds of the district’s teachers live outside Davis where housing is less expensive. He said the bill would encourage more of the district’s teachers to live in the community they serve.

Davis Joint Unified regularly passes parcel taxes to keep class sizes down and to support classroom programs. In 2016, 71 percent of Davis voters approved Measure H, a yearly tax of $620 on each parcel of taxable real property in the district for eight years. The measure raises $9.5 million a year to support math, reading and science programs and reduced class sizes for elementary grades.

But the roughly $50 a month exemption isn’t likely to help Davis Joint Unified teachers enough to make buying a house affordable. The teachers are some of the lowest-paid educators in the region, with some of the highest health care costs.

Barclay said he knows teachers 10 or 15 years older than he is who are renting rooms in other educators’ homes to get by. He said some teachers have weekend jobs to make enough money to pay their bills.

“Because I’m fairly certain I can’t put down permanent roots here, I don’t see this position as a permanent one,” Barclay said of his job as an English teacher at Davis Senior High School.

California school districts have responded by offering signing bonuses, housing stipends, computers and free tuition to educators who sign up with their districts.

When housing costs reach this point there’s no real fix. Raise taxes to increase teacher pay and there’s political trouble. Cut back on other services and the quality of life declines. “Streamline” the schools and educational outcomes and teacher morale plummet.

There’s a limit, in other words, to the ascent of home prices beyond which the system starts to break down. And when the people who make a town run smoothly – teachers, firefighters, cops, sanitation workers – can no longer afford to live there, that town has clearly crossed the line.

Based on the Case-Shiller home price index, which is now back to its 2007 housing bubble peak, there are a lot more Davis, CAs out there, with all the pathologies that that implies.

https://www.zerohedge.com/sites/default/files/inline-images/2018-05-29_6-04-48_0.jpg?itok=Lh4f9UCG

A housing bubble, of course, is just a symptom of a bigger problem. Easy money distorts the workings of a market economy by causing the prices of many assets to soar beyond all reason, enriching the owners and impoverishing the users. Typically, when housing reaches this point so have stocks and other financial assets, CEO salaries, corporate concentration, political corruption and a long list of other evils that feed on low interest rates and lax lending standards. The confluence of resulting problems then brings the cycle to a noisy end.

Housing says we’re getting close.

Source: ZeroHedge

Home Prices In 80% Of US Cities Grew 2x Faster Than Wages… And Then There Is San Francisco

https://www.zerohedge.com/sites/default/files/inline-images/low%20millions.jpg?itok=fwEIKjoM

The housing market is starting to overheat. Again.

According to the latest BLS data, average hourly wages for all US workers in November rose at a relatively brisk 2.7% relative to the previous year, if below the Fed’s “target” of 3.5-4.5% as countless economists are unable to explain how 4.1% unemployment, and “no slack” in the economy fails to boost wage growth. Another problem with tepid wage growth, in addition to crushing the Fed’s credibility, is that it keeps a lid on how much overall price levels can rise by, i.e. inflation. Meanwhile, with record global debt, it has been the Fed’s imperative to boost inflation at any cost to inflate away the debt overhang, however weak wages have made this impossible.

Well, not really.

Because a quick look at US housing shows that while wages may be growing at roughly 2.7%, according to the latest Case Shiller data, 18 of 20 metro areas in the US saw home prices grow at a higher pace, while 16 of 20 major U.S. cities experienced home price growth of 5.4% or higher, double the average wage growth, and something which even the NAR has been complaining about with its chief economist Larry Yun warning that as the disconnect between prices and wages becomes wider, homes become increasingly unaffordable for most Americans.

https://www.zerohedge.com/sites/default/files/inline-images/Case%20Shiller%20feb%202018_0.jpg?itok=mcLLZHMO

https://www.zerohedge.com/sites/default/files/inline-images/Case%20Shiller%20feb%202018_0.jpg?itok=mcLLZHMO

Confirming the recent jump in home prices, at the national level in February home prices for the Top 20 metro areas soared 6.8% YoY according to Case Shiller, the fastest rate since June 2014…

https://www.zerohedge.com/sites/default/files/inline-images/2018-04-24_6-01-39.jpg

… and hitting a new all time high nationwide.

https://www.zerohedge.com/sites/default/files/inline-images/2018-04-24_6-04-56.jpg

And while this should not come as a surprise – considering we have pointed it out on numerous occasions in the past – one look at the chart below confirms that something very troubling is taking place in San Francisco, which has either become “Vancouver South” when it comes to Chinese hot money laundering, or the second housing bubble has finally arrived on the West Coast. And while according to Case-Shiller data, home prices in San Francisco rose “only” 10.1% Y/Y, a more accurate breakdown of San Fran housing prices from Paragon Real Estate indicates a record 24% annual increase in San Francisco home prices, which increased by $110,000 in just the past quarter.

https://www.zerohedge.com/sites/default/files/inline-images/paragon1.jpg

Behold: a housing bubble…

https://www.zerohedge.com/sites/default/files/inline-images/paragon2.jpg

Also worth keeping an eye on: price appreciation in Sin City has quietly surged in recent months, and in February home prices jumped 11.6% Y/Y, the highest annual increase in years. Considering Las Vegas was the epicenter of the last housing bubble when prices exploded higher only to crash, it may be a good idea to keep a close eye on price tendencies in this metro area for a broader confirmation of the second housing bubble, than just the microcosm that is San Francisco.

* * *

Meanwhile, for those looking to buy for the first time, conditions have never been worse. Growth in property values is outpacing wage gains and limiting affordability, representing a major headwind for first-time buyers, and the broader market.

Finally, putting the above data in context, here are two charts courtesy of real-estate expert Mark Hanson, the first of which shows how much household income increase is needed to buy the median priced home in key US cities…

https://www.zerohedge.com/sites/default/files/images/user5/imageroot/2017/08/12/HOUSEHOLD-INCOME-MUST-INCREASE.png

… while the next chart shows the divergence between actual household income, and the income needed to buy the median priced house.

https://www.zerohedge.com/sites/default/files/styles/inline_image_desktop/public/inline-images/divergence-hh-income-vs-hh-cost-to-own.png?itok=eM3GpbaU
Source: ZeroHedge

BOOM: 848 Square Foot Sunnyvale CA Home Shatters Record With $2M Price Tag…

https://www.mercurynews.com/wp-content/uploads/2018/02/sjm-l-sunnyvale-0301-1.jpg?w=810This home on Plymouth Drive in Sunnyvale, Calif. recently set the highest price per square foot ever recorded by the Multiple Listing Service. The two bedroom, two bath home – 848 square feet in size – sold in two days for $2 million. It had been listed for $1.45 million. That means it sold for $2,358 per square foot, which is the highest price per square foot in Sunnyvale recorded by MLS Listings which has data going back to Jan. 1, 2000.

SUNNYVALE — The small, unassuming home in the Cherry Chase neighborhood was on the market just two days before it sold for $2 million, a whopping $550,000 over its asking price.]

In this red-hot real estate market, the price tag barely caused a stir. What did was the other number that turned the home into another Bay Area record-breaker: It sold for the highest square-foot price recorded in Sunnyvale — a stunning $2,358, according to MLSListings, which tracks homes sales going back to 2000.

The jaw-dropping price tag suggests Sunnyvale, which has traditionally been less expensive than neighboring cities Cupertino or Palo Alto, is becoming a real estate destination in itself.

“I was blown away by it,” Doug Larson of Coldwell Banker, the real estate agent who sold the home, said of the price it fetched.

There’s nothing particularly breathtaking about the modest, one-story house on quiet, tree-lined Plymouth Drive. But it sits nestled at the center of one of the country’s most expensive real estate markets. As prices continue to increase throughout the Bay Area, pushing out even some highly paid tech workers, experts say more residents are flocking to relatively affordable Sunnyvale, driving up prices there.

“It’s become the new hot market,” said Jim Harrison, president and CEO of MLSListings.

Homes in Sunnyvale sold for a median price of $1.57 million in January, according to Zillow. That’s affordable compared to neighboring Cupertino, with a median sale price of $2.2 million, or Palo Alto, with a median price of $3 million.

But it may not stay that way for long. So far this year, homes in Sunnyvale are selling for an average of 28 percent over their listed price and are spending just nine days on the market, Harrison said. A four-bedroom, two-bath, 2,000 square foot house in the city recently sold for close to $800,000 over its listing price, fetching $2.47 million.

The Plymouth Drive house is small by comparison, just 848 square feet, which contributed to its high per-square-foot price. But it’s on a large lot — 6,000 square feet. That makes it a prime candidate for the new owner to tear it down and build something else, Harrison said.

Realtor Juliana Lee of Keller Williams, who represents the buyer of the Plymouth Drive home, declined to comment on behalf of herself and her client.

Listing photos of the home show a small, beige house with a huge backyard, hardwood floors and a large front window with white shutters. Before the sale, the most expensive per-square-foot price recorded in Sunnyvale was $2,175, according to MLSListings. That was for a 1,839-square-foot, two-bedroom home on a 36,155 square foot lot, which sold for $4 million.

Sunnyvale has become popular in part because of its proximity to Silicon Valley’s tech jobs, said realtor James Morris of James Morris Homes, which has offices in San Jose and Saratoga. LinkedIn is headquartered in the city, Apple is just next door in Cupertino, and Google is on the other side in Mountain View.

Millennials don’t want to endure long commutes on the Bay Area’s clogged freeways, Morris said.

“They will pay that premium to be close to their jobs and not have to drive,” he said.

When Larson put the Plymouth Drive house on the market on Feb. 7, he asked for $1.45 million and assumed his client would get about $1.6 million. The next day, he opened the house for a realtor tour so the community’s agents could check out the property and determine if it was something their clients might want. It generated a lot of interest, Larson said, with some agents indicating they had buyers willing to offer as much as $1.8 million.

Friday morning, a realtor called Larson and told him she was sending over an offer. Larson told her his client wasn’t accepting offers until the following Wednesday, but the persistent realtor refused to take no for an answer and sent her client’s offer that afternoon.

It was too tempting to pass up — $2 million, all cash, closing in 10 days. The seller was shocked.

“She said, ‘What?’” Larson said. “She was as taken aback as I was.”

https://www.mercurynews.com/wp-content/uploads/2018/02/sjm-l-sunnyvale-0301-2.jpg?w=810

https://www.mercurynews.com/wp-content/uploads/2018/02/sjm-l-sunnyvale-0301-11.jpg?w=810

Pictured is a view of the kitchen inside a home on Plymouth Drive in Sunnyvale, Calif. which recently set the highest price per square foot ever recorded by the Multiple Listing Service. The two bedroom, two bath home - 848 square feet in size - sold in two days for $2 million. It had been listed for $1.45 million. That means it sold for $2,358 per square foot, which is the highest price per square foot in Sunnyvale recorded by MLS Listings which has data going back to Jan. 1, 2000. (Courtesy Michael Silver)

Pictured is a view of the kitchen inside a home on Plymouth Drive in Sunnyvale, Calif. which recently set the highest price per square foot ever recorded by the Multiple Listing Service. The two bedroom, two bath home - 848 square feet in size - sold in two days for $2 million. It had been listed for $1.45 million. That means it sold for $2,358 per square foot, which is the highest price per square foot in Sunnyvale recorded by MLS Listings which has data going back to Jan. 1, 2000. (Courtesy Michael Silver)

Pictured is a view of the kitchen, looking out toward the back yard and patio of a home on Plymouth Drive in Sunnyvale, Calif. which recently set the highest price per square foot ever recorded by the Multiple Listing Service. The two bedroom, two bath home - 848 square feet in size - sold in two days for $2 million. It had been listed for $1.45 million. That means it sold for $2,358 per square foot, which is the highest price per square foot in Sunnyvale recorded by MLS Listings which has data going back to Jan. 1, 2000. (Courtesy Michael Silver)

Pictured is the livingroom of the home on Plymouth Drive in Sunnyvale, Calif. which recently set the highest price per square foot ever recorded by the Multiple Listing Service. The two bedroom, two bath home - 848 square feet in size - sold in two days for $2 million. It had been listed for $1.45 million. That means it sold for $2,358 per square foot, which is the highest price per square foot in Sunnyvale recorded by MLS Listings which has data going back to Jan. 1, 2000. (Courtesy Michael Silver)

Source: The Mercury News

U.S. Cities with the Most Magnificent Housing Bubbles

But some flat spots are showing up!

Just after Wolf Richter reported on the minuscule 1.4% year-over-year growth of per-capita “real” disposable income and the lowest saving rate in 12 years — for the lucky ones — there’s another asset-bubble doozie: The S&P CoreLogic Case-Shiller National Home Price Index for November, released this morning, rose 6.2% year-over-year (not-seasonally-adjusted). The index has now surpassed by 6.1% what was afterwards called the crazy peak of Housing Bubble 1 in July 2006 and is up 46% from the bottom of Housing Bust 1:

https://wolfstreet.com/wp-content/uploads/2018/01/US-Housing-Case-Shiller-National-Index-2018-01-30.png

Real estate prices are a result of local dynamics but are also impacted by national and global factors, including monetary policies and foreign non-resident investors trying to get their money out of harm’s way. This causes local housing bubbles, operating on their own schedules. When enough of them occur simultaneously, it becomes a national housing bubble. See chart above.

The Case-Shiller Index is based on a rolling three-month average; today’s release was for September, October, and November data. Instead of median prices, the index uses “home price sales pairs,” for example for a house that sold in 2010 and then again in 2017. The index provider incorporates other factors and uses algorithms to adjust the price movement into an index data point. The index was set at 100 for January 2000. An index value of 200 means prices as figured by the algorithm have doubled since then.

Here are the most magnificent leaders among the housing bubbles in major metro areas:

Boston:

The index for the Boston metro area edged down again on a monthly basis, the second decline in a row after 22 months in a row of increases. It has essentially been flat for four months but is still up 6.3% year-over-year. The slight monthly decline could be within the normal seasonal variations but there were no seasonal variations during the relentless surge in 2016 and 2015. During Housing Bubble 1, from January 2000 to October 2005, the index for Boston soared 82% before plunging. The index now exceeds the peak of Housing Bubble 1 by 12.5%:

https://wolfstreet.com/wp-content/uploads/2018/01/US-Housing-Case-Shiller-Boston-2018-01-30.png

Seattle:

The Case-Shiller home price index for the Seattle metro ticked up a smidgen on a month-to-month basis, after the first two back-to-back declines since the end of 2014! It has now been flat for the past five months. However, flat spots or slight declines in the index this time of the year were not unusual before 2015. The index is up 12.7% year-over-year, 20% from the peak of Housing Bubble 1 (July 2007), and 79% from the bottom of Housing Bust 1 in February 2011:

https://wolfstreet.com/wp-content/uploads/2018/01/US-Housing-Case-Shiller-Seattle-2018-01-30.png

Denver:

The index for the Denver metro ticked up again on a monthly basis, the 25th increase in a row. It is up 7.0% year-over-year and has surged 45% above the prior peak in July 2006. Instead of the craziness of Housing Bubble 1, Denver experienced more “normal” home-price increases, and was therefore also spared the ravages of Housing Bust 1. But in 2012, Housing Bubble 2 erupted in full force:

https://wolfstreet.com/wp-content/uploads/2018/01/US-Housing-Case-Shiller-Dener-2018-01-30.png

Dallas-Fort Worth:

The index for the Dallas-Fort Worth metro ticked up again on a monthly basis — the 46th month in a row of increases. It is up 7.0% year-over-year and 43% from the prior peak in June 2007. Like Denver, Dallas experienced saner times during Housing Bubble 1. But prices began to surge relentlessly in 2012:

https://wolfstreet.com/wp-content/uploads/2018/01/US-Housing-Case-Shiller-dallas-2018-01-30.png

Atlanta:

The home price index for the Atlanta metro has now been flat (actually down a tiny bit) for three months in a row, in line with prior seasonal declines, but is still up 5.2% year-over-year and 2.6% above the peak of Housing Bubble 1 in July 2007. From that peak, the index plunged 37%. It’s now up 70% since February 2012:

https://wolfstreet.com/wp-content/uploads/2018/01/US-Housing-Case-Shiller-Atlanta-2018-01-30.png

Portland:

The Case-Shiller index for Portland was flat in November, and has now been flat or slightly down for five months in a row, and for now still in the range of normal seasonal patterns. The index is up 6.9% year-over-year and has skyrocketed 73% in five years. It’s 20% above the crazy peak of Housing Bubble 1 and has ballooned 123% since 2000:

https://wolfstreet.com/wp-content/uploads/2018/01/US-Housing-Case-Shiller-Portland-2018-01-30.png

San Francisco Bay Area:

The index for “San Francisco” covers the county of San Francisco plus four other Bay Area counties — Alameda, Contra Costa, Marin, and San Mateo (the northern part of Silicon Valley). It jumped 1.4% for the month, after jumping 1.2% in the prior month. It’s up 9.1% year-over-year, up 31.3% from the insane peak of Housing Bubble 1, and up 85% from the end of Housing Bust 1. The index has surged 151% since 2000:

https://wolfstreet.com/wp-content/uploads/2018/01/US-Housing-Case-Shiller-San-Francisco-Bay-Area-2018-01-30.png

Los Angeles:

Home prices in the Los Angeles metro, as tracked by the index, rose 0.7% for the month, and 7.0% year-over-year. LA’s Housing Bubble 1 was in a category of its own in its steepness on both sides, with home prices skyrocketing 174% from January 2000 to July 2006, before collapsing and surrendering much of the gains. The index has skyrocketed since Housing Bust 1 and is now within a smidgen of the prior insane peak:

https://wolfstreet.com/wp-content/uploads/2018/01/US-Housing-Case-Shiller-Los-Angeles-2018-01-30.png

New York City Condos:

Case-Shiller has a special index for New York City’s condo because this is such a vast market. And this index rose another notch in November and is up 4.4% year-over-year. The index soared 131% from 2000 to February 2006 during Housing Bubble 1, barely deflated during the bust before QE unleashed money from around the world which then re-floated Wall Street more than anything else. The index is 18% above the peak of Condo Bubble 1 and has nearly tripled over the past 17 years:

https://wolfstreet.com/wp-content/uploads/2018/01/US-Housing-Case-Shiller-New-York-condos-2018-01-30.png

This is asset-price inflation at work — now that “homes” have become a global asset class. These homes didn’t get 50% bigger or 50% nicer over the past few years. Instead the purchasing power of the dollar with regards to these assets has been purposefully demolished by the Fed’s monetary policies that resulted in practically no wage inflation, moderate consumer price inflation, but massive asset-price inflation. Asset-price inflation without corresponding wage inflation means that the value of labor (wages earned) with regards to homes and other assets has been crushed — a phenomenon now hypocritically called the “affordability crisis” in many big urban areas in the US.

Source: By Wolf Richter | Wolf Street

New Home Sales Crashed In December As Prices Reached Record Highs


Following yesterday’s
disastrous drop in existing home sales (due to record low supply), new home sales plunged 9.3% MoM after November saw its biggest surge since Jan 1992, revised dramatically lower.

The November 17.5% spike was revised dramatically down to 15.0% spike – the highest since 1993 but December’s 9.3% plunge was already worse than the expected 7.9% giveback…

Biggest MoM drop since Aug 2016.

https://www.zerohedge.com/sites/default/files/inline-images/20180125_nhs1.jpg

In fact the downward revisions are huge…  October from 624K to 599K; November from 733K to 689K

As good as it gets?

https://www.zerohedge.com/sites/default/files/inline-images/20180125_nhs2.jpg

While the blame is immediately laid on weather, the regional drops show that is simply not correct:

Purchases fell in all four U.S. regions, led by a 10 percent drop in the Midwest and a 9.8 percent slide in the South.

Median Home Prices reached a new record high…at $335,400

https://www.zerohedge.com/sites/default/files/inline-images/20180125_nhs3.jpg

As Bloomberg notes, new-home sales, tabulated when contracts get signed, account for about 10 percent of the market. They’re considered a timelier barometer than purchases of previously owned homes, which are calculated when contracts close and are reported by the National Association of Realtors.

But the ongoing lack of supply remains the most notable aspect in the US housing ‘recovery’.

Alhambra’s Jeffrey Snider notes critically that it’s what’s going on underneath the headline that really matters (as always). The reluctance of Americans to sell their houses has become such a contradiction to the attempt to paint the housing market, and therefore the overall economic condition, as healthy, even robust. Prices are rising, in some places quickly. Yet, inventory of available-for-sale homes continues to decline, sharply once again in December.

https://www.zerohedge.com/sites/default/files/inline-images/20180125_housing1.jpg

It’s a glaring dichotomy that ever the NAR’s Chief Economist, Larry Yun, has been forced to grudgingly address.

Existing sales concluded the year on a softer note, but they were guided higher these last 12 months by a multi-year streak of exceptional job growth, which ignited buyer demand. At the same time, market conditions were far from perfect. New listings struggled to keep up with what was sold very quickly, and buying became less affordable in a large swath of the country. These two factors ultimately muted what should have been a stronger sales pace.

It’s the “exceptional job growth” premise that leads toward only confusion. It’s one of those terms, like “globally synchronized growth” or “economic boom”, that refers quite differently to only the mainstream depiction of the economy, the one that has been consistently overoptimistic about things for a decade. The actual data suggests an entirely separate set of circumstances, which is where all this misunderstanding comes in.

In truth, falling inventory is quite easily explained, and in a way that is perfectly consistent with labor market and national (labor) income statistics as they are. The BLS outside of the unemployment rate, which, for the nth time doesn’t include Americans who would work if there was work, actually has been describing a consistently and persistently slowing labor market. The timing of where that started matches with where resale inventory began to contract.

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There is actually a big difference between an average payroll gain of 150k and 250k; the latter is barely minimal, while the former is what panicked the Fed into launching QE3 in 2012. Last year was by every reasonable measure not even close to a good one for American workers.

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The primary effect of sluggish, constrained payroll expansion, along with parallel effects in other labor factors, is weakened aggregate income. Even people who are working start to become uncertain or even fearful when the jobs market as a whole slows down – and not just slows, but continues to decelerate year after year (after year). This trend will be starting its fourth year. At that length, workers and prospective workers become quite certain about their general uncertainty.

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If your ground-level view of the jobs environment and therefore economy is far more unsteady and dour than exceptional, you are not going to be as sure about selling your existing home to move up, taking on a larger monthly payment in the process. The more people like you who pass on the opportunity to cash in on higher prices, the more that says this is a widespread view quite different from the narrative established in consumer sentiment surveys and what news outlets write about in their headlines.

The economy is what actually happens, not what people think other people think Economists say is happening. Talk isn’t cheap, it’s way overvalued.

Source: ZeroHedge

Fate Of US Housing Market Lays In Hands Of Indian Real Estate Agents And Satellite Photos

US home prices have never been more unaffordable.

A little over a year ago, home prices finally surpassed their prior all-time highs, reached during the heyday of the housing bubble back in 2006.

But with home prices in 80% of US cities are growing twice as fast as wages, working-class families across the US are finding it increasingly difficult to support their families – let alone afford a home. But fortunately, this hasn’t been a problem for institutional investors like Blackstone, which are presently enjoying the luxury of a controversial valuation assessment known as a Broker Price Opinion – or BPO.

As the Wall Street Journal explains, Congress prohibited the use of BPOs to underpin traditional mortgages as part of Dodd-Frank. But, fortunately for private-equity firms and their limited partners, that prohibition doesn’t apply to investors buying tens of thousands of homes.

Blackstone and its lender, Deutsche Bank AG, settled on a sort of drive-by valuation done by real-estate agents that are more cursory and cost far less than traditional appraisals.

Congress outlawed the use of such assessments, called broker price opinions, or BPOs, to value properties for traditional mortgages. But the prohibition, enacted as part of postcrash financial regulation, doesn’t apply to investors buying tens of thousands of houses.

Now these perfunctory valuations abound, underpinning tens of billions of dollars of home deals. Sometimes the process is outsourced to India, where companies charge real-estate agents a few dollars to come up with U.S. home values by consulting Google Earth and real-estate websites.

That’s right: Shoddy satellite photos and workers at call centers in India – thousands of miles away from the homes they’re evaluating – are making up prices for homes that are then used to value collateral used in bond offerings. In fact, BPOs have been used to value collateral in the more than $20 billion of bonds sold by institutional landlord. They’re also the fast-growing business of lending to individual house flippers. Banks request them when considering whether to foreclose or negotiate repayment plans with delinquent homeowners.

Their popularity shows how Wall Street is finding ways to adapt to government efforts to crack down on some of the excesses that contributed to the housing crisis. While authorities in Canada and Australia have passed laws to curb speculation in their respective housing markets, US regulators have been unwilling to challenge BPOs – though the SEC is investigating whether certain rental-home companies used these shoddy valuations to distort the value of bonds tied to the deal. Critics say BPOs are ill-suited to gauge home values and could leave debt holders with less collateral than they thought.

So what are the risks, exactly? Well, inaccurate pricing information could result in abrupt and unexpected losses for investors when a more thorough appraisal is sought.

“BPOs are a creature of financial institutions that want deals to close fast, and so they don’t have to use an appraiser,” said Donald Epley, a retired University of South Alabama professor who helped write national appraisal standards after the 1980s savings-and-loan collapse. “You’re just dumbing down the standards to make the loan.”

Some credit rating firms have realized that these valuations aren’t reliable, and have stopped accepting them, or sought a second opinion.

When Fannie Mae last year guaranteed about $1 billion of Invitation Homes debt, it accepted BPOs for the 7,204 houses serving as collateral. Assuming a typical appraisal price of $450 and the $95 that Invitation Homes pays per BPO, the company saved about $2.6 million.

Credit-rating firms usually discount BPO values when grading rent-backed bonds. Kroll Bond Rating Agency has trimmed them by about 10% and uses the lower of the reduced BPOs and the amounts spent buying and renovating the homes.

“We’re never taking BPOs at face value,” said Kroll’s Daniel Tegen.

With many institutional investors expect, as Goldman Sachs put it, “a strong and synchronous global expansion” during the coming year, housing bears are difficult to come by. But Bloomberg managed to find one: James Stack, an investor who manages $1.3 billion for high net worth individuals, says that his “Housing Bubble Bellwether Barometer” is flashing red again. Stack predicted the housing crash back in 2005, just as home prices were reaching their peak.

His assessment of the market should send a chill down the spine of foreign investors who have poured money into New York City, San Francisco and other hot urban housing markets that have led the recovery in home valuations.

“It is 2005 all over again in terms of the valuation extreme, the psychological excess and the denial,” said Stack, whose fireproof files of newspaper articles on bear markets date back to 1929. “People don’t believe housing is in a bubble and don’t want to hear talk about prices being a little bit bubblish.”

Despite the torrid rally in home prices, Stack is one of the few real-estate market observers who foresee a sizable correction in prices. Indeed, as the vital spring selling season approaches, there are plenty of reasons for buyers to be optimistic – not the least of which is the “wealth effect” stemming from gains in equity prices. A backup in home building following the recession has left a paucity of inventory just as the housing needs of two generations – millennials who are buying their first homes and Baby Boomers who are downsizing in retirement – are shifting.

But there’s a structural mismatch between different tiers of the housing market that are poised to create problems for home builders.

There are plenty of reasons to be optimistic. The housing needs of two massive generations – millennials aging into home ownership and baby boomers getting ready for retirement – are expected to fuel demand for years to come if employment remains strong. Sales in master-planned communities, many of which target buyers who are at least 55, reached a record last year, according to John Burns Real Estate Consulting. Last month, a gauge of confidence from the National Association of Home Builders/Wells Fargo rose to the highest level in 18 years, and starts of single-family homes in November were the strongest in a decade.

“As soon as homes are finished, they’re flying off the shelf,” said Matthew Pointon, Capital Economics Ltd.’s U.S. property economist.

Home builders, which have focused on pricier homes since the market bottomed in 2012, are now getting ready for a wave of first-time buyers left with little to choose from on the existing-home market. Investors are rushing to builders of starter homes, because lower-priced homes in the U.S. are in the shortest supply. Shares of LGI Homes Inc., which targets renters with ads that trumpet monthly payments instead of prices, rose 161 percent last year. D.R. Horton Inc., the biggest builder, powered by its fast-selling Express entry-level brand, gained 87 percent.

Home builder stocks rallied 75% last year, outpacing the S&P 500’s best performance since the once-in-a-generation return in 2013. That gain made home builders one of the best-performing subsets of the market.

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While demand for low-income homes remains robust, home builders have so far been fixated on housing stock for high-income earners – particularly in hot markets like San Francisco, New York City and Washington DC. Meanwhile, the SEC requested information in May from Radian Group about the BPO’s it provided for rent-backed bonds.

Of course, its premature to say that this will have any kind of tangible impact on the market. But it should certainly make investors think twice about valuations.

Source: ZeroHedge