How to increase home prices in the face of stagnant household incomes – 6 charts exploring the state of the US and California housing market. 9 million homeowners are still underwater. Pockets of real estate mania.

It is easy to get swept into the momentum of the housing market.  The Federal Reserve has managed to push interest rates to historically low levels creating additional buying power for US households.  As we enter the slower fall and winter selling season, there is unlikely to be any major changes until 2013 as the election year concludes.  We do face major challenges ahead.  This current momentum in housing isn’t being caused by flush state budgets or solid wage growth.  No, this is being caused by low inventory, big investors crowding out households, and a concerted effort to push mortgage rates lower.  If you simply follow the herd, you would think that prices are now near peak levels again (or soon will be) and household incomes are hitting record levels.  Let us examine where things stand today deep in 2012.

California and nation

california and us home prices

It is clear that 2012 has pushed home prices higher overall.  This has occurred both on a nationwide basis and also for California.  Yet California home prices are far away from that peak reached in 2006.  However, some mid-tier markets never really corrected and we are now seeing flippers selling homes for prices that are near peak levels.  The argument is that overall things corrected but then this is applied to niche areas where prices are now back near peak levels (at least with the current prices being seen with some flips).

The low inventory and the narrative that the bottom is here is causing a flood of people to buy especially with low interest rates.  In lower priced areas, a good portion of the market is being over bought by Wall Street and big money investors.  This is still anything but a normal market.

US home prices

us home prices oct 2012

It is evident that US home prices have hit a new trend in 2012.  Prices are moving up.  Yet the driving force behind this is low interest rates, low inventory, and the high amount of investors buying up properties.  Keep in mind that low interest rates and especially investment buying is finite.  This money will dry up.  In housing what you want to be seeing is sustainable appreciation in combination with rising household incomes and a healthy employment market.  Those should be the driving forces instead of the Fed committing to another $500 billion of MBS purchases via QE3.

Median household income

median household income

This is the one argument that is always missing from the home boom 2.0 narrative.  Is it possible to have sustained rising home prices when household incomes are falling or stagnant?  It isn’t and the Fed and banks are fully aware of this.  So the Federal Reserve has decided to push affordability via low rates as far as they can.  It is a win-win for the financial industry.  They can unload properties at much higher prices courtesy of the low interest rate.  Some people think this comes at no expense.  It does.  Carrying a negative interest rate is pummeling those on fixed incomes and also, with one out of seven Americans on food stamps many are seeing those monthly deposits not going so far when they go shopping for food.  Ultimately the cost is being shouldered by those who can least afford it.  Ironically this flood of investors has also pushed rental prices higher as well creating a double-whammy.

LA Tiered home prices

la home tiered prices

Probably one of the better measures of price is the Case Shiller Index.  This looks at repeat home sales so we are measuring apples to apples.  The median price is also important but it is prone to changes with the mix of sales.  Right now, the big drop in foreclosure resales is causing prices to surge.  Yet it is important for trend shifts and also because the media and the public rely on this for their purchasing behavior.

As you can see from the chart above, each tier in Los Angeles County has shifted up a bit.  We are far from peak prices and given the mania in certain areas, you would think this would be rising much faster.  You are not missing anything.  For those thinking they are missing something you might as well go to Las Vegas and try your hand at the tables.  There is a mini mania in prime areas of California happening right now.  As you see from the above charts, household incomes simply do not justify this movement.  The momentum right now is in favor of higher prices but for fleeting reasons.

Home sales and trends

home sales

If things are so hot, why are home sales not running at a higher pace?  The 12 month moving average is running a little bit higher than 35,000.  This is the pace we’ve had since 2009 when the market was flying off a cliff.  From 1998 to 2007 the moving average was above 45,000 sales per month.  So what really is going on then with prices rising so fast overall?

The explanation comes from a few items:

-1.  Inventory is low (we even hear complaints from real estate agents about this)

-2.  Low rates increased leverage in the face of falling incomes (refer to earlier chart)

-3.  From the bottom everything is higher (the increase is big from the bottom but put into context, still has us way below the 12 month moving average from over a decade ago)

-4.  You are competing with big money investors

This is why sales are not exactly off the charts given all the favorable elements that are being perceived.  For this market to continue on this path, nothing from the above can be removed.  Keep in mind that with the “fiscal cliff” some items on the table include the mortgage interest deduction cap.  This will hit California hard especially in these mania locations.  There is no reason for the nation to allow mortgage interest deduction above a certain level (i.e., $500,000 or capped at certain income levels).

“(LA Times) But since only about one-third of taxpayers itemize on their returns — the rest opt for the standard deductions — who’s really getting these tax savings? As you might guess, people who have higher incomes are more likely to itemize and claim mortgage interest and other housing deductions. Citing the latest data on the subject, published by the IRS in 2009, Kolko found that only 15% of households with incomes below $50,000 took itemized deductions, while 65% of those with incomes between $50,000 and $200,000 did. Just about everybody with incomes above $200,000 — 96% — itemized on their returns.”

And guess who was number one on the list?

“California ranked No. 1 in the size of home mortgage deductions, with $18,876 on average. Next came Hawaii ($16,730), the District of Columbia ($16,720), Nevada ($15,502), Washington ($14,262), Maryland ($14,162) and Virginia ($14,094).”

There is little reason for the mortgage interest deduction to allow for such a large write-off especially when the typical US home price ranges from $150,000 to $170,000.  We are in massive debt and for the nation to subsidize expensive California housing does not make sense.

Underwater

Mortgages underwater

Even with home prices moving up we still have over 9,000,000 underwater homeowners.  This is a sizeable number.  The above chart highlights underwater mortgages at various increases or decreases in home prices.  The distressed inventory is still large but is decreasing.

The thing with the housing market is that it largely isn’t a market anymore.  So with all of these market incentives and the fiscal situation looming next year, there has to be a catch.  We have yet to see household incomes increase.  The economy is still on shaky ground.  Yet in many pocket markets you have people ignoring the macro economy and just running around their little enclaves with blinders on.  Hot money is flowing in.  There is no doubt about that.  Yet it is not sustainable.  Since election years usually produce very little change, we’ll have to wait until 2013 to see if this trend actually has some real teeth.

Do you think household incomes are important when it comes to home price?

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64 Responses to “How to increase home prices in the face of stagnant household incomes – 6 charts exploring the state of the US and California housing market. 9 million homeowners are still underwater. Pockets of real estate mania.”

  • @ Doc

    The Fed MBS purchases are OPEN ENDED, not capped 500 billion. Some basic arithmetic will show that the Feds balance sheet will expand by 1 trillion by the end of 2013 alone. Then, consider M2.

    Mark 09.13.12 on your calendar. The future history books will cite that date as the last gasp of a dying superpower. There is no turning back now – the Fed will not be able to unwind its balance sheet. With this, there are only two choices, with one outcome. They will try to continue ’till the system crashes, or they stop and the system crashes. They will choose the former. Either way, epic economic pain will result. From the movie The Matrix: “You hear that Mr. Anderson?…That is the sound of inevitability…It is the sound of your death…”

    Unless the Martians finally come to earth to buy our debt (bail us out.) Then again, you have to be somewhat smart for space travel, thus they will fully understand exponential functions (which 99.99999999% of Earthlings do not understand) and that the debt is not backed by real assets, and abort the mission well before launch date. Never mind, the Martians ain’t coming.

    But please, carry on with your housing purchases. “As long as the music is playing, you’ve got to get up and dance” – Charles Prince, the former Citigroup chief. Right you are Chuck, right you are….

    • @ Variance Doc,

      Nice personal attack from you the other day, real classy. I don’t think anybody is disagreeing with reckless Fed behavior that has been and will be going on. But what are you going to do about it? What is your plan? Are you living in the cheapest rental possible, stocking up on gold, shorting REITs, shorting the market? Please do share.

      You, I or anybody else has no idea how this is going to play out. Rates will likely go up sometime in the futute…whether that is next year, 5 years or 10 years from now nobody knows. If rates go up and prices correct, your monthly payment will probably be close to what it is today, simple arithmetic! We have cash investors scooping up properties today, what will happen if prices correct by 25 or 35%? Are you going to outbid these investors?

      Like I said before, everybody’s circumstance is different regarding home ownership. Many people view owning a home as having stability in their lives. This will not change anytime soon. So please do share with us what us uneducated lemmings are supposed to do…

      • People cherry pick data to make all kinds of argument. I come to this website to read people’s comments and doc’s sentiment. In the last three posts, the doc started to mention bubbles. I can see that gas at $4 or oil at $100 is a bubble. If you see the 6 figures the doc cited above, what I see is that we are crawling at the depressed level in aggregate housing. Where is the bubble? I know LA areas are expensive. They always are. Recall a couple of years ago, there were over 500 auctions a month in LA on the auction website. Most people at that time were in fetal positions. Now it is just starting to show a little improvement, bubble talk is starting.
        Being a market, you need a seller and a buyer. If there is no seller, there will be no crash in price. If there is no buyer, there will be no price appreciation. People keep saying the rate will go up. They are essentially fighting the Fed. Being an individual, you don’t fight the Fed. Today Fed and banks as well as the congress are in this together. They did everything they can think of to keep housing from tanking further. If you still think housing will go lower, you are betting Fed, banks and congress will lose, but to who? To you?
        People also say Median income is lower or stagnated. If you didn’t lose your job in the last five years, you can take a look at your pay check again. Is it really lower than 5 years ago? How about 10 yers ago? If you lost your job, sorry, that’s really a different story.
        I talked to a builder about building a house a couple of years ago, I was told it is around 120$/sq. ft. That’s the building cost, not including the lot. This is not in CA.
        Bottom line is that what you read and what in your mind may not be the reality on the street. To adjust to reality needs work. I like Ray Dalio’s work because of that.

      • As you well expect, you will receive no answer, because there isn’t one. The average person should just be following the same advice today, that we would have provided before the bubble got crazy – “You can buy a home now if it meets your family’s timeframe, but have ~20% to put down, have large reserves, ensure your mortgage payment is fixed and small (< 25%) relative to your net income, etc.

      • Not a “personal attack”, just an observation of your mental capacity (really, really low).

        Since you do not comprehend what you read, I’ll say it again. Interest is the price of CREDIT, not money. Watch the credit markets, not equities or stand around with your head in the sand spouting “[no]body else has no [sic] idea how this is going to play out.” Yes, people do have an idea how this will play out. In a credit based system, the key element is CONFIDENCE. STFU and repeat that sentence ’till you get it. How else do you think *some* people made an ass load of money on the credit/housing burst? They certainly were not listing to people like you – slow and years behind the curve.

      • Variance Doc,

        I don’t know why I even waste time responding to idiots like you, not a personal attack…just a clear as day observation. You can crow all you want about how things are SUPPOSED to turn out because that is what you read in your little text books. Unfortunately they didn’t include the chapter about how the real world works, which we have witnessed the last 5 years. Since you like dodging questions, I’ll ask you again “what is your plan?”

        Variance Doc Jr: Daddy, when can we get out of this little run down apartment? And when can I go to a good school where I don’t get beat up everyday by bullies?

        Variance Doc: Just keep holding on there son. Everything is going to hit the fan real soon because that’s what the professor taught me in class. After that happens, we’ll be going from little apartment to prime Westside location on the cheap!

        Bwahaahhahaha. Couldn’t control myself there….just had to rub your nose in it! :)

      • Just a few cautions, REITs are strange animals, and they all be different. What you might think should go down, might not, and vice versa.
        Also investors are buying foreclosed houses from Fannie Mae for 20,000 apiece, that is correct, 20,000 apiece, 100 percent financing, in return for 30 percent of rental income until Fannie Mae gets about 70k apiece out of them.

    • “One of the first big hedge funds to try to profit from a rebound in the U.S. housing market by investing in foreclosed homes is looking to cash out.
      But the New York-based hedge fund is looking to sell now because the returns it is generating from rental income are less than expected.”

      http://news.yahoo.com/exclusive-och-ziff-hedge-fund-looks-exit-landlord-211902686–sector.html

      I think we see a lot more of these hedge funds bail on this business model once they realize the costs to maintain Single Family Homes.

      • Hmmm, this seems very fishy to me – very fishy indeed. I think the more likely story is that the funds always had flipping in mind but didn’t say they were doing that because, well, you know, that would be BAAAD. Tsk, tsk and frowned upon and not nice to your gramma, etc.

        Rental profits after renovating and after property management expenses is very well known and not that variable. So these funds knew the score going in. Don’t tell me they just found out that they weren’t going to make 8%. No shit.

        Let’s see, now the other large investors are all going to follow suit soon – oh, we’re not flippers, no not us. Don’t hate us, we were just trying to be landlords. Hardy-har-har-wink-wink…

    • Variance Doc
      The Fed MBS purchases are OPEN ENDED, not capped 500 billion. Some basic arithmetic will show that the Feds balance sheet will expand by 1 trillion by the end of 2013 alone. Then, consider M2.

      Mark 09.13.12 on your calendar. The future history books will cite that date as the last gasp of a dying superpower. There is no turning back now – the Fed will not be able to unwind its balance sheet. With this, there are only two choices, with one outcome. They will try to continue ’till the system crashes, or they stop and the system crashes. They will choose the former. Either way, epic economic pain will result. From the movie The Matrix: “You hear that Mr. Anderson?…That is the sound of inevitability…It is the sound of your death…”

      Unless the Martians finally come to earth to buy our debt (bail us out.) Then again, you have to be somewhat smart for space travel, thus they will fully understand exponential functions (which 99.99999999% of Earthlings do not understand) and that the debt is not backed by real assets, and abort the mission well before launch date. Never mind, the Martians ain’t coming.

      But please, carry on with your housing purchases. “As long as the music is playing, you’ve got to get up and dance” – Charles Prince, the former Citigroup chief. Right you are Chuck, right you are….

      You don’t appear to know what federal public debt is or even how our monetary system works.
      If the Martians were really smart they would know that a monetarily sovereign nation would never need to be bailed out.
      Let us suppose they are smart enough for space travel but not smart enough to understand a fiat monetary system.
      The Martians do decide to travel to earth to “bail us out”. How would they obtain US dollars to purchase our debt?

      Highly recommend watching this:
      http://www.youtube.com/watch?v=ba8XdDqZ-Jg&feature=player_embedded

      • “…monetarily sovereign nation…” LOL. It is almost impossible you’re that dumb. Pay attention Lassie, the lesson is easy.

        Effectively every FRN in existence has a coupon. The FRN is merely the manifestation of some debt somewhere else, and NOT just in the US.

        Fiat money is debt.

        Debt has a coupon.

        That system is represented as P + I, and I does not presently exist, only P does. P is the aggregate credit base. I is owed in the future.

        Ergo, FUTURE P must be = present P + I. QED, debt must grow. That is why the answer is always more debt.

        If you don’t understand this, then you need to STFU and do nothing else until you do. Once you understand it, you can start to comprehend why ZIRP is here and what it really means in an aggregate sense and how declining energy supply makes contraction inevitable and debt growth impossible.

      • Variance doc

        “…monetarily sovereign nation…” LOL.

        I simply asked how the martians could bail us out. I didn’t see anything in your meth fueled rant that answered the question.

        So once again, where would the martians get the US dollars to purchase our debt in order to “bail us out” as we so desperately need according to you?

        Why do you think the US federal government has to borrow it’s own fiat currency in order to spend?

    • The deadline for banks to release shadow inventory is the end of 2015, which is when the Fed is expected to raise rates. With a higher interest rate environment, affordability will dictate downward pressure on home prices. Use a simple mortgage calculator to illustrate the dramatic payment increase with higher rates. Banks are taking advantage of a very short term strategy to hold back on releasing homes in order to temporarily help their financials. Expect dramatic home price depreciation, just use per-bubble period rates.

      • What if they apply for a 5 year extension and get it? I recall the rules are the banks can request an extension if it’s too much of a hardship – pretty open on the rules. Wonder how many extensions are approved.

        Also, I wonder how many are actually in the stage where the banks must release the inventory.

  • Variance Doc,
    “…last gasp of a dying superpower.”
    I’ve been feeling this way for years. I hope we are both wrong.

  • You definitely see inventory building in the price ranges above the GSA limits. It will be interesting to see how this plays out over the next few years.

  • “As the deadline for fiscal peril in the U.S. nears, Wall Street is worried that the impact could be much worse than anyone thought—while investors remain nearly oblivious to the danger.” – Jeff Cox, CNBC.com staff writer, “Why the Fiscal Cliff May Be Bigger Threat Than You Think,” October 19, 2012

    “Investment guru Jeremy Siegel, finance professor at the University of Pennsylvania’s Wharton School, says stock prices could fall as much as 20 percent BY YEAR END if Congress does nothing to keep the economy from falling over the fiscal cliff.”

    “As we enter the slower fall and winter selling season, there is unlikely to be any major changes until 2013 as the election year concludes.” This statement seems to be “nearly oblivious to the danger.”

    The wheels come off after November 6, not some indefinite time in 2013.

    But at least you’re finally talking about the fiscal cliff.

    Does not the danger of severe stock market declines BEFORE 2012 ends strike you as a major change?

    Or do you actually think that this state of affairs is just hunky-dory and that this danger of severe correction in stocks would have no bearing on housing?

    • No, the lug nuts will be clattering, but the wheels will stay on the car after 11/6, believe you me.

      And, after the election there will be lip service about making hard choices to avoid the fiscal cliff. Then, a grinding negotiation/game of chicken will ensue between the parties until a “patch and promise” plan is agreed to at the last minute in order to avoid major stock market declines due to immediate cuts. At most, the market will lose 5-10% in December, depending on the theatrics from the actors on both side of the aisle.

      Since all either party cares about is the Presidential election-year politics (i.e, making it so bad for the incumbent so the out-of-power party can win in 4 years), there will be a plan hatched by the out-of-power party to have the economy so bad in 2015 so that their party will re-take the White House.

      The out-of-power party wouldn’t mind an immediate recession in 2013, only that recessions last at most two years and that would mean a healing/healed economy come 2016.

      That means kicking the can well into 2015. Then the real fun starts!

      • To a degree, I agree. But Democrats will not play chicken with the economy to the degree Republicans are willing to.

  • Thank you Mr. Obama for the home prices going up just before we vote. The banks and etc. finally got on board the Obama train and know that Obama will reward them more than those Republicans who want to stop the gravy train. For the good times to continue, you know how to vote folks. Party on and party hardy. Roll out the beer barrels for a barrel of fun.

    • Are really claiming a Romney administration is going to stop the bankers’ gravy train? The Romney whose top five contributors are –

      Goldman Sachs $994,139
      Bank of America $921,839
      Morgan Stanley $827,255
      JPMorgan Chase & Co $792,147
      Credit Suisse Group $618,941

      • Dew "Trickle Down" Your Leg Therory

        Don’t forget Willard has lots of off spring on the dole too. Tag and the For Proft=it college thing. never mind educating hte hungry masses, just fleece them of thier Pell grants and GI Bill Dollars.

  • As a 8 year waiter on market correction – I have to say when is the right time to buy? All indications would lead one to believe several years from now. If we grab a number from the air and say five years, I would be over 50. Point is, while the market may have a near infinite ability to manage its price, we ourselves don’t have infinite time.

    I came to the conclusion that it I needed to get on with getting a place. I have wanted to for a long time. And in so doing I did pay what I consider to be a bit, but in line with what it would cost me to rent for something of similar quality. In the end I have no idea, how this will turn out, though one never does.

    And as the banks continue using their 10 year mark to market accounting, you can rest assured the prices of assets on their balance sheet will remain kind to them. Can’t really have the big 5 going belly up can we?

    I guess for what it is worth, I wouldn’t be overly surprised to see hyper inflation kick in over the next decade. And if it does, just like all the houses bought in the 90′s what I did will look cheap. To my way of thinking about it, the people running the game have let it be known they won’t unwind housing…and if so…will choose the alternative…slow growth, or devaluing the currency to get over the societal debt to value problem.

    • upnorth wrote: “..assured the prices of assets on their balance sheet will remain kind to them…”

      The real purpose of QE3 is to transfer bad mortgages from banks to the Federal Reserve. All nationally chartered banks in the U.S. are required to be share holders in one of the regional Federal Reserve banks.

      When banks reported their 3rd quarter earnings, Zero Hedge howled when loan loss provisions were reduced and banks booked the reduced loan loss provision as income. What Zero Hedge, and many others failed to do is connect the dots. The reduced loan loss provisions is due to banks transferring nonperforming/bad mortgages to the Federal Reserve via QE3.

      QE3 is officially going to continue as long as employment numbers are bad. The real reason for QE3 is to get bad mortgages off the books of the banks and on to the balance sheet of the Fed.

      • Also, the end game for the Fed is hyperinflation. The Fed knows that they cannot unwind the U.S. Treasuries on their balance sheet. Th Fed also knows they cannot unwind the M.B.S.’s on their balance sheet.

        Technically, we are seeing a subtle form of borderline hyperinflation. Real inflation is in the 5% to 6% range. Interest paid on deposits is close to 0%. Wages are stagnant. The net of all this is that purchasing power, and the value of the dollar is in steep decline. This is great for debtors, terrible for savers.

      • ernst blofeld

        Also, the end game for the Fed is hyperinflation. The Fed knows that they cannot unwind the U.S. Treasuries on their balance sheet. Th Fed also knows they cannot unwind the M.B.S.’s on their balance sheet.

        Technically, we are seeing a subtle form of borderline hyperinflation. Real inflation is in the 5% to 6% range. Interest paid on deposits is close to 0%. Wages are stagnant. The net of all this is that purchasing power, and the value of the dollar is in steep decline. This is great for debtors, terrible for savers.

        Subtle hyperinflation?? It that like hyperinflation but without rising prices? Are you saying we will have hyperinflation while wages and home prices fall? That would be interesting to see….. When is this hyperinflation coming?

      • Hyperinflation is already hitting us with much higher gasoline prices, food prices, commodity prices, postage stamps, precious metals, health care, utilities, cable, college tuition, etc. USA is not doing anything different than any other country in history. Try to print your way out of this mess. Buy your own debt. Buy your own bad debt. Borrow trillions to keep the illusion going. Give trillions to banks.

        One day when the sheep wake up and realize that their money is worth much less than they thought, panic sets in, revolutions break out, and new governments get installed. When your wages are not going up while the price of everything keeps going higher and higher you finally realize it. We have a fiat currency backed by only the full faith and credit of the USA. It is not backed by precious metals.

      • Hyperinflation is already hitting us with much higher gasoline prices, food prices, commodity prices, postage stamps, precious metals, health care, utilities, cable, college tuition, etc. USA is not doing anything different than any other country in history. Try to print your way out of this mess. Buy your own debt. Buy your own bad debt. Borrow trillions to keep the illusion going. Give trillions to banks.
        Matt

        One day when the sheep wake up and realize that their money is worth much less than they thought, panic sets in, revolutions break out, and new governments get installed. When your wages are not going up while the price of everything keeps going higher and higher you finally realize it. We have a fiat currency backed by only the full faith and credit of the USA. It is not backed by precious metals.

        Oh no hyperinflation is happening now!! Except for wages and house prices, and oh yeah natural gas(I pay less than half for natural gas now than I paid 4 years ago). Oh And flat screen tv and computer prices are skyrocketing, err, nope not happening either. Ahh gold is spiking like crazy, except if you bought at the peak in 1980, you are still losing money on that one.

      • @Matt,
        If you’re going to be making claims about hyperinflation at least get terminology correct. We are nowhere close to hyperinflation yet. Hyperinflation is defined by many as 50% monthly increases, and an alternative definition is 100% price increases over three years. I agree we will see hyperinflation however we are nowhere even close yet.

  • They will just raise the debt ceiling. It’s never going to stop.

  • Apparently the insane house shopping from above is not an isolated pocket event for California only.In Salt Lake City, Utah the frenzy is in full pitch and the house prices are up 12.9% in the better hoods of town.Local unreal estate agents are advising the average ($10.00 per hour/two jobs/70 hour per week) wage slaves that if there is any hope for them to get a fairly decent home-hood to raise a family here on a 30 year fixed, they should be ready to bid up the sticker price NOW! because some smiling gentlemen are showing up lately and with f$&$&$g…big suitcases full of cash.Not to mention the nearby Park City ski resort town where secretive Florida based hedge funds are wrestling with California flippers on $2.5M foreclosure condos and the mere mortals are just lucky for passing by.

  • “The six richest property developers in Hong Kong lost a combined $2.3 billion in net worth today as shares in their companies dived after the government imposed a property tax on overseas buyers. ”

    http://finance.yahoo.com/news/hong-kongs-property-tycoons-drop-044920569.html

    When Congress decides to cut the deficits, my financial advisor warned me they may do away with some of the property tax breaks here in 2013….similar to the late 1980s. Caused my property to tumble about 20% back then if I remember correctly.

  • I would be interested in seeing the anticipated impact of demographics on US housing prices. Baby boomers downsizing (if they are not underwater), next generation which is meant to pick up the slack is smaller, carries more debt, and has less earning power currently. Surely this puts a long term strain on housing prices.

  • Real personal disposable incomes dropped for the second straight month. The savings rate is dropping too. Both downward trends are ( supposed to be ) negative for housing.

    The Fed has busted the discounting mechanism.

    http://www.zerohedge.com/news/2012-10-29/savings-rate-plunges-lowest-one-year-us-consumer-once-again-tapped-out

  • we are going through what Japan went through in 2000. japan’s Index topped and it’s biggest component (then) Sony failed.. US indexes are topped out and it’s biggest component Aaple is falling. From 2000 to present in Japan, interest rates stayed low, house prices kept falling, inflation rising, aging population, currency went up … we are behind Japan by ~12years..

  • Nice set up for the China (Asean) markets with stuffed
    pockets to outbid and profit while the domestic market suffers.

  • The ‘hot money’ you say is buying real estate is actually stolen money. Price is no object to those laundering freshly printed cash into tangible assets. The only consideration is making sure the working stiff will be working a long, long time to try to buy the same asset.

  • The first thing we have to do is to remove second-home and investor-owned single-family homes from the mortgage interest deduction and other “winner-pickers.” If we want to encourage home ownership, we can continue the mortgage interest deduction for owner-occupiers.

    Second we need to strongly encourage lenders to keep the loans they make, and not flip them to consolidators or collateralize them.

    We need also to find a way to incentivise savings – a market that supports 4-5% savings account interest will do this nicely. As things are today, it’s nearly impossible for those without rich daddies or some sort of windfall to ever save a down payment.

    • Higher interest rates on bank accounts are funded by higher rates on mortgages. How likely is that to happen any time soon?

    • Doug, I agree with everything you said. They also need to put an end to zero
      down mortgages which are still being handed out to people who cannot afford the house. When a lender can pass the mortgage loan off to the taxpayers shoulders via the Fed, they have no incentive to due diligence on the borrower.

  • Question: why is inventory so low? Is it a result of banks holding it back?

    • apolitical scientist

      Banks only control the inventory they own. The vast majority of homes in the US are owned by – homeowners. The problem is that most homeowners aren’t interested in selling right now, because their equity position in substantially worse since the housing crunch, because job hopping has decreased in these times of economic uncertainty and, somewhat circularly, because there aren’t a lot of good places to move to – since nobody else is selling either.

      To many homeowners it feels like housing was a vast game of musical chairs – in which the music abruptly stopped around 2007-2008. Whatever house you were in when the music stopped appears to be the one you’re stuck in. It will take a big change in homeowner psychology before the music starts up again.

  • Anyone can see what is going on if they are actually paying attention. The Fed is increasing home prices so the big boys can get bailed out of the underwater mortgages. As soon as prices are high enough for the banksters to get whole again and they unload their inventory, interest rates will start rising and home prices will come down. Actually they will plummit. In this they take out the small investors who are buying now and the rest of the 99%. It’s a win, win for the banksters and the 1%.

  • There is only one way out of the debt trap. It is all out war in the Middle East. The easiest way to do it is a false flag Royal Kingdom of Saudi Arabia “incident”. While your eye is on Iran, the ball will be in another “court”.

  • The moment I heard hedge funds were buying into CA residential real estate, I thought to myself, “Pump and dump”. It is sure starting to look like it.

  • The best part is the graph on incomes- how it has fallen (adjusted for inflation)- that tells the whole story right there in a nutshell

    Oh and right here is that shadow inventory:

    http://caliscreaming.com/2012/10/30/where-is-the-shadow-inventory-right-here/

  • California, unlike almost any other state, was originally developed as a real estate hustle by an industrial corporation, the Southern Pacific Railroad Company of San Francisco which, in spite of its name, was actually a land-holding company set up to dispose of the millions of acres of land deeded it by the federal government for the timely completion of the western portion of the transcontinental railroad. Unfortunately for the current title holders, there was no water or anything else to speak of except occasionally spectacular scenery. The founders of this company, the so-called Big Four (Crocker, Hopkins, Huntington, and Stanford) were Sacramento merchants who got rich selling picks and shovels to mostly not-so-lucky gold prospectors. Sunset magazine was founded in 1898 as a publicity tool to attract tourism to an otherwise desolate environment that even the native Americans mostly avoided. Land without water is virtually worthless so in the 1920s congressman Phil Swing from southern California lobbied for and finally got water diverted from the Colorado River to the barren state by building Boulder Dam. The film industry relocated to southern California early in the last century during one of its periodic downturns mainly to avoid process servers seeking to collect debts by moving to the most distant spot on the continent and after that inertia set in. After the Second World War, the military-industrial complex took over the state which explains its reputation for insane anticommunism and demands from California congressional legislators for withdrawal from the United Nations and the frequent allegation that sex education was a Communist plot, famously mocked in “Dr Strangelove” by Gen. Ripper’s “bodily fluids” speech to Peter Sellers. After that, it was on to Richard Nixon and Ronald Reagan. A lot of people would pay a premium not to have to live around people with these kinds of political tastes and insights but the government was happy to up pay rates to fill the state up with workers in the defense industries and when Prop 13 ended the property tax as it had traditionally existed, the locals just took that money and bid up real estate. Why not? But the signer of those checks is broke and he’s not going to be solvent any time soon, if ever. The federal government giveth and taketh away but the indisputable fact is that high real estate prices constitute a competitive disadvantage and cost of business that is easily avoided by going elsewhere. But at least the old and infirm can warm their bones in the sun in peace as they kvetch about whatever it is that’s bothering them.

    • Damn. Your post sounds like a crazy movie plot. Notwithstanding Albee’s Cadillac Desert California has and had plenty of water for a pre Baby Boom world population. The Sierra Nevada range is a huge watershed. Granted Southern CA should be a sparsely populated agrarian region but that ship sailed long ago. When the housing boom started here it was the cheapest option in the nation – with the bonus of the best weather.

      What I find most hilarious about your post is the prop 13 comment. The savings from prop 13 rates are mathematically inadequate to support the insane run up in CA home pricing.

      • Property taxes act as a counterweight to home prices because people will not bid up the price of a residence to something which requires them to pay more in taxes than they can afford.

    • Adam Smyth – “After the Second World War, the military-industrial complex took over the state which explains its reputation for insane anticommunism and demands from California congressional legislators for withdrawal from the United Nations and the frequent allegation that sex education was a Communist plot, famously mocked in “Dr Strangelove” by Gen. Ripper’s “bodily fluids” speech to Peter Sellers.”

      Wow – really? Reputation for insane – yes. Anti-communism? Where have you been living? Certainly not Kalifornia.

  • Here is what is happening on the streets in LA, according to my broker (who mainly represents buyers). [I am a qualified looking in West LA, DelRey, Village Green (90016), Beverlywood, Mar Vists, Palms area]: the best houses, meaning houses in good areas (no freeway nearby or not along a major road, etc) and with wooden floors, nice size lot (over 5,000 sqft) with good floorplans and no permit issues and under $600K are selling within 1-2 weeks with multiple over-asking price offers. I looked at a 3bd 2 ba on 7,500 sqft lot near LaCienega and Rodeo Rd and it had 3 overasking offers within 1 week. The buyers, are mainly like me, first time buyers needing loans. The all cash buyers are the investors who are mainly going after lower priced houses that need work. He also said it has become a sellers market now, meaning that unlike 1 year ago, when a listing agent was eager to get it sold, he said often times now the listing agents are not returning calls, not showing up for property showings for other brokers. Anyway, he said that the past 1 year there has been a dramatic change on the Westside: reduced inventory, multiple offers over asking price (for good houses in good areas) and unreliable listing agents. Also he said he sees more now where there are multiple offers over asking but then the house sells and shows up in the records as sold for around asking price. He said this is because the owner accepted an offer, the property went into escrow, then the buyer renegotiated (or appraisal was for less) then the seller decided to settle the deal with the buyer in hand and accept a reduced offer but cautioned that I dont play that game unless the appraisal comes in low.

  • Pete Says: “People also say Median income is lower or stagnated. If you didn’t lose your job in the last five years, you can take a look at your pay check again. Is it really lower than 5 years ago? How about 10 yers ago? If you lost your job, sorry, that’s really a different story.”

    If we willingly overlook nominal increases versus real, then you have something there. When was the last time your salary was adjusted for cost of living? Not a merit raise, but just enough to keep up with the inflation in consumer goods?

    • Fish,

      We live in a nominal world. Everything is nominal. I didn’t say that you got wealthy. I simply say that everything went up. Inflation is higher than what CPI indicated.

      • What are you talking about? I am discussing the difference between nominal vs real. I never mentioned anything about getting wealthy. I stated that in real terms, (that means, adjusted for inflation), wages are lagging. So yeah, a nominal increase on paper (where we ignore inflation) is technically a rise in pay, (you could even call this quasi wealth effect), but if the buying power of that increase is inflated away in real terms, then it isn’t really a raise, is it?

        The answer, is no.

  • I liked what Perspective and Tricia said (which is to say) that if you want to pursue the American dream of home ownership then follow the traditional path as Perspective puts it:

    “You can buy a home now if it meets your family’s timeframe, but have ~20% to put down, have large reserves, ensure your mortgage payment is fixed and small (< 25%) relative to your net income, etc."

    But because of corruption (uncontrolled greed) as Trica states, the housing market has been manipulated to favor very few winners:

    "The Fed is increasing home prices so the big boys can get bailed out of the underwater mortgages. As soon as prices are high enough for the banksters to get whole again and they unload their inventory, interest rates will start rising and home prices will come down. Actually they will plummit. In this they take out the small investors who are buying now and the rest of the 99%. It’s a win, win for the banksters and the 1%. "

    If I was buying a home to live in (not as an investment) then I would still have to wait until interest rates start to rise and the prices of homes fall dramatically and reach a realistic value. Around that time, real employment will be rising and real productivity will also be rising.

    These indicators will be signal a true (real) economic recovery. Do you see these indicators manifesting now or anytime soon?

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