I think it is safe to say that investor activity in the housing market has changed the face of real estate buying. Back when the crisis hit in 2007, some analysts were cheerleading the hedge fund crowd as a tiny blip in the market. It is hard to call it a blip when 30 to 40 percent of all purchases are going to investors for close to half a decade. A recent analysis from RealtyTrac found that the estimated monthly home payment for a regular three bedroom home (costs include mortgage, insurance, taxes, maintenance, and subtracting the income tax benefit) rose an average of 21 percent from a year ago in 325 US counties. What about household incomes? That is another story. So it is no surprise that we are largely becoming a nation of renters. It is also no shocker that young households are largely unable to begin household formation via buying a home. Many are living with parents well into “young” adulthood. For the first time in history, we had a six year stretch where we added more renter households than that of actual homeowners.
It is common knowledge that banks have metered troubled real estate inventory out into the market in a slow drip fashion. This practice over the years has caused an artificially low supply to be present in the market. Add into the mix a low rate environment and years of investors buying up properties and you get our current stalemate of a market. Virtually no one in the press with a voice is even expressing a possibility that prices may sway lower. The only options making the rounds involve a couple of scenarios where prices will go up slowly in 2014 or prices will move sideways. No option for a decrease. This lack of perspective is odd given the resurgence of interest only loans and the fact that a well known bank is dipping back into the subprime market. One surprising statistic that I did see was the resurgence of foreclosure starts in California.
The latest housing data highlights a stagnant market in Southern California. January home sales came in at a three year low logging in 14,471 sales. With a low number of foreclosure resales now making up the pool of total sold homes, there is little reason to use the excuse that foreclosures are depressing home prices on aggregate. Home prices retreated back to levels last seen in June primarily because investors are having a tougher find picking out good low priced properties and modestly higher rates are still hurting the market with cash strapped buyers. The market is caught in a Catch-22; if the stock market goes up this adds fuel for the Fed to retreat from QE and this will likely push rates higher. If the stock market pulls back, the Fed is likely to dive back in and interest rates are likely to stagnate or fall but investor activity is likely to take a hit. Yet there is little action to be had overall with such an artificially low amount of inventory and crowding out regular buyers with investors is still common. It is more likely that we have a month in 2014 with a negative year-over-year median price versus a repeat of 2013.
There is little doubt that growing wealth and income inequality is a reality in the United States. Even in California we can see this microcosm unfold dramatically. You have people being pushed inland from coastal areas and those near employment hubs have seen housing values reach near peak levels. What we are also seeing is that access to debt is the key measure of success in this economy. For example, the bubble favorite of interest only loans is back but with a different flavor. Banks like Wells Fargo, Bank of America, and Union Bank are back at it underwriting interest only loans to wealthier clients. The big difference is that you need to have money to play in this current market. Banks are holding onto these loans in their own portfolios. Not a bad way to earn money in a low rate environment. So this hits at the heart of the issue where Fed policy has largely aided those least needing it in a modern day feudal banking network. For example, you can buy a $1,000,000 home today with a 3 year interest only mortgage and carry a principal and interest payment of $1,562 per month. Impossible? Welcome to the modern banking system where low rates are accessible to those who least need it.
Making homes unaffordable to younger Americans is more problematic than simply altering the living habits of upcoming generations. Housing formation in the United States is entering uncharted territory based on demographic shifts and also the new reality that younger Americans will be less affluent than their parents. This is why we have millions of younger Americans living at home with parents. Some may not view this as an issue but in the past, construction was a big part of GDP and you will have a hard time justifying new housing construction if people are simply living at home or are only able to afford a rental. The student debt crisis goes hand and hand with the unaffordable nature of housing for young Americans. It also doesn’t help that Wall Street is crowding out regular buyers in the market. With a growing population and investors eating up the low supply of housing, many young Americans are essentially in the position to move back home or to rent. Buying is a remote possibility for many Americans and this has put a clamp on new housing formation.
While the stock market can turn on a dime with the agility of a cheetah, the housing market has the nimbleness of the Titanic. That is why the slowdown that started in the summer of 2013 is actually now resulting in on the ground changes for buyers and sellers. The stock market has taken a bit of a reversal early in 2014. This is important for housing since much of the hot money is coming from excess funds from Wall Street and investors chasing yields like hungry hippos. The euphoria of a stock market juiced on Quantitative Easing has leaked into many areas outside of stocks including real estate once again. Yet the resulting re-inflation was largely based on investors cramping out regular home buyers. Regular buyers unlike the last bubble, are the last folks to the party. That is, the last bubble was because of too many regular buyers over stretching with toxic mortgage junk (and prime mortgages with weak income due diligence) while this cycle is because of Wall Street using easy money from uncle Fed. This is why the rise in adjustable rate mortgages (ARMs) and jumbo mortgages so late in the game tells you that families are simply unable to compete with big money and once again, are stretching out their budgets for as much as they can get. Many even with low rates cannot compete so they have taken the next alternative in the form of renting. One thesis I think largely being missed is that the real estate market has caught a ride on the coattails of the non-stop stock rise since 2009. Four years of stocks only going up with QE as a backstop have conditioned people to believing that stocks and real estate only go in one direction. What happens when the juice no longer holds the same kick as before?