FHA insured loans filled a giant void from the private mortgage market exiting the game by brute force as the housing bubble burst. One thing is certain when it comes to consumer psychology especially with such an emotional decision like buying a home. People have wine expectations but come with beer budgets and this is especially true in housing. Becoming accustomed to low down payment mortgages, the bust in housing was a hard retreat for many Americans. In the 1970s and 1980s nothing down or close to it was left to the late night infomercials for those too inebriated to sleep before midnight. Most people knew this was a tiny pipedream. It was only until the 2000s that this became a common pathway to owning a home. FHA insured loans with a 3.5 percent down payment are now viewed as the subprime of current loans. Even recent potential home seller surveys confirm this perception.
What if I told you that you could have a $600,000 mortgage for a monthly payment of $1,700? Sounds like a great deal right? Of course the only way to get this kind of action is by going into the “exotic” mortgage options that everyone once thought were put to rest. I was going through some of my mail and noticed a surge in the last year of offers for creative mortgages and credit card offers. The volume is close to what it was in 2005 and 2006. I’m thinking that the difference this time is that the insane offers are now only going to those with decent credit as opposed to every person in the virtual phonebook. One flyer caught my attention regarding interest only mortgages. Interest only? I thought these were done. So I decided to run a scenario for an $800,000 home purchase with $200,000 down (25 percent). What I found was interesting and also highlights how some people are assuming a big down payment is somehow the immunity from risky moves.
However you want to slice it, median or repeat same home sale prices the price of a home in California went into the stratosphere over the last year. The psychology has now shifted to full fledge mania where people think they are going to be priced out but some are oblivious to the reality that they are competing with a massive amount of investors. The median home price of a SoCal home in March of 2012 was $280,000. For March of 2013 it jumped to $345,500. What justifies such a big move? The only true justification is the artificially low interest rates being provided by the Fed, low inventory, and investors (the trifecta of the current market) but this pace is completely unsustainable and you will see this trending out towards the end of the year. Why? Because there is no way you are going to have 20+ percent annual gains on the median price and the media is running with this feeding into the frenzy. A stunning 34 percent of all SoCal purchases in March came from all cash buyers. How much momentum does this trend have?
The median price for a home is a useful measure in more stable markets. However, this current market is anything but stable especially for California. That is why according to the California Association of Realtors, the median price for a home in California went up 28.2 percent in one year. Even DataQuick has the year over year jump above 20 percent. This jump in the median price is on par to what we saw during the high powered early 2000s. Yet the current jump is coming more from the shift in the homes being sold. Fewer foreclosures are being sold and thus the mix is made up of higher priced properties overall. Foreclosures in general sell for much less than non-distressed homes. Yet the median price for a home gets quoted in the press and causes a self-fulfilling prophecy similar to when home prices start moving down. It is worth looking at this data since it is telling.
The US housing market is massive. You would expect this from a nation of 315,000,000+ people spanning over 50 states. So it is important to understand the various dynamics occurring over many states. In regards to single family home buyers, in most of the United States home prices are very reasonable. This is hard for some in the coastal regions to digest or even comprehend. When you look at certain markets in high priced areas, many people have a hard time penciling out the financial details. Yet with such a large number of investors purchasing with cash, a new market has been created. But if we are to take the US market and make a wide-eyed observation, we will find some good, bad, and ugly aspects of the current housing market. Whereas in 2008 through 2010, the market was dominated by the bad, ugly, and grotesque. What can we say about the current US housing market?
The spring season is now in full bloom and the real estate market continues to have a wickedly low amount of inventory for sale. According to the California Association of Realtors, annual home sales are now down about 6 percent while the median home price is up 24 percent. Inventory is still at or near a record low. What is interesting is that the number of real estate agents saying now is a good time to buy has decline while the number of agents saying now is a good time to sell, has spiked dramatically. While prices have soared in the last year sales have not. As we just mentioned, the annual sales rate for California actually fell year-over-year. Buying power brought on by low interest rates has caused two major shifts in the market; a big bounce in purchasing power in spite of stagnant income growth and a low interest rate environment causing big money to choose real estate as the investment vehicle of choice. Is this record low inventory simply a part of the new housing market?
One of the more challenging pieces of data to come by is financial characteristics of those who own their home. Most data aggregates renters and homeowners together and in California, where nearly half of families rent, this data does not give a good perspective as to what financial characteristics drive homeownership. The homeownership rate in the state continues to fall as outside money pushes out local families with stagnant incomes. Call it global gentrification. In the depths of Census data I was actually able to dig deep and find data on actual homeowners which is very telling and helpful in getting a glimpse behind current owners. It might also help to put things into perspective for those planning on buying in the current market. I was able to get data on a desirable location, Irvine where a large amount of investors, foreign money, and family purchases are taking place. What is the data behind homeownership in these markets?