The housing market is definitely softening. Sales are slowing down, price reductions are increasing, and affordability has decreased dramatically because of spiking interest rates. The problem with relying with artificial stimulus is that the market becomes conditioned to easy money. A recent survey found that only 1 out of 3 Californians had the means to purchase a home, down from 49 percent one year ago. The big change has come from spiking prices, weak wage growth, and of course a 100 basis point increase in interest rates. So it should come as no surprise that inventory is up and more sellers are facing the need to reduce prices. This QE experiment has ‘worked’ but now bigger action is needed to keep the gig going. The Fed owns the mortgage market but with a job report that appears to be solid on the surface, the Fed is now having more pressure to taper. Of course looking at the evidence there will be no taper but perception is the name of the game. One thing is certain and that is, it looks like a tipping point is here.
Current housing policy has been a major windfall for large institutions and investors. Banks enjoyed a continuous stream of good years as rates slowly dragged down and people became serial refinancers. Good way for banks to earn fees courtesy of the Fed’s QE maneuvering. However the results have been negative for the large number of working and middle class Americans. Many of you have encountered investors bidding prices up on properties here in your own backyard but this trend is nationwide. In some areas the bidding has been more aggressive (i.e., San Francisco) but overall, the nation has seen a big jump in home values. However new data continues to highlight how this current policy is really benefitting a small group of Americans. While rental vacancy rates reach decade lows, homeownership rates are also reaching multi-decade lows. Not hard to do when a large portion of the market is coming from the investor crowd.
There are now signs that the unrelenting housing price boom is slowing down. Pending home sales faced their largest monthly drop since the home-buyer tax credit expired back in 2010. If you notice a pattern, any time the government even remotely hints at pulling back the housing market suddenly reverses. The Fed’s hint of a taper ending sent mortgage rates soaring. Of course the taper never materialized and the Fed even became more aggressive in QE. The government shutdown did impact housing from data we are seeing. Existing homes sales pulled out a weak performance and the drop in pending sales, a leading indicator are showing signs of a slowing housing market. In this boom and bust market with no middle ground, are we now to expect a “normal” healthy market after this recent boom?
There is a heavy demand from abroad for US real estate. China as you know is now solidly the second largest economy in the world and with it is wielding heavy economic power. Wealthy families are growing and with it, the ability to purchase investments and assets all around the world. In California target locations like Los Angeles and San Francisco bring in dramatic levels of dollars from abroad. The California housing market has been on a massive run-up in the last couple of years. As we’ve discussed, a large part of this has been driven by domestic investors but how much of this is being driven from those abroad? In particular how much money is flowing in from China into US real estate? It is interesting to note that Chinese property investors are targeting select coastal regions whereas some domestic hedge funds have gone after properties in Arizona and Nevada. It is hard to ignore the money flowing in from abroad.
Americans for the most part are bad at saving money. In fact, the entire credit boom and bust was largely fueled by people and banks living way beyond their means. Even after the recent boom in the stock market and housing market, many Americans are not in a better financial position. The problem with housing is that this is like having golden handcuffs. You will likely only unlock the wealth when you sell it. As we have discussed many are simply reluctant to sell. So in essence, the wealth is locked away. To sell a home also costs money and real estate for the most part is illiquid. And since the recession ended a large portion of home purchases have gone to investors. Never in the history of the US have we seen so many large institutions dive into the housing market in aspiration of being a landlord. Recent surveys show that many Americans plan on working until they end up in their grave. But what about the boom in housing? Unfortunately many are locked in a granite countertop laden sarcophagus.
The mania in certain California neighborhoods is so dramatic that my e-mail box is now filled on a daily basis with Real Homes of Genius. It isn’t as high as it was in 2007 at the apex of the last bubble but I’m seeing some pretty outrageous properties being listed for pipedream prices. Targeted markets are definitely benefitting from the investor fever. First, many of the homes being sold are actually being sold for the land. Given the headline cost plus construction costs this is a very tiny market segment here. Yet the froth is very obvious in these regions. Santa Monica is prime Westside housing. It is hard for anyone outside of the region to understand the crazy prices in Santa Monica. Even those in the region have a hard time understanding. Today we’ll focus on this area and pull up a property that only an investor could love. Welcome to the wonderful Republic of Santa Monica.
For the first time in nearly two years the California housing market showed some brief signs of cooling. The median price dipped and sales slowed down. The mortgage rate turbulence of the summer is likely to show up in late fall since the process of buying a home with escrow takes a bit of time to register in the current data. Although this is a current trend in terms of sales and prices we’ve also discussed why it is unlikely that California baby boomers will suddenly unload properties in mass. These owners may have equity trapped in their home but the only way to unlock it is via selling the place or going with a reverse mortgage which is like raiding the bank before handing something over to your heirs. California real estate has been in a perpetual cycle of booms and busts for nearly 30 years. That is why it is interesting to see the 2014 forecast put out by the California Association of Realtors (C.A.R.). The forecast is modest yet past history tells us a different story.