Housing Groundhog Day: A homecoming for low down payment mortgages and record breaking year-over-year median home price gain in Southern California.
The housing mania is in full swing here in Southern California. A headline reads “record yr/yr gain for median price” in reference to Southern California. Keep in mind that only a few short years ago we had the biggest housing bubble ever pop in spectacular Hollywood fashion. Well the bubble is back. Not the same kind but a newly evolved real estate fever. The players are different this time. In the previous bubble, the easy money came from duped global investors and a NINJA loan market while today, the Fed is basically giving out free money to large banks to leverage in the real estate market. The gig is now only accessible to a small portion of the population in prime markets. Those with good credit and a desperate desire to buy are jumping in as the thunderous momentum rolls along. Largely because of investors, renting has become a more popular option. There is now something in the air. Over the last year, I’ve heard many times that “housing is the best investment” and “the Fed will never let housing prices go down again!” The emergence of low down payment loans outside of FHA insured loans is now coming back in fashion since household incomes are simply not keeping up. Where do we go from here?
Sales are slowing down while gains reach a feverish pitch
With mortgage rates rising sharply and prices going up at record levels, something has to give. Inventory has been steadily increasing for a large part of the year. At the same time, prices have turned around sharply:
A couple of important points to make. Some have said that the change in the median price is largely being pushed by the change in the mix (as if this was the main reason). That was true in 2011 and some of 2012 but foreclosures in many areas are a small part of the sales mix because banks are leaking these out slowly. So the gain in prices is real on many fronts:
“(DataQuick) It appears that around three-quarters of last month’s record 28.3 percent year-over-year gain in the Southland median sale price reflects rising home prices, while roughly a quarter reflects a change in market mix.”
So only about 25 percent of this mania can be attributed to the change in mix. The rest, 75 percent is coming from hot investor money, artificially low interest rates, squeezed supply, and the whiff of mania from buyers. Take a look at the gains. Los Angeles is up 30 percent year-over-year (so is Riverside). Orange County is up 20 percent with a median priced home now selling for $545,000. But look at the sales column. Something is definitely changing. First, we have yet to see the impact of the more expensive FHA insured loans that hit in June. This will hit the lower-end of the market. We are already seeing this hit the market where 19 percent of all sales were FHA based (when a year ago they were closer to 30 percent). You also see inventory rising (partly because home sales are slowing and partly because sellers are jumping on the bandwagon and realize this might be a good time to unload a property).
These are real price gains contrary to some analyst acting like apologists for the army of big money investors acting like a vacuum for the easy money being pumped out by the Fed. If you look at the Case Shiller data which looks at repeat home sales, we see a real trend here:
Home prices in the LA/OC area are now moving up at roughly a 20 percent annual pace. This is flat out unsustainable. Yet the momentum is real and the price changes are definitely something to behold. Of course, last month 30 percent of all purchases came from the all cash camp.
The return of low down payment mortgages
Instead of realizing that the Fed has engineered another housing mania within a decade, the financial system is pulling out an old card trick. Low down payment loans:
“(Yahoo!) Remember the 10 percent down payment on a house? After virtually disappearing for years, it’s back.
Around the country, some lenders are offering 90 percent financing again on all loan types. For example, San Francisco-based RPM Mortgage resumed offering “piggyback” loans in the first quarter of 2013 after discontinuing them during the height of the credit crisis in late 2007, according to Vice President Julian Hebron. (A piggyback loan enables a home buyer to put only 10 percent down without having to buy mortgage insurance. This is done by getting two loans totaling 90 percent.)”
Of course FHA insured loans only require 3.5 percent down but these are seen as the modern day subprime loan. Good luck trying to get a home in a prime market with a FHA insured loan. Yet banks, seeing this trend are now resurrecting conventional low down payment products and using them in large fashion in some markets:
“In Monroe, NY, Rosalie Cook of Weichert Realtors says she is seeing buyer down payments range from all cash to as little as 5 percent. Mortgage lender Tom Gildea of Prospect Lending in Rockland County, NY agrees, saying that he’s doing loans with as little as 5 percent down “all day long.” Those 5 percent down deals are with private mortgage insurance, are only for conforming loans (less than $417,000) and are reserved for borrowers with excellent credit, verifiable income and little debt.”
At the same time this is what is happening with household income:
Yet there is plenty of easy money in the hands of large global financial institutions so it is hard to say how much longer this can go on especially when the Fed is trying to go into QE infinity and the coming back of low down payment is back in fashion. I don’t need to tell you that Americans are willing to go into debt up to their eyeballs and that clearly their incomes cannot support the current momentum without the crutch of the Fed being in place for a very longtime. Heck, the Fed is digitally printing money to give to banks that they clearly cannot afford but when gambling with OPM, why worry? Remember the banking motto “IBGYBG” – I’ll Be Gone, You’ll Be Gone. From talking with many people in the last year this is the mentality now permeating the market. Try to grab some of this easy money as real assets are inflated once again. Just remember, the Fed was at the helm of the last housing bubble as well but financial amnesia is part of the game. Just remember how bananas the last housing bubble was and tell yourself that we just set an annual year-over-year record in SoCal when it comes to annual price changes. The musical chair timing is back in full effect.
Are we witnessing another tipping point or does this real estate run have more in the gas tank?