March 31, 2013

Buying Because Prices Are Going Up

Readers had some questions on the current housing market. “Two weeks ago on the local news radio station they interview a local hot shot broker. He was gushing over home sales and how great of a summer it was going to be, but what struck me most is he said ‘81 percent of buyers in 2013 are move up buyers who already own a house.’ I was shocked it was that high. First off using his numbers in theory you should put back 81 houses on the MLS for every 100 houses sold (excluding rental property) with new houses rounding out the other 19 percent.”

“Second, in my area I wouldn’t necessarily label them as ‘move up’ as to say get a better or bigger house, I’d label them as ‘move out’ as in get out of the McMansion and move to a cheaper place. I’ve seen more higher end homes on the market in my area than lower end homes. Buyers who realize how bad of an idea it was to buy that big place, plus if you were a 2005 buyer with 8 and 6 year old kids, those kids are now 16 and 14. College and empty nesting are just around the corner. Selling now to get out of your bad investment sounds pretty damn good now. Only question is: What happens when everyone in your neighborhood has the same idea?”

“Just a few weeks ago we were talking about how bad the sequester was going to hit the local economy. Defense Contractors and lawyers being interviewed on the local news about how a double digit percentage paycut were going to kill the local economy. Car dealerships couldn’t sell high end cars, restaurants at dinner time were vacant and just like that …….BOOM…….houses are selling like hot cakes. I just can’t see how with lingering pay cuts and furloughs around the area you could even think of buying now.”

A reply, “There’s a lot of people out there that made money during the boom, and they are desperate to do so again. They’ll see what they want to see and jump, and there are enough to create an echo bubble (for lack of a better term.) But you’re right, with the cuts in spending coming there’s going to be a lot of businesses (and housing investors) learn the meaning of deflationary spiral.”

One added, “California’s unemployment rate is still at a recession-level 9.6%, several years after the Great Recession officially ended. But that hasn’t stopped the housing market from prematurely roaring back to bubble-era price appreciation rates. Something about this market doesn’t smell right.”

One said, “I hear the term ‘It’s a good investment.’ So just what is a good investment? Baseball cards or beanie babies or cars or antiques (what is quality here) or art or sculpture or violins or PM’s or stamps or ? What is their premium to buy or sell or house or insure or can be freely move in bad times or?”

“Just remember that one man’s garbage is another man’s banquet. What I find of interest since my youth is that market makers have conned people into believing something is a ‘good investment’ when truly it isn’t. Fools and their money are soon parted and that is why we will always have wealth distributed unequally.”

From KTVN in Nevada. “I sat down with Michael Wood, a realtor with Re/Max Realty. He said homeowners are opting to short sale as opposed to foreclosing. I asked Wood if that is healthy for the real estate market. ‘It’s great if you’re a buyer and you can be the lucky buyer of a short sale and you can at a great price. It’s not good for everybody else, because what it does is short sales can, at times, artificially deflate a true housing value.’”

“Wood said even finding a short sale in this market isn’t going to be easy. He said there’s only about five weeks worth of inventory left, meaning homes available. Wood said he is seeing an average of five bids per home and up to 15 on others. Homes that are being sold for less than $300,000 are even more scarce because they are being swallowed up by investors.”

“Along with investors, Wood said 35% to 40% of his clients are relocating from California and looking to buy. All this adds up to low inventory, which means newer homes are starting to be built again. Wood said Di Loreto Homes has 19 reservations on homes here in Reno that aren’t even built yet.”

“I asked Wood, if he is concerned about another real estate bubble forming and bursting on all of us. He said he’s not concerned, at least not yet. ‘The last time we’ve been this high was 2009. We’re on the same trajectory going up as we were back in 2004 to 2006, right before the bubble. However, we started in the high $200’s. I think it becomes cause for concern if we see this string continue for another 12 to 16 months.’”

The Aledo Times Record in Illinois. “Sixteen of the 25 cities surveyed in the GateHouse Media’s Western Illinois Division project showed an increase in housing construction permits from 2011-2012. The total number of permits in the 25 cities grew from a low point of 219 permits in 2011 to more than double, 440, in 2012.”

“‘I think we’re kind of skating along the bottom,’ said Ty Livingston, East Peoria’s director of planning and community development. ‘One thing that hopefully shows there’s light at the end of the tunnel, even though we only had 31 permits, about half were spec homes.’”

Southern California Public Radio. “The lack of foreclosures in Southern California has contributed to housing supply crunch that, in combination with other factors—low interest rates, investors chasing deals—has driven up prices. ‘It’s likely that there will be no relief in terms of more foreclosure inventory in the next few months,’ said. ‘The California Homeowner Bill of Rights that took effect in January will in fact likely further reduce foreclosure inventory in the short term, but will likely result in a backlash of delayed foreclosure inventory near the end of the year or early next year.’”

“Stuart Gabriel, an economist who runs the Ziman Center of Real Estate at UCLA, agrees. He pointed out that banks currently holding foreclosures or dealing with a pipeline of distressed properties have an interest in not flooding the market. The two-step here is obvious: banks want to originate new mortgages and take advantage of a rising price environment; and they want to sustain property values in areas where they operate.”

“‘We know there’s a stock of foreclosures out there waiting to be resolved,’ he said. ‘Banks and financial institutions strategically regulate the pace of foreclosures so that they won’t further damage the markets where they hold a lot of loans.’”

TVNZ in New Zealand. “The International Monetary Fund (IMF) is warning that rising house prices are threatening the stability of New Zealand’s economy. BNZ chief economist Tony Alexander told ONE News the IMF is warning that property speculation could cause an economic shock. ‘They’re simply noting that there is a risk if the housing market does move into that more speculative stage then if there is a shock that hits the economy, we’d see some relatively strong falls in prices,’ he said.”

“Olly Newland, a property developer, says only certain sectors of the housing market have seen real growth while many areas remain stagnant. ‘The areas that are increasing the most are the middle class areas if you like, the mum, dad and three kids in the leafy suburbs.’”

“Those are areas like Mt Eden in Auckland. For example, in June last year one house sold for $700,000. Nine months and a renovation later, it is back on the market, listed at $985,000.”

“The IMF’s Dr Brian Aitken noted in the report that rising house prices are much more of an issue this year compared with last year, largely due to supply constraints in Auckland and Christchurch. However, Aitken warned that there also appears to be some easing of mortgage lending standards and as a result there is an emerging risk of sustained rapid price growth giving rise to a bubble type situation.”

“In response to the report, ASB Chief Economist Nick Tuffley told TV ONE’s Breakfast this morning that the Reserve Bank (RBNZ) is already developing prudential tools to slow bank lending, as the IMF suggested. But Tuffley said that tools, such as loan to value restrictions which could be used to ward off a sharp spike in house price inflation, would only be used sparingly by the RBNZ.”

“‘It’s more about building up the resilience in case we do go through that period of prices pushed up quite dramatically and then fall back for some reason. What they worry about is that if the price growth continues, we go back to the 2000’s and what they are worried about is that sort of behaviour where we all start buying because house prices are going up, and that risks putting prices up further than they probably should be going,’ he said.”

Bits Bucket for March 31, 2013

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