June 22, 2014

Did Housing ‘Recover’ Too Much?

Readers suggested topic on where we are. “When will this echo-bubble hit its peak, or has it already done so? Someone this past week posted a comment of ‘I’m calling top.’ But it made me wonder: are we really close to the top? Past the top? Still years from the top?”

A reply, “We should include a discussion on how people are faring with higher food prices, high gas prices and high utilities. The CNY area is approximately 427K and approximately 25 percent of the population is having a tough time paying their utility bills. Yes I personally know guys in their fifties retiring from this company with over a million dollar retirement package. In Syracuse people working for this utility have a saying which goes something like ‘there are two kinds of people ones who work for National Grid and the others who want to work for national Grid.’ So our house prices are high, food prices are high, gas is high, utilities are high. But the new LYING Fed doesn’t see inflation.”

“Our property taxes are astronomically HIGH. A house now selling for 400K will cost you 24K and yes 24K in taxes. This is not a typo.”

I suggested this link, saying, ‘Wiped itself out, huh? It recovered too much?’ “The two-year-old U.S. housing recovery is faltering. Bullish forecasts in early 2014 from MBA, Fannie Mae and Freddie Mac have been sideswiped by rising home prices and an economy that isn’t producing higher paying jobs. The share of Americans who said they planned to buy a home in the next six months plunged to 4.9 percent last month from 7.4 percent at the end of 2013, the highest in records going back to 1964, according to the Conference Board, a research firm in New York.”

“‘The big housing rally wiped itself out because prices increased too quickly for buyers to keep up,” said Richard Hastings, a consumer strategist at Global Hunter Securities LLC, who predicted the slowdown eight months ago. ‘The pool of eligible new buyers is collapsing’ because of stagnant incomes and lack of credit, he said.”

From The Paper. “When it comes to buying real estate in The Woodlands, your money is getting eaten up by location, location, location. Real estate inventories in The Woodlands are at historic lows—with less than the months of inventory for houses priced at $600,000 or below, according to the Houston Association of Realtors. In the past three years, median home prices in The Woodlands have gone up $100,000. This environment is anticipated to stay sizzling through 2017, which merits caution for all but long-term investors.”

“‘Long story short, if you buy at the top of a market like this, it’s going to be an expensive mortgage for a long time,’ says Paul Carroll of Efficient Wealth Management in The Woodlands, Tex. ‘This is a very interesting bubble, which is a function of the good fortunes of the energy industry. With inflation running at just 1.5 percent, the true cost of that money over the lifetime of home ownership will be higher than expected.’”

“Carroll cautions that unless a buyer is sure they will own their house at least 7 to 10 years, renting may be a better option than home ownership. ‘Usually you think of renting as throwing away money, but if a rental costs $2,000 a month vs. $2,400 a month plus the full cost of home ownership, it may be a better investment,’ Carroll says. Once you factor in repairs, home insurance, flood insurance and more, renting may be the safer bet.”

“Americans think of real estate as a life-long investment in which housing values faithfully march up over time. Keep in mind, however, that appreciation is not guaranteed to continue the steep incline of the past several years. ‘Real estate is a devilish investment in a low-inflation environment,’ Carroll says.”

From Bloomberg. “Vera Johnson from Seattle is barely making do, let alone saving for retirement. The 45-year-old almost lost her home to foreclosure in 2010 after the housing-market collapse in the worst recession since World War II. She embodies the financial challenges facing America’s Generation X, those born between the mid-1960s and 1980, which lags behind other generations in building assets.”

“Good timing is not the age group’s forte. Many took out mortgages just before prices plunged, making them the most disadvantaged by the housing crisis, while the 2008 stock-market slump dealt them a further setback. Only one-third of Generation X households had more wealth than their parents held at the same age, even though most earn more, The Pew Charitable Trusts found.”

“‘I try to remain in the present moment and not live in fear of the future,’ said Johnson, who has neither retirement savings nor a college fund for her two children. ‘My property is underwater, the properties around me are underwater, I’m not building equity in my home.’”

“For Johnson, a mother of a 17-year-old daughter and a 12-year-old son, she’s more concerned about day-to-day living than about preparing for retirement. Her home-loan modification ‘is a Band-Aid for a hemorrhage’ as her business continues to struggle, she said. ‘It’ll seem like it’s getting better, and then it gets worse.’”

The Guardian. “Americans are experiencing one kind of economy – high unemployment, expensive housing, rocketing food prices and costly medical care – but the US Federal Reserve is seeing another kind of economy: the one in which you shouldn’t believe your own eyes.”

“It all comes down to inflation: the measure of rising prices that we all experience in our daily lives. And inflation is rising – fast, much faster than the Fed anticipates. Meat prices are rocketing at plus-7.7% in 2014, and dairy is up 4.2%, a considerable hit to family shopping budgets. Shelter – either mortgages or rent costs – are rising at about 3%, while car insurance is up 5%, and tuition costs and public transportation are both up more than 3%.”

“This means consumers are surrounded by rising prices on all sides – paying higher bills, paying more money at the market, paying more just to get to work. At the same time we’re shelling out more for these necessities, our incomes are stagnant. No more money is coming in. Yet the Fed, which just wrapped a two-day meeting to diagnose the economy, is dismissing these real-world costs as a trick of the charts – a mere math problem rather than a real snapshot of the challenges facing Americans. And its new leader, Janet Yellen, has now officially risked her reputation on a potential misreading of the concerns of regular people.”

“Take this exchange: A reporter asked Federal Reserve chair Janet Yellen on Wednesday whether the central bank is taking an overly rosy view and is ‘behind the curve’ on inflation. Yellen denied that the patterns in higher prices actually exist: ‘The data we’re seeing is noisy … inflation is rising in line with committee’s expectations.’”

“Translation: Nothing to see here, folks. Move along. This blinkered view is alarming. The Fed’s chirpy insistence that ‘economic conditions are improving’ fails to reflect the experience of Americans who are finding less money in their already-squeezed budgets.”

“Even Yellen seemed slightly unconvinced by the Fed’s insistence that the economy is improving. She rattled off a list of reasons why the economy should be growing instead of shrinking (which is what it’s doing): it’s allegedly easier to get loans, and households “are becoming more comfortable with their debt levels” – and with their rising home prices, rising stock prices and an improving global economy.”

“The important common bond among all those factors: the represent the Fed of magical thinking. They’re all dependent on people believing that things really aren’t so bad. Six years into a weak recovery that’s turning darker, that’s not enough.”

Bits Bucket for June 22, 2014

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