A Ponzi Scheme For Anybody Who Wants The Chance
It’s Friday desk clearing time for this blogger. “The recent surge is U.S. home prices has market watchers and money managers already playing defense to deter the notion that the market is entering another bubble. ‘You’ve still got decreased supply and increasing demand, and the values are still incredibly affordable by historic standards,’ said Brad McMillan, chief investment officer at Commonwealth Financial Network. ‘We’re probably in the third inning of this recovery, but there’s no reason to believe we’re in a bubble right now.’”
“According to Mr. McMillan, low interest rates — courtesy of the Federal Reserve — remain one of the most powerful forces driving the housing market rebound. ‘When the price of housing gets so high that an average family can’t afford to buy a house, that’s a bubble,’ he said. ‘Right now, mortgages are lower than rents in most places, and the average family can afford two homes.’”
“At a recent open house in Glassell Park, a neighborhood in northeast Los Angeles, curious buyers and neighbors streamed into a green stucco house that had just come onto the market. Michael Delacruz is one of the real estate investors from Dossier Capital, the group hoping to sell this house. He says it was purchased a few months ago in a short sale. Records show Dossier Capital bought it for $390,000. It’s now listed for more than $720,000.”
“‘Typically, our houses are in escrow first week,’ Delacruz says, ‘maybe even the first day that it’s listed.’”
“The successful return of Home Flipping in California is indicative of the housing market’s recovery. In California alone, 6,000 homes were reportedly flipped between January and April of this year. ‘Flippers can be anybody,’ said Troop Real Estate’s Robin Karcich. ‘It’s for anybody who wants to take the chance, and jump in and go ahead and do it.’”
“Some real-estate experts think flippers could quickly get swamped in a market that is still prone to shocks. ‘They’re a real concern to me,” says Stan Humphries, chief economist at Zillow. ‘They create volatility and make prices go up more than they should. And it’s usually the less sophisticated participants who get hurt the most. The most successful flippers will probably be those who recognize the formation of new bubbles and get out before they burst. ‘Flipping is like a Ponzi scheme,’ says Humphries. ‘It’s not a bad idea for those who get into it first, it’s a bad idea for those who get into it late.’”
“Lex Levinrad, head of the Distressed Real Estate Institute in Boca Raton, said he recently bid $52,000 for a three-bedroom Lauderdale Lakes home listed for $36,000. But his offer was rejected because there were other buyers willing to pay more. Levinrad’s club is hosting an event this weekend to teach investors how to buy foreclosed homes, and he expects the lack of inventory to be a main topic of discussion. ‘There are so many bidders, and they’re swarming over every property,’ Levinrad said. ‘Even if banks have hundreds of homes in a ZIP code, they’re only trickling out one at a time.’”
“Lenders are being deliberate because they aren’t getting any pressure from regulators to sell their distressed real estate, said Mike Larson, a housing analyst at Weiss Research in Jupiter. At first, banks were taking their time to prevent big price declines, Larson said. But as the market improved, lenders decided that delaying sales would help prices rise and boost their bottom lines. ‘It’s not really in the banks’ own best interest to dump this stuff,’ Larson said.”
“The federal government is getting a return on its investment. The return on some of the financial industry bailout money comes in the form of dividends from mortgage servicing firms Fannie Mae and Freddie Mac. Earlier in May, Fannie Mae announced a record annual profit for 2012 and plans to send the U.S. Treasury Department a dividend check for $59.4 billion. Freddie Mac said it will send the Treasury $7 billion.”
“The financial giants remain state-run today despite an improving housing market and record profits. It may even be the case that the housing market is overextended. Perhaps the government itself is fueling another housing bubble.”
“The government also keeps a big stake in the banking industry despite growing profits. More than four years after the financial crisis the government can’t seem to get out of the banking business. U.S. taxpayers have an equity interest in more than 150 banks. The Federal Deposit Insurance Corporation reports that U.S. commercial banks as a group earned more than $130 billion in 2012, an 18 percent increase over 2011. But all is not equal in the banking industry. More than 92 percent of the industry’s profits go to only 9 percent of the institutions.”
“Testifying before Congress this month, Stanford economist John Taylor pointed out that under Dodd-Frank, big banks appear ‘to be enjoying a huge subsidy on their borrowing costs due to market expectations of bailouts. This expectation of bailout of some creditors increases the risk of financial instability.’”
“Rising prices are a big nothingburger. They just mean that more yield-crazed speculators are scavenging the market looking for their next big killing.”
“The banks have been playing hide-n-seek for the last 4 years. That’s what the phony mortgage modification programs were all about; helping the big lenders extend and pretend while they recapitalized. Take a look at this: ‘Housing industry leaders and congressional lawmakers are ramping up their push for regulators to resolve a residential mortgage rule without placing strict down payment requirements on borrowers. Bankers, real estate agents, home builders and lawmakers got a renewed jolt after President Obama’s State of the Union address to press their point that new rules determining a borrower’s ability to repay a loan will be the central consideration for obtaining a mortgage.’”
“Obama’s blundering mortgage modification fiasco, dubbed HAMP, was actually a sop to Wall Street. The program was designed as a holding tank for underwater borrowers. Here’s a brief update on the program: ‘As of March 31, 2013, the oldest HAMP permanent modifications, from the third and fourth quarter of 2009, are redefaulting at a rate of 46.1 percent and 39.1 percent…”
“46 percent default rate. That’s worse than subprime. Hell, that’s worse than any batch of loans in history. But, that’s okay, because it’s good for the banks, and that’s what matters to Obama. And, guess what? Now Obama is planning to surpass his own record of failure by launching another bank welfare program more idiotic than the last. He’s given the green light to ‘no documentation’ loans for borrowers who haven’t made a payment on their mortgage in two years.”
“After five years of unemployment, government deficits and financial struggle, every American wants to call it a recovery. That’s why some optimistic economic data this week seem to have messianic importance. But if evil has one power, it is the power of illusion, to mask reality. And, in this case, that is also the power of the positive economic data.”
“The idea of a strengthening recovery is out of step with some bubblicious activity, including the dubious and sudden rise in housing prices. However, the sources of that rise - as with all sudden booms - are dubious. While house prices are rising, incomes, purchasing power and lending are not keeping up.”
“Still, why should we question good news? Even if a recovery is made of vapor, it can make people feel good. So why not believe in a recovery if it makes us feel better? The reason to maintain skepticism of good times a-coming is that an economic recovery can – and is – used to package a lot of political snake oil. As long as people believe in a recovery, Congress can keep ignoring the unemployment and equality crises and enjoy ginning up imaginary problems. If Americans believe in a recovery, CEOs can keep claiming that they don’t need to invest in the United States or hire American workers.”
“A mythical recovery gives cover to a lot of irresponsible people hoping that Americans won’t look behind the curtain. There is a momentary discomfort in realizing that the recovery is weak. When the absurd illusion of a ‘better economy’ is gone, lawmakers and CEOs may be forced to stop believing in the myth of a good economy and actually start working to create the reality of it.”
“A key element of asset bubbles is that the primary impetus of irrational money chasing too few assets is always recognized. Pretty soon real measures of value are assigned as reasons for increased asset prices - say for example in the Internet bubble era: folk started going for top-line revenues as the key measure on the logic that while these companies were losing money initially they would eventually turn around as long as the top line grew. Then any improvement in the top line whether by organic means or acquisition was hailed as evidence of the investment thesis and so on.”
“Perhaps the worst of all the bubbles though is in the former tier 2 and tier 3 cities in the US where house flipping is back on. The treatment of housing stock as a trading good has potentially serious consequences for longer-term investments, as well as the systemic risk of US banks. This then is the worst of all the unintended effects of central bank involvement in the markets; instead of ushering in investors who could help turn around economies, the central banks have created a class of traders who roil asset prices, maximize leverage, but produce no lasting benefits for the underlying economies. Ironically such rising asset prices also make it more difficult for engendering a real economic recovery.”
7 Reasons to Fear the Housing Bubble
http://wallstcheatsheet.com/stocks/7-reasons-to-fear-the-housing-bubble.html/?a=viewall
2. Flippers on the prowl
California is experiencing a strong resurgence of ‘flipping’
The WSJ does an article on flippers in CA and suddenly it becomes a fact in the MSM. This has been going on for over a year. There are even flippers in Flagstaff.
It makes me wonder if all the flipping seminars are actually having a real impact on the number of flippers in the market. I was previously under the impression that people went to the seminars, got scammed, gave up and went to something else. But maybe not, maybe they’re actually becoming inspired by Armando and Than and trying it themselves. I got a binder and a cassette tape, now I’m ready to get rich.
I went to a Farmer’s Market last week-end and saw a booth that dealt in foreclosures set up.
were they fresh picked, organic foreclosures?
Then that’s a shitty Farmer’s Market. Good markets don’t let that crap in .
“…I was previously under the impression that people went to the seminars, got scammed, gave up and went to something else….”
Amway is still going strong after fifty+ years….
Some wonderful research and postings there Ben…Thanks for all your effort…
“The banks have been playing hide-n-seek for the last 4 years. That’s what the phony mortgage modification programs were all about; helping the big lenders extend and pretend while they recapitalized ??
Thats what we all here have suspected from day 1….
At least two years where I live in northern Calif. and a very sleazy business indeed. Over a year ago I held my nose and made a bid on a flipped house (with the typical cheap appliances, granite countertops, quicky paintjob, lotsa bark in the backyard, etc) as the location was excellent for me. The flippers countered and attempted to force me to use their lender and title company both of which Google quickly revealed had been fined millions by the feds for illegal kickbacks, white collar crime, etc….AND these douchebags wanted to fine ME $100/day if the deal did not close in 30 days.
I made the bid in the first place as I’d been ignored in favor of flippers and speculators offering 100% cash on several other places I’d bid on..
Oh well, am happy to read that this bubble will likely pop soon and buying might make sense and even be possible after the pop, have been on the sidelines for the last year.
Hang in there. it’s really hard not to throw a bucket of money away.
“The WSJ does an article on flippers in CA and suddenly it becomes a fact in the MSM.”
I have learned a great deal about the limitations of human judgment since the onset of the housing bubble. For instance, many people completely discount their own perceptions. They won’t believe what should be readily obvious until it is confirmed by the stated observations of others. There is an underlying perception that stating a disagreeable (though correct) opinion might be upsetting to others.
I personally trust my own perceptions, but feel the pressure of mass delusion pushing back against what should be readily apparent to anyone who has a voice to speak or eyes to see. Until the Masters of the Economic Universe acknowledge an economic phenomenon, it simply doesn’t exist in the eyes of the masses. The sad reality is that most humans are utterly incapable of forming an independent opinion or coming to closure in the absence of affirmations to reassure them that they are not completely clueless idiots.
As always, Ben, a terrific collection of articles. Thanks for all your hard work.
‘Right now, mortgages are lower than rents in most places, and the average family can afford two homes.’”
Clearly this fellow does not live in Seattle.
I saw this same comment and just had to laugh at the idiocy of this guy’s statement. What the hell, ‘Take two- they’re small!’
Yeah, I saw that one also…I think RAL just up-chucked his cheerios..
He lives in your empty skull, rent free.
what did you pay for your debt-shack?
Hello Junkie…… hows your dismal debt ridden life?
“He lives in your empty skull, rent free.”
Well………not quite “free”………you have no idea what he does to you in there at night (hahahahaha).
I don’t have any debt
Life has been dismal for me at times; never over money but over pain.
But when life gives you lemons…make lemonade and sell it so that’s what I do now.
I own a business; debt free; Commercial property; debt free. Feeling good.
Thanks for the tip to sell my house( which I owned debt free). Used the cash to get back into the natural foods biz.
Hey MikeInBend — glad to hear your life is on an improving trend.
Above all, regard the sage advice of my father:
“Don’t let the bastards get you down.”
In other words, simply ignore the opinions of others who cast aspersions on your way forward in life, and follow whatever works for you.
Good for you, Mike! I’m really glad to read this, and hope it works out wonderfully for you and your family.
the average family can afford two homes.
WTF? I wonder if he said this with a straight face?
What is this “Lionel” talking about? He must be giving them some weird 5/1 ARM to get them into those houses. Where I live, the averag family has to have two full-time wage earners and no kids to still not afford the average home.
“Where I live, the averag family has to have two full-time wage earners and no kids to still not afford the average home.”
Mathematically speaking what you said is impossible.
Not impossible at all. People buy what they cannot afford all the time, which is what a 40+% default rate is all about. To the debt junkie, if the bank will approve it, you can afford it.
Hi Slithers, AKA Eddietard.
Well played, Smithers. Now rearrange the shoe closet.
‘The successful return of Home Flipping in California is indicative of the housing market’s recovery’
Of course it is. I like how they capitalized Home Flipping.
some of these debt shacks in n. california are being flipped for obscene profits.
Seems like the only attempts to get the economy going are via asset bubbles.
Are there any assets that the banks cant manipulate?
‘being flipped for obscene profits’
Are flipped houses excluded from comp sales in appraisals? Of course not. So as these accumulate, we taxpayers are forced to finance loans for surrounding houses. And don’t we have a “special” absurdly high limit on GSE loans in California?
Here’s something for those of you that have never been to California. When I first visited, I don’t know what I was expecting; gold lined streets, free avocados, I’m not sure. But here’s the truth; houses in California are just like houses where any of us live. Many are crummy little shacks, too close to each other. They just ain’t worth 5 or 10 times what a similar house in Kansas costs.
Ca has plenty of ghettos along with with the coastal properties.
One thing about az you could get a decent house n a nice area.
anything cheap in CA is run down n a bad area.
‘One thing about az you could get a decent house n a nice area’
It depends. If you look at the census bureau chart of Flagstaff house prices, in 1999 it rocketed up and kept going. To this day I have people ask me, why haven’t Flagstaff house prices fallen like Phoenix?
Austin Texas used to be a kinda cheap place to live. When I moved there in 1999, it was in a roaring bubble and it still is. IMO cities where houses are expensive are that way because someone will lend them the money. If I went to a bank in Phoenix and said I want to borrow the Flagstaff price for a house there, they would laugh me out the door.
houses are expensive are that way because someone will lend them the money ??
Spot on Ben….
I spent 4 years in the military based out of San Diego and until recently, I used to fly out to LA a couple times each year for business. California is horribly expensive, overtaxed and overhyped. Most people also seem to think that 75% of California is right next to the beach. Its not. But 75% of California IS right in the middle of some of the worst traffic in the US. Right outside your door and made fresh daily. And then there are the earthquakes…
There’s nothing like seeing eight lanes in each direction, all jammed with traffic. I read somewhere that a third of all the surface area in Los Angeles County is paved.
Despite that, I think the traffic around Washington, DC, is worse. I’ve never been to any place where traffic was discussed more in ordinary, day-to-day conversation, or influenced people’s daily decisionmaking to a greater degree.
I’ve lived on the east coast, in Europe, and traveled throughout the US. Northern CA is beautiful, hands-down.
There are many awful, ugly places in CA (Fresno, Bakersfield, Stockton anyone?), but if you’re like me and couldn’t decide if you wanted to live in the mountains or at the beach, NorCal fits the bill. I like the fact that I can be outside most of the year, never need A/C, and don’t have to shovel snow.
May everyone be so blessed to find a place to call home that they love, wherever that is.
Yep…
sfhomeowner:
If you live in SF, then you do not live near beauty. I used to live there too. That place is butt.
“So as these accumulate, we taxpayers are forced to finance loans for surrounding houses.”
I thought the taxpayer’s job was to guarantee the principle? The Fed’s $40 bn in QE3 MBS purchases provide the finance, so no taxpayer dollars need ever be spent until foreclosure.
“They just ain’t worth 5 or 10 times what a similar house in Kansas costs.”
They are alot cheaper to rent these days than to buy…ALOT!
But in defense of California living, the risk of strike-slip fault earthquakes scares me a lot less than Kansas tornadoes do.
’scares me a lot less than Kansas tornadoes do’
I grew up on the plains and when there was a tornado watch or warning, many people would get on their roof to watch. Those storms are incredible sights. Then years after I moved away, we have the storm chaser shows on TV.
California is OK with me. I’m just saying my image of it was way off. I suppose it’s from the movies I watched growing up. The first time I drove into California in 2001, coming back from Alaska, I went by Mount Shasta. Pretty cool I thought. Then I got stuck in a traffic jam because of a wreck. I believe it was near Bakersfield. It was 105 degrees, looking out at the landscape, I had my mental picture of what California was like altered. I spent a couple nights with my brother in San Jose. We drove around and everywhere saw strip malls and apartment complexes. Just like Dallas. I guess I was expecting Hollywood starlets to be handing out free shrimp on the corners, I don’t know.
Yes, but you CAN construct a safe room/shelter or even a basement for protection from violent weather. For an earthquake, they advise you to go stand in a doorway… A doorway. About 4 years ago I was in Long Beach on the 3rd-floor balcony of my hotel drinking a beer with a few other co-workers after a meeting. A temblor (later measured at a balmy 4.7 on the richter scale) struck nearby. The power went out, car alarms went off for miles around, the stoplights were gently swinging and the streetlights were all doing the hula in unison. I immediately downed the rest of my beer and curled up into the fecal position. NOT a typo.
The doorway thing is not true, actually.
From Earthquake Myths:
The safest place to be in an earthquake is under a doorway. That’s true only if you live in an unreinforced adobe home. In a modern structure the doorway is no stronger than the rest of the building. Actually, you’re more likely to be hurt (by the door swinging wildly) in a doorway. And in a public building, you could be in danger from people trying to hurry outside. If you’re inside, get under a table or desk and hang on to it.
The safest place in an earthquake is apparently right next to something very dense. This comes from disaster relief workers who found that right next to things like stacks of paper were pockets where debris landed with one end on the paper, and the other end somewhat away from the paper, creating a triangle of air and protection.
Wouldn’t have guessed it, but it makes sense.
They say one of the worst places is under a desk, as when everything falls down on you, the desk is just something else that can collapse on top of you.
“The safest place in an earthquake is apparently right next to something very dense.”
In that case, if it ever happens again I’ll go hug a Realtor. Ba-dum-boom-Tssss. Thank you folks! You are wonderful! I’m here all week and don’t forget to tip your waitresses!
Why not go outside?
You often don’t have time to get outside.
Obviously if you can, that is preferable. I was outside during Loma Prieta north of SF…saw the waves rolling over the ground…very weird.
My brothers were home at the kitchen table, each thought the other was just shaking the table until they looked up and saw the light swaying and heard my mom run through the house telling them that it was an earthquake. By the time they realized what was happening, the worst was over.
Of course, we were pretty far from the epicenter, so the jolt wasn’t as strong.
Clearly the recent severe weather outbreak in the Midwest be due to global warming. (Never mind intrinsically-increased level of surveillance in the camcorder era!)
U.S. NEWS
Updated June 1, 2013, 12:34 a.m. ET
Tornado-Hit Oklahoma Struck Again; Mother and Baby Among the Dead
OKLAHOMA CITY—Tornadoes rolled in from the prairie and slammed Oklahoma City and its suburbs, trapping people in their vehicles as a storm swept down an interstate highway while commuters tried to beat it home.
Five people were killed, including a mother and baby killed near Union City. Another person died at El Reno, the first city struck by the storm, said Amy Elliott, a spokeswoman for the state medical examiner. Circumstances involving the other two deaths weren’t immediately known, Ms. Elliott said.
An overturned semitrailer rests on its side on the eastbound lanes of Interstate 40, just east of El Reno, Okla., after a reported tornado touched down on Friday.
About 50 people were hurt, five critically, hospital officials said.
Meteorologists had warned about particularly nasty weather Friday but said the storm’s fury didn’t match that of a deadly twister that struck suburban Moore last week. Violent weather also moved through the St. Louis area, ripping part of the roof off a suburban casino.
Friday’s broad storm in Oklahoma hit during the evening rush hour and stuck around, causing havoc on Interstate 40, a major artery connecting suburbs east and west of the city, and dropping so much rain on the area that streets were flooded to a depth of 4 feet.
To the south, a severe storm with winds approaching 80 mph rolled into Moore, where a top-of-the-scale EF5 tornado killed 24 on May 20.
Rick Smith, the warning coordination meteorologist for the National Weather Service at Norman, said that while the storm packed a powerful punch, it wasn’t as strong as the Moore tornado.
“This storm had everything you could handle at one time: tornadoes, hail, lightning, heavy rain, people clogging the highways,” Mr. Smith said.
The region was fortunate because the storm touched down mostly in rural areas and missed central Oklahoma City.
“It’s not even close to anything like what we had last week,” Mr. Smith said. “We were very concerned this would move into downtown. It would have been a major problem. It made all the difference that it was out in the country.”
…
Global warming IS REAL!
CBS/AP/ June 1, 2013, 1:08 AM
Storm hits Oklahoma City area
Updated June 1, 2013, 1:08 AM ET
OKLAHOMA CITY Tornadoes rolled in from the prairie and slammed Oklahoma City and its suburbs Friday, trapping people in their vehicles as a storm swept down an interstate highway while commuters tried to beat it home.
A mother and her baby were killed, but meteorologists who had warned about particularly nasty weather said the storm’s fury didn’t match that of a deadly twister that struck suburban Moore last week. Violent weather also moved through the St. Louis area, ripping the roof off a suburban casino.
About 50 people were hurt, five critically, hospital officials said.
…
‘There’s just no rest’ as new twisters kill 5 in tornado-traumatized Oklahoma
By Ben Brumfield, CNN
updated 2:18 AM EDT, Sat June 1, 2013
Watch this video
See tornado touch down in El Reno, OK
(CNN) — The full scale of the destruction wrought by new tornadoes that plowed through Oklahoma will only be apparent when the sun comes up Saturday morning.
A handful of fresh twisters killed at least five people Friday, less than two weeks after a monstrous tornado waylaid the town of Moore, a suburb of Oklahoma City. Among the dead were a mother and her child, officials said.
At least 71 others were injured statewide.
Though the tornadoes were not as strong as the EF-5 twister that killed 24 on May 20, fear drove some people into their cars to flee.
The state’s transportation authorities strongly advised residents not to drive, but some interstate highways in Oklahoma were jammed with stalled traffic.
Officials described parts of Interstates 35 and 40 near Oklahoma City as “a parking lot.”
“We really needed a break after last (week), and there’s just no rest,” said city spokeswoman Kristy Yager.
…
Most of the folks I know who were injured in the big Northridge Quake were hurt by the blades of the swinging ceiling fans over their bed.
“They just ain’t worth 5 or 10 times what a similar house in Kansas costs.”
Maybe not 5 or 10 times, but the fact is, people, lots of people, would much rather live in California than live in Kansas.
‘lots of people, would much rather live in California’
Hasn’t that been the case for a long time? Long before house prices went nuts.
Yes.
The problem with home prices in CA was the following:
1. For years and years and years (really starting in the 90’s, when there was an additional 4 million population, but only 1 million housing units built), CA underbuilt housing relative to its population growth. This created a fundamental supply/demand imbalance, which has not been made up, and which over time made home prices higher than they would have been if CA’s zoning laws, etc. allowed more development. (this was the tinder)
2. When debt became available to everyone (strawberry farm workers and all), it instantly increased demand at all price points, thus driving up prices at all price points. (this was the flame)
Take away both conditions, and prices would be somewhat higher to reflect the desirability of climate.
Have one of the two, and prices will be higher than they should be.
Have both, and you are creating the next bubble.
My fear is that the current move in housing won’t motivate the Fed to raise rates quickly enough (because other states…NY/NJ/FL/IL have been slow to foreclose), and we will have #1 and #2 again in CA…and the fire will burn again.
Rental Watch:
If CA house prices were caused by a supply/demand problem, then the rents would be just as bad as the prices. In reality, the rent:price ratio in California is verrrrrry low compared to most other places in this country. This tells us that the price imbalance is not being caused by the supply or demand of houses. It is likely caused by the supply and demand of money that is specifically available for houses, and ONLY houses (i.e., mortgages).
“If CA house prices were caused by a supply/demand problem, then the rents would be just as bad as the prices. ”
They ARE just as bad.
Here’s what $2500/mo gets you in SF…. a crappy 2 bedroom apartment.
http://sfbay.craigslist.org/sfc/apa/3841729993.html
If there was ample housing, there wouldn’t be an overcrowding problem….there is.
The mortgage money is available throughout the US thanks to Fannie/Freddie…why does that available money not result in higher home prices elsewhere?
Here is a more recent article on high rents in CA.
http://www.huffingtonpost.com/2013/03/13/california-rent-second-highest_n_2867993.html
BTW, the ratio of home prices/rent isn’t important, it’s the rent and prices relative to incomes, in which, CA is very high (as noted in the above article) in both cases.
“For years and years and years (really starting in the 90’s, when there was an additional 4 million population, but only 1 million housing units built), CA underbuilt housing relative to its population growth.”
I presume your ‘years and years’ predate the early 2000s, when the CA builders ran amok? Because I have seen huge recently-built tract home developments on the high desert sit empty, due to the disconnect between supply and needs.
The “years and years” really started in the 90’s.
And when you say in the 2000’s when “builder’s ran amok”, you should really do the math. In the whole of CA, the estimate of how much building needs to happen annually is approximately 200k units per year to keep up with population growth and replacement of obsolete structures.
CA only exceeded that level in two years in the decade of the 2000’s. Here is the complete data:
2000: 149k
2001: 149k
2002: 168k
2003: 196k
2004: 213k
2005: 209k
2006: 164k
2007: 113k
2008: 65k
2009: 36k
2010: 45k
CA added 3.4 million people during the decade and 1.5 million new housing units…better than the 90’s (approximately 4 million new people, 1 million new housing units), but still not enough when you factor in the catch-up needed from the 90’s. CA had a total of 13,680k housing units in 2010 for 37.25MM people (2.72 people per housing unit) and 11,182k in 1990 for 29.75MM people (2.66 people per housing unit).
And from 2010 to 2012, we added approximately 800k people, and less than 150k new housing units, which is pushing the 2.72 people per housing unit even higher.
And adding on top of the problem, as you note, not all the development occurred where it was needed.
I’ve compared CA to Spain before, but it is worth noting again. Spain has a population approximately 25% greater than CA.
When CA built roughly 200k homes in 2004 and 2005, Spain built approximately 800k homes per year. That’s what I would call “builder’s running amok”, not what happened in CA.
“Of course it is. I like how they capitalized Home Flipping.”
Probably soon to be a sanctioned sport in the next Olympics…
“Home Flipping”
It’s a growth industry in California. Never mind the harsh lessons learned long-ago by latecomers to the California Gold Rush.
When I first read this I actually thought “Home Flipping In California” was a reality television series that had been picked up for another season — suggesting all sorts of surrealistic permutations….
‘The federal government has a moral obligation to Fannie Mae and Freddie Mac shareholders and needs to end the current state of limbo, activist and consumer advocate Ralph Nader tells MarketWatch in an interview. Nader is a shareholder in both companies. He said he bought his stake before the firms entered conservatorship.’
‘MarketWatch : Should shareholders who bought GSE stock before the firms were placed into conservatorship receive preferential treatment over those who bought shares after conservatorship began?’
‘Nader : That’s a good question. Certainly they have a higher moral claim because they relied, like I did, on Paulson and Bernanke.’
http://www.marketwatch.com/story/nader-us-has-duty-to-fannie-freddie-investors-2013-05-31?siteid=yhoof2
Animal House–”You F’ed up, you trusted us”
http://www.youtube.com/watch?v=zOXtWxhlsUg
LOL….
“Nader is a shareholder in both companies.”
Gawd. Talk about a cynical attempt to manipulate the political process for personal gain…
A sharholder who RELIES on the government to give preferential treatment to certain shares has a higher moral claim? How odd. I always thought the government was just there to reflect the will of the people, abide by the Constitution, and enforce the law. I didn’t realize they were there to choose winners and losers in the stock market.
You have no idea how much it cheers me to know that Ralph Nader had an equity position in FNMA when it traded at $30+/share. Makes picking up tens of thousands at $.33/ all the sweeter….
“The Housing Market Recovery Is ‘A Complete Hoax’”
http://www.truthdig.com/eartotheground/item/the_housing_shell_game_20130503/
Afterall, a “housing recovery” is dramatically lower prices by definition.
If you bought a house 1998-current, you’ve already lost alot of money. And the losses will continue to grow.
Beware.
“90 Percent of Foreclosures Are Withheld From Sale”
http://www.counterpunch.org/2013/02/19/theres-still-a-foreclosure-crisis/
If you’re looking to buy a house, sit tight as there are an estimated 25 MILLION foreclosures coming to the market. If you buy now you’ll lose alot of money. ALOT of money.
Beware.
“December 1998
FASB Rules on Accounting for Mortgage-Backed Securities
The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) 134, Accounting for Mortgage-Backed Securities and Certain Other Interests Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise, amending FASB Statement 65. SFAS 134 requires that after the securitization of mortgage loans held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities and other beneficial interests based on its ability and intent to sell or hold those investments.
The statement also addresses the accounting for certain retained beneficial interests resulting from the securitization of mortgage loans “held for sale” under the provisions of Statement 65.
SFAS 134 is effective for the first fiscal quarter beginning after December 15, 1998. On the date the statement is initially applied, an enterprise may reclassify mortgage-backed securities and other beneficial interests retained after the securitization of mortgage loans held for sale from the trading category. Those securities and other interests shall be classified based on the entity’s present ability and intent to hold those investments, according to this statement and Statement 115. An enterprise may also be required to reclassify other beneficial interests retained after the securitization of mortgage loans held for sale into the trading category. Transfers from or into the trading category that result from implementing this statement shall be accounted for in accordance with paragraph 15(a) or 15(b) of Statement 115.”
FASB Rule 134 was suspended on April 2, 2009.
If you invested in the stock market at that time you would have more than doubled you money.
When they restore #134 all the banks will have to dump their REO. Home prices will decline sharply, maybe 15-20%, and then will recover in a few years back to what they are now. I expect mortgage rates will be over 6% by then so that will keep a lid on average prices.
When they restore #134 all the banks will have to dump their REO.
Which apparently means they never will.
Not that long ago posters here would say interest rates would never rise.
I’m still curious and a bit skeptical regarding whether the current small movements upward will continue. I hope it does, but no longer expect the Fed to lose control any time soon.
I wonder at what point the Fed starts to publicly target long-term rates.
In other words, instead of telegraphing to the market that they are buying $85B per month, or $60B (or $100B) of various debt instruments, they instead say that as they dial back QE, they are targeting the 30-year no higher than x% (4.5%? 5%?). Price fixing and manipulation, no doubt, but also would set an expectation that could keep markets calmer than without such an expectation (where many are surely envisioning a downside with long term rates much higher than 5%, from the 3.3% of today).
I wouldn’t put it past them…
In many markets, it’s cheaper to rent than buy — but that’s not stopping home builders
May 30, 2013, 11:01 AM
In many top markets, it’s cheaper to rent than buy.
That’s according to an analysis done by Stern Agee home-builder analyst Jay McCanless, who compared the “fully-loaded price” (mortgage + fees, insurance and taxes) vs. renting. In the 25 top markets of the builders he follows (which excludes New York and Los Angeles but includes Chicago, Indianapolis, Houston, Washington D.C. and San Francisco among others), it’s cheaper to rent instead of buy in 13 markets at an interest rate of 3.5%.
That number grows to 17 in the “rent” camp when rates reach 4%, and to 20 when rates reach 5%. The five markets where it would still be better to buy than rent at rates of 5% are Chicago, Tampa, Sarasota, Miami and Atlanta.
The interesting takeaway is that builders are seeing growing demand anyway.
…
Those rapidly rising mortgage rates represent massive losses to anyone who purchased MBS at the start of May.
May 30, 2013, 11:05 a.m. EDT
30-year mortgage rate highest in a year
By Ruth Mantell, MarketWatch
WASHINGTON (MarketWatch) — Mortgages are costing consumers more, with the 30-year benchmark rate at its highest level in more than a year, according to data released Thursday.
The average rate on the 30-year fixed-rate mortgage rose to 3.81% in the week ending May 30 — the highest since the week ending May 10, 2012 — up from 3.59% in the prior week, Freddie Mac said Thursday. This month alone the rate has climbed almost half a percentage point.
“Fixed mortgage rates followed long-term government bond yields higher following a growing market sentiment that the Federal Reserve may lessen its accommodative policy stance,” said Frank Nothaft, Freddie’s chief economist.
Despite recent gains, the 30-year rate remains relatively low, helping to keep housing affordability high. Interest rates falling and hovering close to record lows have been supporting the housing market’s rebound over the past year.
A gauge of pending home sales, also released Thursday, showed that levels rose more than 10% in April from the same period in the prior year, signaling ongoing future gains.
A separate recently released report indicated that actual existing-home sales increased in April to the highest rate since November 2009.
However, analysts say that low inventories, along with high unemployment and credit standards are constraining sales.
With low inventories, escalating prices are keeping some buyers, such as would-be first-time homeowners, from participating in the market. In April, first-time buyers accounted for 29% of existing-home sales, compared with 30% in March and 35% in April 2012.
Since all-cash investors rather than owner-occupant buyers are driving the housing market, perhaps rising mortgage rates will have no effect on the pace of transactions or the prices paid. For a relevant comparison, so far as I am aware, interest rate fluctuations had no effect on the price of Beanie Babies.
I think you are wrong about that. Take the argument about global climate change and it’s the same kind of problem with the danger of CO2 passing 400 ppm. It’s not that 400 ppm was reached, it’s the rate of change that will cause the problem. Interest rates will have the same effect, a little at a time and the system can hedge against it but jack up rates from 1.6 to 2.5 in 5-6 weeks and you will blow up the system.
Hey Whac:
If 1/2 of the people get priced out of the (mortgage) market, then I think prices will go down. I don’t think the all-cash investors alone can keep a bubble going for very long.
“‘They create volatility and make prices go up more than they should. And it’s usually the less sophisticated participants who get hurt the most. The most successful flippers will probably be those who recognize the formation of new bubbles and get out before they burst. ‘Flipping is like a Ponzi scheme,’ says Humphries. ‘It’s not a bad idea for those who get into it first, it’s a bad idea for those who get into it late.’”
You know the party is nearly over when permabulls start voicing concerns.
How about this:
‘The recent surge is U.S. home prices has market watchers and money managers already playing defense to deter the notion that the market is entering another bubble.’
There are too many variants of 2006 “shoeshine-boy-moment deja vu” to keep track of them all.
I personally find it quite shocking to have to watch the whole movie played over again so soon after the last Ponzi collapse.
‘You’ve still got decreased supply and increasing demand, and the values are still incredibly affordable by historic standards…”
Decreased supply because banks are sitting on foreclosures and plenty of FB’s are zombies, unable to move unless they short sell or foreclose.
Incredibly affordable at 3% interest rates, maybe in some parts of the country, but not at higher interest rates.
Not with flat incomes, gas, groceries, health insurance, tuition all on the rise.
That’s a polite way of saying that the financial parasite class has cued up the propaganda. There really isn’t any entity that can be relied upon to present objective truth in opposition, certainly not this Administration or the Federal Reserve, so from the standpoint of dialectics propaganda is all we have.
“Lenders are being deliberate because they aren’t getting any pressure from regulators to sell their distressed real estate, said Mike Larson, a housing analyst at Weiss Research in Jupiter. At first, banks were taking their time to prevent big price declines, Larson said. But as the market improved, lenders decided that delaying sales would help prices rise and boost their bottom lines. ‘It’s not really in the banks’ own best interest to dump this stuff,’ Larson said.”
There ya have it. The reason why that unoccupied house in your nabe isn’t being listed and sold.
The mania is back here in South OC. In the community where I currently lease, a 2/2 condo sold for $295K last year. This month, the same model, asking price was $340K, 64 offers, and highest offer ended at $380K. This is so depressing. The home owners in the neighborhood are ecstatic because there values have gone up. Happy days are here again…
Correcting typos. “home owners” should be “condo debtors” and “there” should be “their.”
64 offers ??
Thats the real scary part….A feeding frenzy….Built on a foundation of cheap money….
I know! Sixty-four offers is friggin unbelievable, but it is what it is.
…and no supply.
Cheap money had a different effect in many places where there was lots of building (Texas as an example).
They better sell while the selling is good. This won’t last.
I am sorry, Beachchic. I really wish that houses were not stupidly priced. I feel your pain.
Awesome post, Ben. This is the best post in a long time. Lots of good material out there, huh? I am still in shock over the rebubble, but I guess it’s making this blog pretty fun again.
The re-bubble has put some much-needed mojo back into this blog.
The counter-argument:
http://www.cjr.org/the_audit/its_not_another_housing_bubble.php?page=all
To which I say, it’s not a full rebubble…yet.
The last bubble was fed by investors pulling equity out of their existing mortgage to buy another house — with minimal (if any) capital investment required. So far I’ve seen no indication of banks offering HELOCs to J6P, let alone no-down, choose-your-payment option ARM mortgages.
What I AM seeing is realtors selling to other realtors, with minimal involvement of the general wage-earning public this time. I’ve also noticed that shortly after the NAR holds one of its national conventions, (like the one three weeks ago in DC), the housing bubble hype gets majorly pumped in the MSM again.
‘Flippers can be anybody,’ said Troop Real Estate’s Robin Karcich. ‘It’s for anybody who wants to take the chance, and jump in and go ahead and do it.’”
This reminds me of the scene in the film Trading Places:
“And no matter if the price goes up or down, Duke Brothers gets paid their commission”.
“You guys are a couple of bookies”.
Most important lesson I have learned since posting on the HBB:
There is a sizable majority of people who believe objective truths don’t exist. Rather, they adopt the subjective belief of many major religions that winning the argument results in establishing the validity of their point.
I hate to burst your bubbles, but this is not the way the world works. Rather, there is an objective truth, and it is our job as objective scientists to seek it out and explain it.
Anyone who believes otherwise lives inside a bubble of mass delusion. And I am talking about the majority of MSM-favored economic ‘experts’ here.
Re: “Objective truth”.
Name one.
One objective truth: “This is a stale thread, yet I comment”.
One particular subject related to this bubble and the last that I have seen scant reporting on is the huge problems and risk associated from the gross misallocation of capital towards residential real estate both at the micro/individual level as well as the macro/national level. Seems to me BB and company believe the most recent crash was not about this at all. I am afraid they are very mistaken but are forestalling the next train wreck by shifting much of the risk to US taxpayers.