The Housing Bubble

It’s Friday desk clearing time for this blogger. “The median home price in Southern California surged a stunning 28% in June compared with a year earlier — outpacing any month during last decade’s housing bubble. The gain puts the median at $385,000, up from $300,000 last June. Syd Leibovitch, founder and president of Rodeo Realty in Beverly Hills, said he expects prices to double from their bottom last year. ‘You have a lot of room to run,’ Leibovitch said. ‘Because historically, they always double in these cycles, and then they drop back a bit.’”

“In the first half of 2013, house flipping was on the rise in more than two-thirds of housing markets. Investors who flipped houses in Washington, D.C., saw an average 80 percent gross profit, the highest in the nation. Nebraska was next with 62 percent gross profit, followed by Oklahoma (35 percent), Pennsylvania (31 percent) and Florida (25 percent). ‘We’re seeing house flipping exceed what we saw back during the height of the housing bubble,’ said Daren Blomquist, VP at RealtyTrac.”

“Wall Street-backed investment groups have emerged as a new breed of homebuyer in Charlotte. ‘Oftentimes they like the newer-built homes on slab with vinyl siding,’ said Anthony Moore, co-owner of Charlotte-based real estate company Pike Properties. ‘A lot of times they really won’t even look at the properties very hard. They’ll literally just buy sight unseen.’”

“The interest rate boost is actually working in the buyer’s favor, according to Dean Wegner with Guaranteed Rate. He said for the past couple of years sellers held all the cards, picking from multiple offers. This interest rate boost levels the playing field. ‘Buyers will have more flexibility negotiating with an easier close of escrow, you won’t get bullied by other buyers or their agents,’ he said.”

“And to potential home buyers who are frightened off by a 5 percent mortgage rate, Wegner said rentals come with a 100 percent interest rate. Wegner said the rate hike to almost 5 percent prevented a possible housing bubble because seeing home prices jump 20 percent year over year was unsustainable. ‘We needed something to hit the brakes.’”

“Are we in another real-estate bubble? Zillow chief economist Stan Humphries considered the typical monthly mortgage payment after a 20% down payment. Between 1985 and 2000—the ‘normal’ period—the typical American homeowner paid 20% of their income on a mortgage payment. The median mortgage payment fell to 12.6% in 2012 and, at current mortgage rates—4.63%—homes in the biggest 30 metropolitan areas are more affordable than their historic norms. But that starts to change when rates rise above 5%, Zillow says. At that point homes in several metro areas start to look more expensive than their historic norms.”

“‘And, logically, the six markets that were more expensive at 5% only look even pricier at 6%. In San Jose, for example, at 6% mortgage interest rates, homeowners can expect to pay 36% more of their monthly salaries on mortgage payments than they were paying between 1985 and 2000,’ Zillow says.”

“The Federal Reserve should begin tapering its $85 billion bond-buying plan very soon with an eye toward ending it by the end of this year, said Charles Plosser, the president of the Philadelphia Fed Bank. ‘We don’t want to create another housing boom and we have to be careful of the unintended consequences of our policies,’ Plosser said.”

“New England may have been spared the worst of the Great Recession, but the slow and uneven recovery is widening the divide between the affluent and the poor and threatening to create a permanent underclass with few prospects for better jobs or better housing, according to the Federal Reserve Bank of Boston’s July Community Outlook Survey. Sixty percent of survey respondents said they expect little change in low-wage job availability over the next six months.”

“Most respondents were also pessimistic about the availability of affordable housing, which will be ‘even further out of reach’ for low-wage residents if home prices continue to increase. ‘If this trend continues,’ the Fed concluded, ‘it ensures further income disparities, which economists and service providers alike suggest lead to additional long-term negative effects on the social and economic well-being of the region.’”

“Our nephew, a high school teacher and coach in southern California, decided to stop paying on his mortgage a year ago. Matt, 34, is still in the home. I thought about him recently when I read that foreclosures are taking longer to complete, with the average time it takes a lender to repossess a home jumping to 477 days, up from to 414 days in the fourth quarter of 2012. ‘I was really concerned about doing the right thing,’ Matt said. ‘I didn’t want to hurt my credit by getting behind, but there were larger homes in our neighborhood we could rent for half of what we were paying on a mortgage.’”

“Meanwhile, the Office of the Inspector General (OIG) at the Federal Housing Finance Agency announced it is trying to find strategic defaulters and collect on what they still owe. The OIG says such walkaways have constituted mortgage fraud, and the OIG plans to refer them for criminal prosecution. The OIG estimates that strategic defaulters owe more than $1 billion to Fannie Mae and Freddie Mac, and they’re ready to start collecting. ‘We’re not just going to demand repayment,’ Heather Wolfe, OIG assistant inspector general for audits, was quoted as saying. ‘We’re going to lock [people] up.’”

“Each month, sales reports say the housing market is recovering in Ohio and in the rest of the country. But Ohio still had more than 90,000 foreclosures last year. The National Mortgage Settlement alone was worth $25 billion. In March of 2012, 49 states signed on to the deal with mortgage servicers who had admitted to massive ‘robo-signing’ of loan documents and other abuses. The settlement was supposed to be an expedient way for some 1 million people to keep their homes.”

“But Paul Bellamy director of research for a group called Empowering and Strengthening Ohio’s People, an advocacy group involved in foreclosure prevention statewide. likens it and other programs to ‘foaming the runway, again and again and again.’ As in, preparing for a major crash and trying to keep things from blowing up.”

“You might think that we have been living in a post-bubble world since the collapse in 2006 of the biggest-ever worldwide real-estate bubble and the end of a major worldwide stock-market bubble the following year. But talk of bubbles keeps reappearing. Bubbles are essentially social-psychological phenomena. One problem with the word bubble is that it creates a mental picture of an expanding soap bubble, which is destined to pop suddenly and irrevocably. But speculative bubbles are not so easily ended; indeed, they may deflate somewhat, as the story changes, and then reflate.”

“It would seem more accurate to refer to these episodes as speculative epidemics. A new epidemic can suddenly appear just as an older one is fading. A new speculative bubble can appear anywhere if a new story about the economy appears, and if it has enough narrative strength to spark a new contagion of investor thinking. This is what happened in the bull market of the 1920’s in the US, with the peak in 1929. A major boom in real stock prices in the US after ‘Black Tuesday’ brought them halfway back to 1929 levels by 1930. This was followed by a second crash, another boom from 1932 to 1937, and a third crash.”

“Speculative bubbles do not end like a short story, novel, or play. There is no final denouement that brings all the strands of a narrative into an impressive final conclusion. In the real world, we never know when the story is over.”

“In March 2000, the Nasdaq composite stock market index closed at an all-time high of 5,048.62 and then promptly rolled off the table, losing nearly 80 percent of its value by October 2002. One way to look at it — the way real estate people look at the for-sale housing market — is that in more than 13 years the Nasdaq composite has never ‘recovered.’ It’s still down more than 25 percent from its peak.”

“The thing is, stock market people didn’t usually talk about the Nasdaq composite in terms of recovery after the Nasdaq bubble burst, maybe because they were simply too embarrassed. So why is ‘recovery’ the word just about everybody uses when discussing the housing market? This is more than a complaint over a word choice; the language broadly used to describe financial assets and choices for consumers really does matter. Talking about a recovery suggests some sort of natural level for housing prices, much like a rainy spring after a drought leads to a recovery of lake water levels.”

“But it’s batty to imply that any asset should quickly reach its previous high in valuation as more normal times return, not when the old high reflected prices that were fundamentally unhinged from reality.”

“Consumers, of course, could be accepting all this talk of recovery at face value. That could be what explains news like what was reported by the June Thomson Reuters/University of Michigan consumer surveys. It turned out that the highest proportion of consumers since 2007 expect an increase in house values in the coming year and the fewest consumers in 10 years believe it is a bad time to buy a house.”

“Herb Tousley, the director of the Shenehon Center for Real Estate at the University of St. Thomas Opus College of Business, produces closely watched real estate market data. In looking at conventional sales, by which he means a real estate deal that wasn’t through a foreclosure or a short sale, the median price in June was $232,000. That’s inching very close to the peak of the bubble, a median price of $239,000 in June 2006.”

“So, enough about the ‘housing recovery,’ and worries over the fragility of the ‘recovery’ and the sustainability of the ‘recovery.’ In fact, by one common measure of valuation — the median value of a house as a multiple of median household income — the market may already be overvalued.”