It’s Not Just A History Lesson
A weekend topic on interest rates and the housing bubble. MetroNews from Canada. “In July, the Bank of Canada lowered its overnight lending rate from 0.75 per cent to 0.50 per cent. The major banks soon followed suit, resulting in increased sales activity in the GTA. The Canada Mortgage and Housing Corporation recently released a quarterly supplement entitled Housing Now Canada. Despite Toronto’s red-hot real estate market, the report has an ominous message about overvaluation. It warns that the rise in prices has not been matched by growth in personal income.”
“Toronto real estate analyst Brian Persaud says that although the market has been hot, we haven’t really seen runaway condo prices, not like the case with single-family homes. ‘The average price of a condo downtown was $460,000 last month. And it was $440,000 this time last year. I mean, that’s not nuts.’ Condo prices rise for various reasons. Easy access to mortgages is certainly fuelling the market, especially since the interest rate drop.”
“‘It’s no secret that the amount of money being lent out is higher than it’s ever been,’ says Persaud, who is also a real estate agent.”
“Persaud points to examples of the explosive growth in single-family housing prices in the GTA, like High Park properties doubling in price to $2 million. And we’re starting to see it in the 905. ‘I’ve been seeing price increases from the fall in Durham. Houses were going between $370,000 to $380,000 and now they’re in the fives (hundred thousands). In Whitby. Can you believe that?’”
The Denver Magazine in Colorado. “The past few years have seen the local real estate scene flirting with coastal-type price increases. Bidding wars are still occurring, particularly in that mid-$300,000 range. (To wit, yours truly just refinanced a condo near downtown Denver whose appraisal showed that its value has increased by almost one-third in only 18 months, a spike that’s absurd and unsustainable, but sure did make for a pleasant closing.)”
From Realtor.com. “We’re on Month 3 for the continuing rise of existing-home sales, according to a report by the National Association of Realtors®. But here’s a surprising tidbit. Two months ago we wrote that ‘first-time home buyers helped push home sales in May to their highest level since May 2009,’ but Thursday’s report says that low inventory, and those soaring prices, ‘are likely to blame for sales to first-time buyers falling to their lowest share since January.’”
“You’re more likely to buy a home, it seems, if you already have one. ‘Current homeowners are using their increasing housing equity towards the down payment on their next purchase,’ said Lawrence Yun, NAR chief economist.”
The Los Angeles Daily News in California. “Rising home prices across California have eroded affordability to the point that only seven counties have housing that a family earning the median income can afford to buy, according to a study. The analysis of second-quarter home prices and income levels in 32 counties by the California Association of Realtors found that 25 counties have housing stock priced out of the reach of families earning the median income.”
“Home prices have been rising around the state for several years and some markets have approached or matched their pre-recession highs. ‘It’s pretty shocking,’ said association chief economist Leslie Appleton-Young. ‘I think that the big risk is with the millennials in California. Where are they going to live? There are some that have parents that can help them with the down payment. They are the lucky ones. But the others are on their own,’ Appleton-Yound said.”
“In the second quarter of 2015, the statewide median price of $446,980 was nearly 50 percent higher than what a California household with the median income could qualify for, the analysis said. In Los Angeles, where the median income was $54,510, a family earning that amount could afford a home costing $275,530. But the median-priced home here was 58 percent higher at $436,010.”
“Households in San Francisco earning the median income of $75,910 were only able to afford a home costing $383,670, a difference of $863,900 or 225 percent. That’s compared with the actual second-quarter median home price of $1.2 million. And during the second quarter, just 10 percent of families could afford a median-priced home costing $1.35 million and they would need to earn a minimum annual income of $267,780 to qualify for the loan.”
The Orange County Register. “What would it have taken for the Federal Reserve to prevent the housing debacle of the last decade? Apparently, 8 percentage points of increases in the key short-term interest rates the Fed controls. Oh, and that series of rate hikes would have had to start way back in 2002. That’s the conclusion of a recent study by researchers at the Federal Reserve Bank of San Francisco.”
“It’s not just a history lesson, as the economy struggles again with steep housing costs. Please don’t forget, the last time the nation got housing policy wrong – just a decade ago – the nation plunged into its darkest economic period since the Great Depression. The San Francisco researchers noted this rate-hike solution is too simple. Early rate hikes by the Fed might have signaled a warning about asset bubbles in general. Plus, the initial rate hikes might have cooled housing to the point where house hunters weren’t in a buying frenzy and real estate’s overvaluation wasn’t a huge problem. So the full 8 percent hike might never happened.”
“Perhaps more problematic was the notion that this intense level of rate hikes would have cooled the economy, probably into a recession. That broad dip in the national business climate could have further tempered real estate’s upswing. ‘Slowing down a boom in house prices is likely to require a considerable increase in interest rates, probably by an amount that would be widely at odds with the dual mandate of full employment and price stability. Moreover, the Fed would need a crystal ball to foretell house price booms. In restraining asset prices, while the power of interest rate policy is uncontestable, its wisdom is debatable.’”
“Of course, the Fed would have had to see a problem to act at all, if not accordingly. Take the last real estate mess as an example: In December 2004, with housing bubble talk heating up, researchers at the Federal Reserve Bank of New York issued a report that noted a 36 percent rise in after-inflation U.S. home prices since 1995 was double what had been seen in two previous real estate run-ups.”
“But, the report concluded: ‘We argue that market fundamentals are sufficiently strong to explain the recent path of home prices and support our view that a bubble does not exist.’”
“Even at the state level, where this research revealed evidence of excessive price run-ups on each coast, the researchers would not sound any alarms. ‘Volatility at the state level is the result of changing fundamentals rather than regional bubbles,’ the 2004 New York Fed report said. ‘Nevertheless, weaker fundamentals have caused home price declines in those areas with inelastic supply. If the past is any guide, however, that phenomenon is unlikely to plunge the U.S. economy into a recession.’”
“That kind of thinking probably lead then-Fed boss Alan Greenspan – the reigning ‘maestro’ of the economy at the time – to go to Congress 10 years ago and say he saw only tiny bubbles. ‘Although a ‘bubble’ in home prices for the nation as a whole does not appear likely, there do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels,’ his prepared testimony said. ‘The U.S. economy has weathered such episodes before.’”
‘It’s pretty shocking,’ said association chief economist Leslie Appleton-Young. ‘I think that the big risk is with the millennials in California. Where are they going to live?’
Exactly what risk are you referring to? That they will leave? Or default on the loan when they couldn’t even save a down payment?
‘Current homeowners are using their increasing housing equity towards the down payment on their next purchase’
Second house purchases in the US went to record numbers in the last year. More than any time since the numbers were kept.
‘With interest rates projected to rise and inventory increasingly tight, the window for purchasing a second home at an affordable price may be starting to close.’
‘Such sentiment has helped to fuel the recent boom in vacation property sales among affluent investors, many of whom are feeling flush on the heels of a six-year stock market rally. Demand is particularly high among baby boomers who are prepositioning for retirement.’
“Last year’s impressive increase reflects long-term growth in the number of baby boomers moving closer to retirement and buying second homes to convert into their primary home in a few years,” said Lawrence Yun, chief economist for the National Association of Realtors (NAR).’
‘Vacation home sales rose 57 percent last year over 2013, to 1.3 million properties, well above their most recent peak level in 2006, according to NAR. In fact, vacation home sales accounted for 21 percent of all real estate transactions last year, their highest market share since the survey was first conducted in 2003. NAR found in a survey that 85 percent of vacation buyers think now is a good time to purchase real estate.’
“When I was working at traditional financial-planning firms, it was often the people with second homes who were having difficulties retiring early (or at all) because the cost to maintain two properties is so high,” said Sophia Bera, a certified financial planner and founder of Gen Y Planning.’
“I am not a huge fan of buying second homes, but I am a big advocate of investment properties,” Bera said. “Usually people don’t use their second homes enough to justify the costs. It would be cheaper for them to rent a furnished apartment for a few months a year and then change locations if they decide to try a different country, city or apartment for a while.”
It would be cheaper for them to rent a furnished apartment for a few months a year and then change locations if they decide to try a different country, city or apartment for a while ??
I agree…In our case we choose long ago to travel in a RV…We change locations all the time…
“Usually people don’t use their second homes enough to justify the costs. It would be cheaper for them to rent a furnished apartment for a few months a year and then change locations if they decide to try a different country, city or apartment for a while.”
AirBnB, baby! We rented someone’s comfortably furnished basement a couple of weekends back for $88/night, which came out to $22 for each of us.
Ben Jones: Exactly what risk are you referring to? That they will leave? Or default on the loan when they couldn’t even save a down payment?
The risk that they won’t execute a transaction which provides money to the CAR.
‘Current homeowners are using their increasing housing equity towards the down payment on their next purchase’
It’s like you can be the victim of your very own ponzi scheme!
Hilarious observation. Flip your own home to yourself!
Cogent observation.
“Home prices have been rising around the state for several years and some markets have approached or matched their pre-recession highs. ‘It’s pretty shocking,’ said association chief economist Leslie Appleton-Young. ‘I think that the big risk is with the millennials in California. Where are they going to live? There are some that have parents that can help them with the down payment. They are the lucky ones. But the others are on their own,’ Appleton-Yound said.”
There is really nothing shocking at all about the situation, and it is really simple to explain:
1) Historically low, artificially suppressed interest rates have led to historically overvalued asset prices, including stocks, bonds, commodities and, particularly, housing.
2) …history has not dealt kindly with the aftermath of protracted periods of low risk premiums. — Alan Greenspan
3) If something cannot go on forever, it will stop. — Herbert Stein
This all adds up to a bullishly optimistic outlook for more affordable future California housing prices.
‘yours truly just refinanced a condo near downtown Denver whose appraisal showed that its value has increased by almost one-third in only 18 months, a spike that’s absurd and unsustainable, but sure did make for a pleasant closing.’
And a nice cash-out check I’m sure.
‘There were a total of 326,143 Federal Housing Administration (FHA) loan originations – typically low down payment loans utilized by first time homebuyers in the second quarter. FHA loan originations increased 50 percent from the previous quarter and were up 46 percent from a year ago. FHA loan originations represented 16.7 percent of all loan originations in the second quarter, up from a 13.6 percent share in the previous quarter and a 14.1 percent share a year ago to the highest share since the second quarter of 2010. FHA purchase loan originations in the second quarter spiked 73 percent from the previous quarter and were up 36 percent from a year ago, while FHA refinance loan originations were up 32 percent from the previous quarter and were up 58 percent from a year ago. The average value of homes purchased using an FHA loan increased 1 percent from the previous quarter and was up 13 percent from a year ago.’
‘There were a total of 118,807 Veterans Administration (VA) loans originated in the second quarter, representing 6.1 percent of all loan originations. VA loan originations in the second quarter were up 12 percent from the previous quarter and up 39 percent from a year ago. VA purchase loan originations in the second quarter increased 45 percent from the previous quarter and were up 11 percent from a year ago, while VA refinance originations decreased 7 percent from the previous quarter but were up 83 percent from a year ago.’
“The rise in loan originations particularly the sharp rise in FHA purchase originations indicates the FHA premium reduction at the end of January really is having a big impact, pushing people off the fence to purchase,” said Daren Blomquist, vice president at RealtyTrac. “The average loan amount for FHA purchase loans increased from $187,718 in the first quarter of 2011 to $197,315 in the second quarter of 2015 (a 16 quarter high), as the lower FHA premium gave those buyers more buying power.”
http://www.realtytrac.com/news/company-news/q2-2015-loan-origination-report/
The federal housing financiers are setting up lower income households with massive debt burdens, which will lead to high foreclosure rates among low-income household in the next recession, followed by Democrat-led “Save our Homes” bailouts and housing rescue schemes.
Same story as in the recent episode…
From yesterdays post:
“As reported by Stephen D. Oliner, a former associate director in the Division of Research and Statistics at the Board of Governors of the Federal Reserve System, 40 percent of government-backed mortgage loans go through programs that are not as firm about qualifying as Fannie and Freddie. The median credit score for borrowers going through the Federal Housing Administration, for example was in the lower third of all credit scores in the U.S. Stress tests indicate that in a crash similar to what happened six years ago, 25 percent of those FHA mortgages would go into default.”
“That’s not something to lose sleep over, of course. Not tonight, anyway. But some powerful voices are arguing for a loosening of qualifying standards.”
Arguing for? Mel Watts has a pen and he’s lettin’ er rip.
Mo Credik Mel
http://picpaste.com/mel_watt.jpg
Just curious, did he actually ever say “mo’ credik” or is that just a jab at the way he talks?
The VA loan program is self supporting and self sustaining. No federal costs or subsidies. They underwrite carefully and title is vested in the VA, not the vet, so problems can be rectified easily and cheaply.
It proves that low down payments work if properly underwritten.
Wrongo Jingle_Fraud. VA mortgage program is fully subsidized by the feds. It’s been a money loser for decades.
Really all those perms pension employees are volunteers ?
Dead wrong….the VA does not hold the title, the bank does. The VA does not make the loan, they guarantee it up to 20% to the bank that makes the loan and the cost to the veteran is low. I bought a house with a zero down GI Bill/VA loan (and later sold it and paid off the loan in full) so I know how it works. The VA loan guarantee basically amounts to low cost PMI for the veteran who puts less than 20% down.
associate director in the Division of Research and Statistics at the Board of Governors
wow how many bureaucrats are there?
http://polobserver.wix.com/cutspending
Used to comment here quite a bit in the period 2006-2009. In 2010 I bought an apartment building. Probably paid too much for it, as I now have it on the market at just a smidge over what I paid for it, and am not seeing any action. It runs in the black, but that’s mainly because I bought it for 100% cash. Am offering owner-financing as an inducement to whatever would-be investor is fool enough to fool with it.
It is just in the past month or so that I’ve been really noticing how badly mismatched the price and income pictures are. And really, that California article saying that a household income of $54.5K can afford a house costing $275K…are you kidding me? I never EVER lend more than 3x annual income, and I prefer to keep it down closer to 2x. So I wouldn’t be making the loan to the median LA earner unless he/she could make a 50% down payment. Fat chance of that, huh?
A purchase I made quite recently was a condo in Vero Beach, FL. Probably what induced me to buy that was the observation that the exact same thing in Morro Bay, CA would’ve cost twice as much, and that it’s very hard to become a tenant in Vero, as people line up their vacation digs about a year in advance. Also I am noticing how many of my friends in Maine are starting to talk Florida as they get fed with with worse and worse winters. We’ll see…probably I love being here at HBB because I hope you guys will help me not to be an idiot. I did sell a house in 2006 thanks to y’all, and did not replace it in any way until I bought the apt building in 2010.
If having paid cash affects whether you are “in the black, ” then your accounting is wrong. I suspect you neglected to expense the return you could be earning on the cash you tied up in real estate.
…until that vehicle tanks.
“Opportunity Cost” doesn’t show up anywhere in accounting.
Ignoring your losses doesn’t make them go away Rental_Fraud.
HA! Ignoring and denying my gains doesn’t mean you’re correct.
Data my friend data.
Alameda, CA Housing Prices Fall 12% YoY
http://www.movoto.com/alameda-ca/market-trends/
The data you linked indicates that the price per square foot increased by 3%. No way have prices in Alameda fallen.
It’s the 14% decline in transaction prices in Alameda, CA that is important here. Price per square foot will fall as demand and transaction prices continue to crater.
It does, though the term economists use to describe the concept may not be used by accountants.
By contrast, Realtor math ignores opportunity cost. For instance they love to assume huge down payments to make the monthly payment smaller, in order to make an overpriced home seem more affordable. 100% cash is most affordable, as the monthly is $0, so why not borrow the full purchase price from your friendly neighborhood shadow banker?
And how does “opportunity cost” show up on a financial statement? What terminology is used?
I’m no accountant, but I’ve seen my share of financial statements, and I’ve never seen the concept of opportunity cost show up anywhere (terminology aside).
If it did, then Apple, MSFT, Google, etc. would be getting hugely dinged for keeping so much cash on their balance sheet.
If I buy an apartment project with cash and earn a 2% return on the investment, I’m “in the black”. It may be a p*ss poor allocation of capital (if I can get more than 2% with similar risk profile elsewhere), but I am making money on my investment, just not enough for the risk.
How?
It’s starts by performing the math that shows the total aggregate of your losses on housing Rental_Fraud.
Everyone commenting here on opportunity cost is not asking the obvious question: what is the return on equity on your apartment building? In other words, (annual rents-expenses)/market value.
“…what is the return on equity on your apartment building?”
Soon to go negative once the China contagion infects the U.S. residential real estate sector…
Since his equity is 100%, it’s impossible for ROE to go negative.
It’s possible, but the complex would need to be empty enough that the rents didn’t cover the fixed costs of owning the complex (taxes, insurance, etc.).
Plus depreciation plus lost opportunity costs.
There is no roi on a depreciating asset like a SFR.
Cresent beach fl is sweet
Can’t why zillow calls Orlando + 8%
Unlimited land over there
About: Leslie Appleton Young
“I’m calling it a soft landing — a return to what is considered to be more normal market conditions,”
- Leslie Appleton-Young, Chief Economist, California Association of Realtors
“Maybe we need something new. That’s all I’m prepared to say. I’m sorry I ever made that comment. When I get my new term, I’ll let you know.”
- Leslie Appleton-Young, Chief Economist, Cal. Assoc. Realtors
When asked about her “Soft Landing” prediction
Even when the data shows collapsing demand, falling prices, they just can’t bring themselves to be honest with the public. What did NAR/CAR do after this statement was made? They continued to mislead by overstating demand in an environment of collapse demand……. every single month for 4 years straight.
Lesson: Study the data, ignore the words.
The brightest minds at the Fed:
“What would it have taken for the Federal Reserve to prevent the housing debacle of the last decade? Apparently, 8 percentage points of increases in the key short-term interest rates the Fed controls. Oh, and that series of rate hikes would have had to start way back in 2002.”
Shoot me!
They definitely could not have:
1) Increased down payments to a minimum of 10% of the purchase price.
2) Required a FICO score of 700+
3) Required a longer employment history than just 3 months.
4) Made all or some of the capital gains from the sale of a house taxable.
5) Restricted loans on purchases of properties that were sold less than 11 months ago.
6) Restricted the ration of cash-out refinancing and home equity loans to a smaller percentage of the total value of the house.
Nah! They clearly couldn’t have done that! Wow! They would have had to raise interest rates in 20002 to 8%! There was no way around it!
It is so much clearer to me now. I think I’ll go have a lobotomy!
C Ya!
+6
Nice post!
All you need is the 10% down
This is going according to what I thought. Next, tons of QE and liquidity added by central banks to stop the crash. Rents and home prices, which are already rising quickly in quality markets, will start rising rapidly. Major inflation ahead. Food prices will also jump. After inflation really gets going, an economic disaster will occur. While home prices will jump and stun all watching from the sidelines, don’t worry. Shortly after will be the economic disaster, and it will be so bad, no one will care about home prices. You will have much bigger problems like safety and food. Watch. I have been posting this opinion for a long long time.
Ehhhhhhhhh not really. Not at all considering prices are falling globally now.
“I have been posting this opinion for a long long time.”
Cool story.
More QE won’t save this train wreck and the Fed knows it. It’s 1987 all over again. First stocks blow off then real estate. Might be time to put my money where my mouth is and short the Case/Shiller index. I don’t think it’s blind faith.
“In Los Angeles, where the median income was $54,510, a family earning that amount could afford a home costing $275,530.”
Someone making a bit over $50k a year has no business buying an almost $300k house.
Even with low interest rates, he probably shouldn’t be looking at anything over $200k at that income.