By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Cross posted from Testosterone Pit.
Cities have seen dizzying home-price increases that are giddily reported and infused with pandemic housing hype and trillions from the Fed into a self-propagating force. And it has become accepted wisdom that the housing market would recover all the way to where it was in 2006, which would represent a complete recovery, a sign that the Fed has done its job, that it cured at least one of the ills that has been dogging this economy for so long.
Alas, not too long ago, everyone had called 2006 “the peak of the housing bubble,” the apogee of all craziness, one of the causes of the disaster that followed, and everybody had tales of just how crazy it was back then. All this is forgotten. The prices of 2006 are suddenly no longer the peak of the housing bubble, but a goal to get back to.
Electronic real-estate broker Redfin covers 19 metro areas with its Real-Time Price Tracker. It’s based on sales contracts that are reported to the MLS data bases upon signing, and thus far timelier than other gauges. It measures prices per square foot, thus eliminating the issue of larger versus smaller homes. In its report at the end of August, home prices in San Francisco soared 27.3% from a year ago; in Riverside, CA, 29.6%; in Sacramento, CA, 38.8%; and in Las Vegas a cool 39.1%.
Toxic Mix: Higher Prices and Higher Mortgage Rates
Price increases that make the last bubble appear boring! So in San Francisco, the median list price, according to Redfin, is $832,000. The median sales price is 7.5% higher.
Mortgage rates have jumped too. Combined with higher home prices, they make a toxic mix. So if our homebuyer in San Francisco pays $16,000 down on his median home and finances $816,000 for 30 years, with a fixed-rate mortgage at the average rate of 4.80%, the payment will set him back $4,281 a month.
If the price on that unit was up 27%, it would have cost $655,000 a year ago. Back then, rates on equivalent mortgages were about 3.5%. With the same amount down, he would have financed $639,000. The payment would have been $2,736 a month. In the course of a year, for exactly the same unit, the mortgage payment jumped 55%.
Insanity. Homes weren’t cheap last year either. Have incomes jumped 55% to make up for it? Um, no. In other cities, such as Las Vegas, it would be even worse. In other words, the new housing bubble has been beautifully inflated – and is approaching full bloom. Thank you halleluiah, Fed.
What’s Next? Repeat of 2007-2009?
“The price increases are crazy,” real-estate agent Amy Downs in the Dallas suburb of Garland echoed to the Wall Street Journal. And it’s not good for business; a lot of her clients stopped searching for a new home.
Homebuilders have pushed to the max. But after raising prices for well over a year, they’re suddenly feeling the heat – suddenly being in August. Builders are normally able to raise prices in August, on average by 2% from July, according to John Burns Real Estate Consulting. But in its survey of 273 builders, covering about 16% of the new-home sales across the country, 47% of the builders raised prices in August, 48% kept them flat, and 5% lowered them.
By contrast, in July, 64% raised prices, 36% kept them flat, and 0% lowered them. You just down lower prices in the summer. The 5% in August was the worst score on price reductions since March 2012.
The summer debacle was confirmed by homebuilder Hovnanian Enterprises during its earnings call on Monday for the quarter ended July 31. CEO Ara Hovnanian talked about improving gross margins and “positive operating trends.” And then he proffered an iffy forecast: the company expected “to report much stronger results” for the fourth quarter, assuming” – emphasis mine – “that market conditions remain stable.”
But that appeared to be a big IF in his own mind
During the quarter, net contract dollars rose 8%, net contract numbers only 2%, compared to prior year, he said. “We jokingly wish we had a June quarter end, so that we could have reported that our net contract dollars were up 17% and the number of contracts were up about 10%, similar to what many of our peers recently reported that had June quarter ends.”
Because July was crummy. And August was worse – weekly net contracts were down 5% from prior year. “To put this slowdown into perspective,” he said, “we were well ahead of our internal year-to-date budgets for net contracts going into July, and we are now slightly behind our year-to-date internal budget for net contracts at the end of August.” Among the reasons: “significant home price increases, higher mortgage rates, and a little lower consumer confidence.”
The company had raised prices “aggressively” in 80% of its communities. For example, in a single-family detached community at Roseville, CA, they’d implemented a series of price increases, each time watching how sales responded. At one point, sales did slow down but then picked up again on their own, “as people adjusted to the prices,” he said. The last price increase in June brought the cumulative price increases for the 12-month period to $141,000, or 40%.
It triggered a backlash. “We got a little over-exuberant with the last price increase,” he explained. Sales ground to a halt – they sold one home in the following 7 weeks, as opposed to one home per week. Hence, they made “a small downward pricing adjustment” – and a week later, they sold another unit.
Their strategy was to raise home prices “to the point of significantly slowing down sales pace,” he explained. And that point has been reached. Homebuyers are maxed out. That’s what ultimately pricked the last housing bubble. And that’s what will eventually prick this bubble too
21 comments
Comments are closed.
I feel sorry for the folks getting whipsawed by the housing machinations.
I live on the same block with a couple that is just now putting their house on the market. He just retired early (59.5) to take care of sick wife and now they want to move from OR to WA to save taxes….to be spent on wife’s medical condition. I wish them the best but fear they will be a victim of the latest/coming crash.
How much will they lose in price in the current freak market? It used to be that one invested in housing as a conservative nest egg that could be counted on…..now, not so much.
If he bought the house more than a year ago and already placed in the market, he is likely to make a handsome profit considering the prices have gone up substantially in the last year and the market hasn’t collapsed yet. Of course, it is a different case with those bought a house in the last year with an intent to sell it and are planning on holding on to the house for sometime into the future.
Around here, the crazy is mostly driven by the perceived lack of for-sale inventory. My neighbor just sold his house for more than we paid for ours in 2009–and his house is quite a bit smaller and less-recently renovated. The bubble crash pushed up rents quite a bit, so buying is starting to look like a better option. But the local RE boosters don’t get (as usual) that pent-up demand will ebb, and that “underwater” homeowners will start to sell when they feel they can afford to do so. It’s not in their interest to recognize that the inventory crush will pass.
Great post. A topic near and dear to my heart as well as the reflation of the housing market has pushed prices well above what we saw in Houston before the meltdown. Granted, we’re still adding jobs in the Bayou City, but the point of incomes and affordability still holds true. Even here in Houston the market has gotten ahead of itself.
In Katy and West Houston, we still have a number of oil and gas companies moving staff into the area. New construction is all over and euphoria is in the air for those living high on the hog. One has to wonder just how long the party will last because the middle class (if there are any of those left) and most others are being squeezed by exploding housing costs.
A new Costco going up here in Katy next to the new Grand Parkway tollway extension provides a good picture of what we’re dealing with. The new tollway extension is part of Houston’s new 4th loop which will connect the Energy Corridor area with ExxonMobil’s new campus. Yeah, more concrete tollways!
I feel for the first-time buyers and others looking to get into an affordable home here in the Houston area because the price increases were overdone this summer. I think we’ve at least bottomed with inventory, but the affordability question will have to be dealt with unless incomes keep improving and/or rates come down. Of course that issue is completely lost on the local real estate board which continues to tout the consecutive record highs for home prices. I suppose when new proposed mortgage rules make buying a home even more expensive than it already is, they’ll play up the continued strength of expat investment. LOL!
That which is unsustainable will eventually end.
But they’ll try everything to keep the party going.
http://www.bloomberg.com/news/2013-09-11/jpmorgan-removes-lending-barriers-in-booming-u-s-markets.html
Real estate is cyclical and those cycles usually last 5-7 years. This time IS different, calvinball policies and the criminogenic ecosystem in the halls of power have had an effect ( Look at how uneven the “Price recovery” has been in the SF Bay Area). I mentioned that we were clearly at an inflection point for house prices yesterday both in a comment on “Calculkated Risk” and in my weekly blog post on the Broker’s meeting and tour for “Bay Area Real Estate Trends” blog. full disclosure, I am a Real Estate Broker based out of Sebastopol CA.
“calvinball policies”
That’s a great turn of phrase, definitely going in the toolbox.
This entire ‘recovery’ has been predicated on asset reflation.
Housing is in a bubble again, the plutocracy has recovered all (and more) of its wealth, while the middle class continues to evaporate as wages go down.
All hail our saviour, the Fed!
Mike in NY:
While the recovery has been premised on asset reflation, the plutocracy hasn’t had most of its assets in housing. It’s the middle class whose net worth declined so much because of the housing crisis. The reflation should be good for the middle class.
Should be* is key phrase.
Assuming the headline numbers are shared efficiently among the population, this would be great. Not everyone is selling today. What will be prices be next year? Any time your assets are based in a house you owe a mortgage, you are always one step away from disaster. Housing prices were high because of poor financial rules and interest rates which encouraged large-scale malinvestment, and we had the same rules when the prices plummeted.
It can happen again especially with the end of full time jobs and the rise of part time and contracting. Some people will sell today and make out like bandits, but in six months, the pent up demand is gone. Waiters facing new scrutiny from the IRS aren’t buying houses.
Jim in SC,
The problem is that the Fed’s policies have had dramatically more influence on financial assets (equity markets up +150%) than on housing, and those benefits accrue overwhelmingly to the plutocrats; hence, while asset reflation has helped the middle class recoup SOME of its losses from the GFC, the wealth disparity, the concentration of wealth in this country, has actually INCREASED, because the very wealthy are even wealthier than they were in 2007. Meanwhile, wages cotinue to languish.
I do not view this as a sustainable economic model… but it does allow our government to procaim “Victory! Recovery!” even as capitalism fails the vast majority of the populace.
Real estate in the U.S. has been a time-honored path to wealth both for speculators and just regular people largely for cultural reasons and I don’t believe significant downward price-pressure will turn into a “crash.” My impression is that real estate in markets where population is bound to increase and in neighborhoods with good schools will be a good investment unless interest rates spike–which is very unlikely.
Most homes that have been built in recent years are aimed at upper-income buyers and their numbers are increasing. Wealth in the U.S. is increasing particularly for the already rich and that is unlikely to change. I believe that market provides some guarantee for price stability. Now low/moderate income housing could suffer over the next few years; but, the fact is that people will scrimp and save in order to finance their home in a culture that is increasingly focused on what we used to call “cocooning” as well as the fact we are choosing to devalue public space.
I disagree. The cohort you describe are incredibly sensitive to the stock market so if the stock market swoons for whatever reason this group’s buying power will evaporate. These people are also dual-income households and spending every dime they make on housing school, etc. If one person loses their job it’s game over.
Bottom line is the group you mention is anything but stable.
Strider, you hit the nail on the head. People are up to their ears in debt. Granted, low interest rates have given people and companies more breathing room for the time being. Where is good ole’ Mr. Peter Schiff on this? He might be foolish with gold, but his comments can be traced to this oncoming crash as well. I can’t believe the amount of credit that is being issued once again. Phoney wealth goes poof!! Increase our nations productive capacity and get median wages on an upward trend and then I’m comfortable with rising real estate. I think I’ve witness rents in my area go up 30-40% just this year. Don’t know where these folks are getting the money, let alone paying their astronomical tax bills.
If one want to get and keep housing prices low, one needs to flood the market with cheap housing. And the way to do that is for some entity with deep pockets to build them at cost.
Loans beget loans, and simply fuel a Ponzi ratchet…
Why is everyone lamenting the price of a house and not the price of a cantaloupe; nobody’s laughing at the price of a new car; new shoes? no problem. But the price of real estate is the scapegoat always. Bring down the price of real estate, but let everything else be ridiculous. Whatever. Real estate would simmer down into a demand market if they stopped screwing around with interest rates. The interest rate on a mortgage should be set at the Fed Funds rate with some basis points for the mortgage originators, and the Fed Funds rate should be shielded from the volatility of investors seeking a gain on anybody’s hapless assets. We have an absurd economy.
Possibly because housing expenses make up a far greater portion of people’s paychecks. I know I pay more in rent than on food, or on car expenses, or on healthcare, or really on anything except taxes probably.
It’s interesting, regional banking neighbor ( cultural conservative& Randian) got into it yesterday how the lack of (local and state) government employment, and subsequent dearth of steady mid to high paying jobs, was depressing the housing market, both in terms of demand, and not having enough people in the offices to process needed permits, title work, et al.
If that dude is starting to want increased Keyensean govt spending and taxation, we may start to see a political shift.
——-
Alas, not too long ago, everyone had called 2006 “the peak of the housing bubble,” the apogee of all craziness, one of the causes of the disaster that followed, and everybody had tales of just how crazy it was back then. All this is forgotten. The prices of 2006 are suddenly no longer the peak of the housing bubble, but a goal to get back to.
——-
I’m thinking (probably too obvious to others to deserve mentioning) that the need to reflate the bubble to its previous extent, this particular chosen path of jump-starting the economy, has to do with the fact that TPTB chose to bail out the banks rather than the debtor public. For the significant portion of “consumers” who were in debt up to their eyeballs in 2007, who couldn’t consume any more, and still probably can’t, having their main big investment revalued to its biggest bubble valuation provides their only opportunity to get back “above the surface”.
So then what? Then they’re no longer “underwater”. Yippee. Can they sell now, realize their profit or whatever, and spend? WHOM ARE THEY GOING TO SELL TO?
> So then what? Then they’re no longer “underwater”. Yippee. Can they sell now, > realize their profit or whatever, and spend? WHOM ARE THEY GOING TO SELL TO?
They won’t, they will cash out refinance and will get in even more debt and then, of course, the whole system will crash again, because as you said: WHOM ARE THEY GOING TO SELL TO?
Same old story, same old mindset, same old boom and bust. It won’t be any prettier this bust and the bailouts won’t be available. It’s not a housing market, it’s a housing casino…..