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Rampant Speculation Drives Prices Higher

Housing Hijinx

by MIKE WHITNEY

“Experts do not seem to think that we are going back to the same boom. There might be ‘cheap talk’ that housing is ‘off to the races again,’ but the people who think about it seriously, doubt it.”

– Robert Schiller, co-founder of Standard & Poor’s/Case-Shiller home price index

There’s a lot confusion about the recent uptick in housing prices, which–according to CoreLogic– have gone up 7.4 percent year-over-year. Many analysts think that that the “bottom is in” and the market is about to roar back to its bubble-era highs. Nothing could be further from the truth. Housing prices are likely to remain flat for years due to persistent high unemployment, negative wage growth, crippling student loan debt, and changing attitudes about home ownership. The reason prices have been going up can be explained in one word: speculation. Here’s how CNBC’s Diana Olick sums it up in a blogpost titled “Housing Market Already Shows Signs of a New Bubble”:

“Investors have cleaned out the (distressed) inventory so much that they are now bidding up prices higher than any expectations….markets that saw the most distress during the housing crash, like Phoenix, Las Vegas, and much of California, have also seen so much investor demand, that prices are up by double digits from a year ago…..

In St. Louis, Chicago, Charlotte and Dallas, distressed properties are making up about one third of the market, often higher than markets out West, but home prices are either flat or down annually, a far cry from the jumps out West. That is because investors are not as interested in these markets. As banks now begin to ramp up foreclosures, not just in Florida, but especially in states like New York and New Jersey where judges had been holding up the process as well, more distressed inventory will come on the market with fewer potential buyers. That will push prices there down.” (“Housing Market Already Shows Signs of a New Bubble”, Realty Check)

This sounds more confusing than it really is. What Olick is pointing out, is that housing prices are going up where speculators are buying everything they can get their hands on, but going down in markets where investor interest is weak. In other words, what’s driving the market is not firsttime homebuyers, move-up buyers, organic growth, higher wages, lower unemployment, or a stronger economy. It’s speculation, pure and simple.

And there’s something else that’s interesting in Olick’s article, too, that is, it shows that the Fed’s historic low interest rates are not driving sales. Keep in mind, that 30-year fixed rates are just as cheap in locations where prices are flat (ie–St. Louis, Chicago, Charlotte and Dallas) as they are in booming Phoenix, Las Vegas or California. That means the difference isn’t rates, it’s investor interest. (speculation) That’s what’s pushing prices higher.

This is why housing guru Robert Shiller hasn’t been caught up in the “housing is recovering” baloney and why he continues to maintain that housing is a “risky investment” and that prices “could go down”.

There’s an interesting article on Alternet that details the impact speculation is having on prices. Here’s a clip from “The Ugly Truth About America’s Housing “Recovery”:

“… the housing “recovery”….. is fueled almost entirely by Wall Street private equity firms, hedge funds and the Fed’s unwavering support. After creating a massive bubble in home prices that eventually burst and caused our economy to go into a tailspin, these guys have decided to come back for more, and figured out a way to profit off their destruction….

The Blackstone group, the biggest player in the new REO to rental market, has spent $2.5 billion in the last year purchasing 16,000 homes, a number that amounts to over $100 million per week.” (Alternet)

So, the big boys are throwing their money around right and left, pushing prices higher and reducing margins. When profits shrink to the point that it’s no longer worth their while to invest, they’ll pack it in and chase yield somewhere else. That’s when prices will start to retreat. The former director of the Office of Management and Budget in the Reagan Administration, David Stockman, makes the same point in a recent interview on The Daily Ticker. Here’s what Stockman said:

“I would say we have a housing bubble…again…..It’s happening in the most speculative sub-prime markets, where massive amounts of ‘fast money’ is rolling in to buy, to rent, on a speculative basis for a quick trade…..And as soon as they (professional investors like hedge funds and private equity firms) conclude prices have moved enough, they’ll be gone as fast as they came.”…

We don’t have a real organic sustainable recovery because in a world of medicated money by the central bank, things aren’t what they appear to be,” ….Stockman argues the problem in housing is the two forces needed for a recovery, first-time buyers and trade-up buyers, are missing.(The Daily Ticker)

Everything about the US housing market is fake; the rates, the inventory, the prices, and the sales data. All fake, which is why buyers need to crosscheck their information to make sure they’re not getting bamboozled by a system that exists merely to rip them off.

For example, just take a look at inventory. Everyone knows that inventory is unusually low which is another reason why prices are going up. But how accurate is the inventory data? Check out this clip from an article by George Feiger at Contango Capital Advisors:

“….there remains a large “potential supply” of single family homes for sale. According to BCA Research, if one adds existing homes for sale, single family homes for rent and homes held off the market for other reasons, there remain over 10 million vacant housing units or something well over 7% of the single family housing stock. Foreclosures have slowed down but still run around 1.5 million at an annual rate and delinquent mortgages have fallen but remain around 7% of all mortgages outstanding.

There is another “shadow supply”. Somewhere between 25 and 30% of all house sales in 2011 were cash sales to speculators rather than to potential “final residents”. In all likelihood in the Western states hardest hit by the collapse of house prices the percentage of sales to speculators was even higher.” (“Reflections on the Current Belief That Housing Will Come Roaring Back”, George Feiger, naked capitalism)

Repeat: “There remain over 10 million vacant housing units” and that does not include the “shadow supply”. It’s worth noting that 10 million is slightly more than the 2.14 million existing homes reported in the National Association of Realtors (NAR) October report. Indeed, some would claim that that is more than just a “rounding error”. Of course, the MSM sees the massive manipulation of inventory as a positive sign since it helps to keep prices artificially high which trims the losses on the banks’ stockpile of garbage mortgages and non performing loans. (which is what this shellgame is really all about.)

More and more people are beginning to see what a sick and twisted game this is and how the Fed’s collusion with the criminal bank cartel has created epic distortions that exponentially increase the risks of buying a house. But, if that’s the case, then who are the people buying houses in this upside-down market? For that, we turn to Dr. Housing Bubble. Here’s a blurb from a recent post titled “The broke vs the all-cash buyer”:

“As I dig through the monthly data on home sales, one trend continues to intrigue me when it comes to California housing. Call it the broke versus the big cash buyer. For example, over 23.2 percent of Southern California home buyers used FHA insured loans last month. These loans are no longer good deals even though they require only a paltry 3.5 percent down payment. Yet they are popular for those chasing the middle class dream in a state where it is becoming much more difficult to follow a middle class lifestyle. On the other side of the spectrum, we have the all cash buyers. A record 33.8 percent of all sales last month came from those with all cash in SoCal. In total, over 56 percent of SoCal buyers are diving in with 30x leverage loans or are investors going in with all cash.” (“The broke vs the all-cash buyer”, Dr Housing Bubble)

Think about that for a minute: All-cash buyers (mostly investors) and maxed out borrowers (Borrowers who have nearly- zero equity in their homes) account for more than half of all buyers in the booming California housing market. Is it any wonder why prices have more than doubled in parts of Southern California in the last year? And, don’t kid yourself, if Bernanke could inflate other flagging markets the same way he has “The Golden State”, he’d do so in-a-heartbeat.

Anyone who’s thinking about buying a house in the next year or so, should seriously consider what will happen when the speculators –who presently make up over 30 percent of the market—pull up stakes and vamoose. That’s going to send prices into a nosedive wiping out a good portion of your investment and leaving you shackled to an asset that’s worth less than what you paid. It’s worth mulling over.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.