FacebookTwitterGoogle+RedditEmail

Hot Markets Gone Cold

by MIKE WHITNEY

Higher rates, higher prices and weak fundamentals have sent home sales crashing in last year’s hottest markets casting doubt on the sustainability of housing recovery.

In the San Francisco Bay Area, home “sales plunged to a six-year low”…. while prices dropped 4.3 percent from a month earlier. (Los Angeles Times) Additionally, sales of new and existing homes and condos fell to their “lowest level for the month since 2008”, the peak of the financial crisis.

Similarly, Dataquick announced that “January was the worst month for home sales in nearly 3-years for Southern California.” Here’s more from Dataquick:

“Southern California logged its lowest January home sales in three years…The median price paid for a home dipped from December…The number of new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month (was) down 21.4 percent…in December, and down 9.9 percent…in January 2013.”…

“The economy is growing, but Southland home sales have fallen on a year-over-year basis for four consecutive months now and remain well below average. Why? We’re still putting a lot of the blame on the low inventory. But mortgage availability, the rise in interest rates and higher home prices matter, too,” said John Walsh, DataQuick president.” (Southland Home Sales Drop in January; Price Picture Mixed), Dataquick

Low inventory is the favorite excuse of realtors who want to conceal what’s really going on in the market. The fact is, the higher rates (since the Fed announced its scaling back of QE) and higher prices have weakened demand and sent moneybags investors racing for the exits. Weak fundamentals (Stagnant wages and high unemployment) have added to housing’s troubles. Unemployment remains stubbornly high in the Golden State. It’s currently locked at 8.7 percent, a full percentage point above the national average.

Sales have also dropped sharply in Las Vegas and Phoenix, which were red-hot in 2013. In Vegas, “sales dropped in December to the lowest level for that month in six years … Total December home sales were the lowest for that month since December 2007.” (Dataquick)

In Phoenix, it’s the same deal. Check out this article in the Phoenix Business Journal which explains the situation without placing the blame on low inventory. Here’s an excerpt from the article titled “Has the Phoenix housing market finally balanced out? 2014 could provide the answer”:

“Despite the fact that there were 36 percent more homes on the market Valleywide in December than a year earlier…demand has continued to fizzle since July…In fact, single-family home sales were down 17 percent year-over-year, the report said. Even with a 12 percent increase in listings priced below $150,000…sales in that range plunged by a whopping 47 percent…

Demand has been falling for several reasons. Rising interest rates and poor consumer confidence, largely ignited by the government shutdown, are among them. On top of that, many wannabe buyers don’t have the money for a down payment or have poor credit from a previous foreclosure or short sale…

Additionally, Wall Street-backed investors have been losing their interest in the Valley as home prices rebound and foreclosures lessen. Institutional investors made up 19.3 percent of Valley home sales in December — less than half their peak market share in July 2012, Orr said… (Has the Phoenix housing market finally balanced out? 2014 could provide the answer, Phoenix Business Journal)

There it is, in just two paragraphs, everything you need to know. Sales are “fizzling” because rates are higher, prices are higher, and the economy stinks. The whole inventory-thing is a red herring, in fact, if you comb the data you’ll see that inventory had been increasing for a full year until August 2013, when the banks realized that they were in big trouble.

Why?

Because the Fed announced that it was going to reduce its asset purchases (QE) which pushed up mortgage rates by a full percentage point overnight. That’s what killed demand. (Mortgage rates had been in the 3-percent range, now they’re in the 4’s.) Two months later, the banks started reducing their inventory in order to keep prices artificially high and avoid more balance sheet hemorrhaging. It is a tale of blatant collusion that can be proved by simply browsing at a chart of housing inventory for the last couple years. (See chart here.)

Now take a look at this chart of mortgage rates and you can see how they spiked shortly after the Fed made its announcement in June. Rates have never really come down since. This is from the Mortgage Reports:

Freddie Mac 30-year fixed rate mortgage rate climbs to 4.28%, the first weekly rise mortgage rate of 2014

Mortgage rates rose last week, according to Freddie Mac’s weekly Primary Mortgage Market Survey (PMMS).

Housing expert Mark Hanson predicted the current sales collapse back in September 2013 in a post titled “Housing…Where we sit” which we cited in an earlier article. Here’s a clip from the post:

”Starting in Q4 2011 “housing” was injected with arguably the greatest stimulus of all time; a 2% “permanent mortgage rate buy down” gift from the Fed. As a result of rates plunging over a very short period of time…purchasing power was created out of thin air…

Some think the rate “surge” (note: The recent rate increase) will have little impact…while the bears…think the rate surge was a rare and powerful “catalyst” only rivaled two times in the last seven years. The first, when the housing market lost all it’s high-leverage loan programs all at once in 2007/2008; and the second, on the sunset of the Homebuyer Tax Credit in 2010.

In both these previous instances … when the leverage/stimulus went away … housing “reset” to the current supply/demand/lending guideline/interest rate environment, which in 2008 resulted in the “great housing crash”, and in 2010 the “double-dip”. Here we sit in a eerily similar situation.” (“Housing…Where we sit“, Mark Hanson)

In other words, the higher rates are going to send housing sales off a cliff. Which they have. Hanson was right and the media Pollyannas were wrong. In the absence of –what Hanson calls–“the greatest stimulus of all time”, the sales-slide should continue for some time to come.

The distortions in housing are so extreme –due to the persistent meddling of the Fed, the government, and the banks–that traditional areas of market strength have gradually eroded while speculation has reached fever-pitch. For example, in December, firsttime homebuyers–the “Mother’s milk of the housing industry–slipped to just 27 percent of all sales while all-cash buyers represented a full 42 percent of all residential sales. This illustrates the impact the Fed’s “easy money” policies are having on the market. Everything’s upside-down; organic demand is steadily declining, while speculation is at levels never seen before. It’s crazy and it won’t end well.

Just this week, the California Association of Realtors (CAR) released its Traditional Housing Affordability Index which confirmed that buying a home is increasingly out-of-reach of ordinary working people. The report found that “only 32 percent of home buyers could afford to purchase a median-priced, existing single-family home in California…..To purchase a median-priced home in California, homebuyers needed to earn a minimum annual income of $89,240. Compared to 2012, where homebuyers needed to earn an income of $66,860….The median home price for California was $431,510 in Q4 2013.” (“Housing Affordability Drops in California“, DS News)

(Note: The median income in California is just $58,000.)

The fundamentals are not strong enough to support today’s prices, which is why sales are tanking. The market has peaked, the bull run is over. Even the banks know it, which is what makes the chart below so interesting, because it suggests that the nation’s biggest lenders are planning to dump more of their backlog “shadow” inventory onto the market before prices drop and they’re left holding the bag. Check out the sudden reversal in foreclosure filings in January.

california_foreclosure_starts

Will you look at that! It looks like the banksters are getting ready to jump before the old Housing Hindenburg slams into the powerlines and explodes into sheets of flames.

Like we said earlier: This won’t end well.

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.

More articles by:

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.

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

July 20, 2017
Sebastian Friedrich – Gabriel Kuhn
A New Class Politics
Patrick Cockburn
The Massacre of Mosul: More Than 40,000 Civilians Feared Dead
Paul Street
The Abandonment: Reflections on James Foreman’s “Locking Up Our Own”
Kim Codella
A Practical Education
Frank Scott
America’s Trump, Not Trump’s America
Louis Proyect
Clancy Sigal Goes Away
Don Monkerud
The Real Treason in DC: Turning Our Lives Over to Corporate
Brian Dew – Dean Baker
Are Amazon’s Shareholders Suckers?
Ralph Nader
Detecting What Unravels Our Society – Bottom-up and Top-down
Barbara Nimri Aziz
Covering Islam, Post-Jack Shaheen
Binoy Kampmark
Uhlmann’s Trump Problem
Patrick Walker
In Defense of Caitlin Johnstone
Barry Lando
Those Secret Putin-Trump Talks
Sean Marquis
Thank You, Donald Trump
July 19, 2017
Adam Ziemkowski and Rebekah Liebermann
How Seattle Voted to Tax the Rich
Patrick Cockburn
Why ISIS Fighters are Being Thrown Off Buildings in Mosul
John W. Whitehead
Zombies R Us: the Walking Dead of the American Police State
Mateo Pimentel
Net Neutrality’s Missing Persons
Adil E. Shamoo - Bonnie Bricker
Yemen Policy is Creating More Terrorists
L. Ali Khan
U.S. Misreads Pakistan’s Antifragility
David Macaray
Fear and Trembling in the Workplace
Brian Trautman, Gerry Condon and Samantha Ferguson
Veterans Call on U.S. to Sign Nuclear Ban Treaty
Binoy Kampmark
Militarising Civilian Life: Australia, Policing and Terrorism
Ricardo Vaz
Venezuelan Opposition “Consultation”: Playing Alone and Losing
Jesse Jackson
Trump’s Cold-Hearted Agenda is Immoral
Raul Castro
We will Continue to Advance Along the Path Freely Chosen by Our People
July 18, 2017
James Bovard
Obama’s AWOL Anti-War Protesters
Gary Leupp
CNN: “Russia is an Adversary, Ukraine is Not.”
Ryan Shah
Beware the Radical Center
John Carroll Md
Cold Hands Don’t Need Narcotics
Derrick Jensen
Endangered Species Don’t Need an Ark – They Need a Living Planet!
Kenneth Surin
Brief Impressions of the Canadian Conjucture
Arturo Lopez-Levy
Trump’s Cuba Restrictions: a Detour, Not the Future
Russell Mokhiber
State Street Bentley University Business Ethics and Corporate Crime
Laura Finley
Being Too Much
Robert J. Gould
What is Our Experience of our Flawed Democracy?
Taju Tijani
The Burden of Indivisible Nigeria
Guillaume Pitron
China Now Leads in Renewables
Ted Rall
How I Learned Courts are Off-Limits to the 99 Percent
Binoy Kampmark
Militarising Civilian Life: Australia, Policing and Terrorism
July 17, 2017
Gregory Wilpert
Time for the “International Left” to Take a Stand on Venezuela
Gary Leupp
Trump’s Embrace of the Saudi Crown Prince, and a Qatar Nightmare Scenario
Thomas Hon Wing Polin
Liu Xiaobo: the West’s Model Chinese
Terry Simons
Why I Did Not Go to Vietnam
Jim Green
Nuclear Power’s Annus Horribilus
FacebookTwitterGoogle+RedditEmail