After I studied the issues and the historical trends in the year following the 2008 meltdown, I concluded that there was no easy way to resurrect the American economy. In 2013, we can be confident that this prognosis was correct. But that has not prevented economists, politicians and mainstream pundits from attempting to put lipstick on this pig. Over the last year or so, the "revival" in the American housing market has been the focus of much of their hopeful self-serving bullshit. It's only when things go wrong that you learn what people are made of.
This post follows up on my January stories There's No Reason To Panic, and before that, The Fed Engineers A Phony Recovery.
House sales have recovered from the "sub-basement" in the words of David Stockman, and home prices have risen. But who is buying many of these houses? To answer that question, we examine what's going on in California, the land of shattered dreams. The Los Angeles Times reported on new house sales on February 6, 2013 in Cash purchases of California homes hit record in 2012.
Who needs a mortgage when you have greenbacks to spare?
Not the wealthy, and certainly not investors, both of whom appear to be saturating California’s real estate market these days. The latest sign: Cash purchases of homes in the Golden State hit a record last year, accounting for 32.4% of all home sales...
“It’s clear that a lot of today’s housing market recovery is being fueled by people putting their own money into homes,” John Walsh, president of real estate firm DataQuick, said in a news release detailing the new data. “Some cash buying is part of a normal housing market, but we’re at twice that normal rate"...
And those buyers appear to be driving up prices. The median home price for cash purchases last year was $205,000, a 17.1% increase from the year before. That means that cash buyers are either paying more for homes or increasingly purchasing pricier properties.
Ed Kaminsky, a real estate agent with Shorewood Realtors in Manhattan Beach, recently told The Times that he has done more cash deals in the last two years or so than during the first 24 years of his career. A good chunk of those buyers are young and wealthy shoppers who are either the recipients of trust funds or are getting help from their parents, he said...
The 32.4% of purchases that were all-cash last year was up from 30.4% in 2011, and is more than double the annual average of 15.6%, DataQuick said. A total of 145,797 condominiums and houses were bought without a mortgage last year. Compare that to 39,731 in 2007 when the market crashed.
It is easy to believe that young, wealthy shoppers are snapping up cheap houses, that doesn't tell the whole story, as this chart demonstrates.
From the National Association of Realtor's Economic Outlook, September 16, 2012 — The percentage of cash payments fluctuates from month to month. The high
preponderance of all-cash sales appears to be due to stricter mortgage
underwriting standards, and purchases by investors and second home
buyers, who frequently pay cash, possibly edging out buyers needing to
secure a mortgage.
Who can make cash purchases? Not ordinary people, as this Daily Ticker story makes clear.
There’s no doubt that housing is recovering. Existing home sales—which account for the bulk of the market—have topped year-ago levels for 20 months in a row and existing home prices have bested year-ago levels for 12 consecutive months. In addition, inventories of those homes have dropped to a 4.7 month supply — far below the more normal 6 months.
But unlike past housing recoveries, this one is heavily supported by investors — big and small. They account for about a third of home purchases in the existing housing market, according to the National Association of Realtors [see the graph above.]
Among those big investors are the Blackstone Group which has been buying $100 million worth of single family homes a week since early last year, spending a total $3.5 billion to date, according to the Wall Street Journal's Investors Pile Into Housing, This Time as Landlords.
Institutional investors like Blackstone as well as individuals are buying homes to rent as landlords, taking advantage of another growing market. About 12% of U.S. households rented single family homes in 2011, versus 9% in 2004, according to the most recent data from the U.S. Census Bureau. Many of those renters are folks who lost their homes to foreclosure.
While these investor purchases are boosting the housing market they are also creating more risks because investors are not necessarily in the market for the long-run as the typical individual home owner usually is.
What happens when these investment firms leave the market?
Good question!
“That’s a huge risk," says The Daily Ticker’s Aaron Task. “If they decide…they don’t really want to be in this business all of a sudden you could have a ton of new homes coming back into the market and then that supply situation will get flipped very badly against the market itself.”
In short, we have a new bubble in the Housing Market. The dangers for ordinary people who want to buy a house are obvious—if institutional investors drive up house prices in some local market, and non-wealthy folks who can scrape together a down payment buy a house as prices are rising, they could find themselves with a house whose value is declining soon afterwards when Blackstone and other institutional investors pull out of the market.
In the video below, David Stockman calls it Housing Bubble 2.0. None of this comes as a surprise. We know who has the money in this society and who does not. The American economy can not ride on the backs of a relatively few wealthy investors speculating in rental properties. It's the same old nonsense dressed up in different clothing. No other outcome is possible, which is what I concluded in 2009.
Dave,
maybe we should write another nice letter to God and ask him what to do with all that vacant/foreclosed houses. But wait, China is just waiting for a giant housing crash, which will make Us housing bubble just a small inconvenience. Maybe we should ask them.
Or we should pour speculative money into shale gas industry, or climate change adaptation industry, or whatever makes us money, since there is no other meaning in life than to make money. At all costs. Since there is no past, no future, and no present...
Alex
Posted by: Alexander Ač | 03/26/2013 at 10:46 AM