Let me know you're there today. I want to hear from the people — Dave
This is not a normal housing market. This is not a normal housing recovery
— Michelle Myer, Bank of America economist and housing "expert"
On March 26, 2013 I wrote A New Housing Bubble In The United States. In that post I cited several sources which, taken altogether, provided persuasive evidence that we were witnessing the emergence of a new housing bubble. It appeared at that time that institutional investors were driving up house prices in weak local markets, not ordinary home buyers. This was not a case of "pent-up demand" driving a housing recovery. Optimistic economists are big believers in pent-up demand because economies heal themselves.
It only took mainstream sources another 10 weeks to start reporting the same story. Good for them! Such swiftness of true observation! Hats off!
First, we've got another Dealbook story called Behind the Rise in House Prices, Wall Street Buyers.
The last time the housing market was this hot in Phoenix and Las Vegas, the buyers pushing up prices were mostly small time. Nowadays, they are big time — Wall Street big.
Large investment firms have spent billions of dollars over the last year buying homes in some of the nation’s most depressed markets. The influx has been so great, and the resulting price gains so big, that ordinary buyers are feeling squeezed out. Some are already wondering if prices will slump anew if the big money stops flowing...
“The growth is being propelled by institutional money,” said Suzanne Mistretta, an analyst at Fitch Rating. “The question is how much the change in prices really reflects market demand, rather than one-off market shifts that may not be around in a couple years.”
Wall Street played a central role in the last housing boom by supplying easy — and, in retrospect, risky — mortgage financing. Now, investment companies like the Blackstone Group have swooped in, buying thousands of houses in the same areas where the financial crisis hit hardest.
Nationwide, 68 percent of the damaged homes sold in April went to investors, and only 19 percent to first-time home buyers, according to Campbell HousingPulse. That is helping to shore up prices and create confidence in the broader markets...
... Joe Cusumano, a real estate agent in Riverside County, Calif., said that in recent months 90 percent of his business had been for companies like Invitation Homes, a Blackstone subsidiary. Home values in Riverside County have risen by 15 percent in the last year, according to CoreLogic.
A few days earlier, The Guardian's Heidi Moore wrote Don't be fooled by the false economic recovery, which provides more telling detail on the phony housing boom.
Before I quote that article, I just want to say to Heidi that readers of DOTE are not fooled. But thank you, Heidi, for saying it.
The housing recovery, for instance, seems to be just another stage of the foreclosure crisis. Note that the areas where house prices have risen the most - Arizona, Las Vegas and California - are all areas that were hurt most deeply by the housing crash. So pry between the boards of the housing recovery and the termites start crawling out. Here, you'll find some old villains of the last housing bubble, crawling on the same properties. There are the house-flippers and the financial institutions, the foreclosure players that regenerate whenever there is a boom.
In this case, they may be creating the boom themselves.
House-flipping in California has reached levels not seen since 2005, according to the Wall Street Journal. This rise in price is, by all accounts, artificial. Housing, like all products, responds to the laws of supply and demand. When supply decreases - when there are fewer homes on the market - then prices will rise. This is what is happening now.
There is evidence that lenders are controlling the housing supply by reducing the number of houses for sale. Last year, AOL Real Estate's reporting suggested that as many as 90% of available properties were not even really on the market, but just polished for sale and being held back to keep supply low.
Then, last month, three major banks, including Citigroup and Wells Fargo, halted all their sales of homes in foreclosure; this also reduced the supply of homes on the market. The reduction in housing supply, then, is largely artificial, designed by the banks and institutions that hold thousands of houses and thus have the most to gain from higher house prices.
Thus we learn that lenders are controlling the housing supply by reducing the number of houses for sale. And banks are halting foreclosure sales to achieve the same end. The fast money boys have got us coming and going. Their stranglehold on the housing market is accomplished by controlling both supply and demand.
Heidi Moore goes on to make the not unreasonable point that no bottom-up, Main Street-driven recovery in housing is possible in any case because ordinary Americans don't have any money, their real (inflation-adjusted) incomes have been declining since "the recovery" began, and taking on large amounts of debt is very risky. She cites a chart from Doug Short which I posted on February 13, 2013 in Economic Growth Fantasies. I've been talking about the wealth and income distribution in the United States for over three years now.
Which brings me to this post's title. We've got a new housing bubble, though its fundamental drivers are somewhat different than those of Version 1.0. Was any other outcome possible in a society in which a relatively few have nearly all the wealth and receive all the income gains? In a society in which Fed-manipulated interest rates favor the Big Money Boys who can take advantage of all that nearly free money? (See my January 18, 2013 post The Fed Engineers A Phony Recovery.) In a society in which financial interests dominate so much of the economic activity?
Well, it was either a new bubble or no recovery in housing at all. Those were the choices. But the latter was unlikely because the Big Money Boys will always—must!—find a way to manipulate the economy to their advantage. With a big assist from Ben Bernanke & Co., it seems to me that it was only a matter of time before we got a new bubble in housing, let alone a new bubble in stocks. Genuine, organic, bottom-up economic growth is simply an impossibility in contemporary America. Garbage in, garbage out, yes, but what a ride!
As those happy-go-lucky Louisiana cajuns like to say, Laissez les bon temps rouler!
I guess it's one way for investor's to keep their book value high. Park your money in real estate, and then artificially inflate the prices. It doesn't even matter if you benefit from selling some properties, the mere fact that prices go up can help them boost the estimated value of their holdings.
Posted by: Remi | 06/05/2013 at 11:00 AM