Recovery or External Manipulation?

san diego home

Commentary by J. David Rauch
Down here in the grass roots it sure looks and sounds like a bona fide economic recovery underpinned by a resurging housing rebound.  Even though unemployment and gas prices remain high (California raised its gasoline tax; now the highest in the nation at 72 cents/gallon) housing prices have increased in all major markets.  Indeed, the media drumbeat is again loud and incessant.  Have you seen these headlines?  “Florida is on Fire”; “10 Signs We’re Not in a Bubble”; “It’s a Seller’s Market”;  “Home Prices Post Biggest Gain in 6 years”; ” Why it’s Better to Buy a Home Now than Rent.”  In March, 75% of agents with broker Redfin said their clients’ offers were countered by rival bids, up from 56% who said so in late 2011. The competition has been most intense here in California, where 9 out of 10 homes sold in San Francisco, Sacramento; cities in Southern California drew competing bids during the month. One home in an Elk Grove, California subdivision recently received 62 separate bids. Yet when talking with our builder clients about their project pipeline there is a tone of caution in their voices.  When we ask them if they are full-throttle forward there is hesitancy.  Could it be that builders are just gun-shy from the last housing bubble?  Or is there fear that interest rates could start rising “dramatically” as soon as the Fed buying of $85 billion per month in mortgage-backed securities (quantitative easing: QE) ends?  In May, Chairman Bernanke told Congress that “the U.S job market remains weak and that it is too soon for the Federal Reserve to slow its extraordinary stimulus programs,” according to the recently hacked Associated Press.  Then, in June he slipped and said that he may back off on the throttle as early as the end of 2013.  Panic ensued and then he later corrected himself so as to calm the markets – and bankers.  Below are historical rate averages:

  • 42 years is 8.15%
  • 30 years is 7.45%
  • 20 years is 6.52%
  • 10 years is 5.72%

With rates currently at 4.5%, prices can go up 28% nationally just to equal normal affordability over the last 10 years. If that happens, that will create price/income ratios that are 27% above their historical norms. So what if the music stops (Fed buying) and there are some chairs missing and mortgage rates go up a lot?  Housing analyst Keith Jurow who recently wrote “The US Housing Recovery Is a Mirage and a Serious Delinquency Crisis Is Coming” asserts that there is no convincing data to support the view that housing markets have turned the corner.  His conclusion is that “the much-vaunted housing recovery is actually a mirage and that a new delinquency crisis is coming.”  He writes that banks have severely curtailed the number of foreclosed properties which they have put on the market. The effect of this severe reduction in foreclosing activity by mortgage servicers is to artificially increase the median price of homes sold in just about every major metro. Jurow has reported in several previous articles that delinquent homeowners are continuing to walk away from their underwater properties.  Homeowners have been greatly influenced by those in the media who have been asserting that the bottom has been reached and prices are clearly heading higher.  Going against a widely-shared consensus is never easy. Keep in mind, though, that experts have been declaring a housing bottom and full-blown economic recovery for more than three years. But what if it’s not just the threat of a major “interest rate” correction that is holding back buyers? As reported by Heidi Moore in the Guardian, Gary Shilling said in an interview this week, “It’s a precarious recovery because it’s based on rentals, not new home owners.”  Builders are breaking ground on multi-family homes – rentals – at a far faster pace than they are on single-family homes this year. Starts on such rentals are up 40% so far this year. That’s confirmation that the most powerful buyers of residential homes right now are banks and private investment firms, flush with millions of dollars and eyes for a good deal, who are looking for homes to sell or rent. “If you’ve signed a lease in the past year, there’s a good chance your landlord wears a tailored suit and works on Wall Street,” The New Republic wisely wrote in February. The Blackstone Group alone – just one of many investors, including Colony Capital, that are snapping up properties – spent $1.5 billion on homes last year, according to Bloomberg News. This keeps the housing game all in the family. Where investment firms like Blackstone are called the “buyside” of Wall Street, banks are the “sellside”. That’s because they do the selling: of stocks, of bonds, of mortgages, of homes. Banks, who hold the great stock of housing because of housing-bust dump of foreclosures, are limiting the supply of foreclosed homes for sale so that there isn’t a glut on the market. According to Heidi Moore, “Something is holding back construction. Anecdotal evidence suggests that local and regional banks who used to fund residential construction are still holding back.” The giddy rise in house prices, too, should be examined skeptically. For one thing, in a sane market, such double-digit rises for so long are not sustainable. Housing prices depend on the economy and the health of the consumer. The economy is not improving that fast; both unemployment and income is relatively stagnant; and lending is not rising, we should be suspicious that housing – which depends on all of those – is suddenly booming. House prices are rising when the rest of the economy is languishing; that’s either a sign of an overheated market or some external manipulation.

1 thought on “Recovery or External Manipulation?

  1. Do you think there’s anything to the possibility that much of the inventory is being purchased by investors, both overseas and in the US?

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s