Real Estate Collapse 2.0 Is Starting To Accelerate

As real estate prices continued to surge higher throughout 2013, I went out on a limb in October of 2013 by predicting that this real estate “dead cat bounce” is about to reverse course. And while the roll over has been a little bit slower than I originally thought, it is beginning to accelerate pace as prices and volume decline. For instance, Southern California home sale volume for January slowest since 2008: The stalemate accelerates with Orange County seeing a monthly median price drop of $28,500.

What’s more, expect the situation to get even worse as the FED raises interest rates and most real estate buyers/speculators realize that this so called “Real Estate Mania 2.0” is not happening. Recently release negative real estate data (housing starts, mortgage applications, volume of sales, price appreciation/declines, builder earnings, land prices, etc….) tend to support this notion. The report below was originally published in February of 2014. It is as applicable today as it was back then (with a few minor changes). Enjoy

Real Estate Collapse 2.0 Why, How & When

If you ever want to ascertain the primary psyche of the American culture, just watch 1 hour of TV, paying particularly close attention to the commercial breaks. Here is what “The Man Behind The Curtain” wants you to do. The worst part is… most people seem to comply.

First, you must go to college, get a massive student loan and get a bunch of credit cards. After you graduate, buy your girlfriend a giant diamond ring, get married and she will love you forever. Then buy a house, a new car, start a family, get a dog and drink a lot of beer. Of course, the overwhelming pressures associated with all of the above will grind you into the ground. But not to worry, our top notch pharmaceutical and medical industry got you covered. Bonner pills, ADD pills, depression pills, high blood pressure pills, surgery and who can forget ….adult diapers. And that’s your future, in a nutshell.

In all of the above, one thing stands out. There is nothing more prevailing in the American culture than the notion that any self respecting, reasonable American with half a brain should own his/her own house. If you don’t, you are viewed as a failure. Now, before I destroy that notion with a few simple calculations and tell you why the housing market is going down the drain again (yes, it’s happening right now), please allow me to destroy the notion of home ownership with some simple common sense.

Reason #1: You Will Never See Your $50-100K Cash Down Payment Again:

Let’s say you are a responsible member of society and instead of getting Interest-Only-No-Down-Payment-I-Am-Never-Going-To-Pay-It-Back Loan, you get a typical 30-Year fixed with 20% down payment. In fact, you have worked incredibly hard and saved up $50,000 – $100,000 to do just that. Congratulations. However, the stupidest think you can do next is to buy a house and get a mortgage. If you do, kiss that money goodbye. Under today’s monetary conditions you are never going to see it again.

“But Alex, my realtor is telling me that buying a house right now is an opportunity of a lifetime….if I don’t do it now, I will never be able to afford it again, recovery is here, the prices are about to go through the roof, blah, blah, blah…” – Everyone.

Well, unless your realtors name is George Soros or Warren Buffett, tell your realtor to go pound sand. What we have experienced between 1994-2007 in the real estate sector is not only atypical, but is truly once in a lifetime. More on that later, but if you are lucky enough to sell the house you buy today at a breakeven, you will still not see the down payment again. It will simply roll over into your next house. From my point of view it is a lot better to invest that money into your future as opposed to park it in an illiquid asset that is likely to lose at least 50% of its value over the next 2 decades.

Reason #2: Closing Costs, Maintenance & Property Taxes:

Finally got that house of your dreams? Great, now bend over and take it like a man. Everything in this house will break down over the next 20 years and it will cost you a boatload of money to maintain. Throw in closing costs and property taxes and you talking about real money. Realtors themselves estimate you should budget about $8,000-$12,000 annually on a $500,000 house. Sure, there is an interest deduction on your taxes, but typically (based on your family’s tax structure) the costs above are never fully recovered.

Reason #3: It’s Not An Investment:

Stop saying that your house is an investment. Just stop. It’s a debt burden, not an investment. Investments produce income and pay dividends. Your house doesn’t do either unless and until you rent it out. Yes, your house can exhibit capital appreciation, but that is not an investment either. That is more accurately defined as a speculation. What we saw during the housing boom was just that. Speculation. Household incomes didn’t go up 500% between 1994-2007, but house prices did. People who were in the real estate sector simply got lucky. Now, it’s time to ride this Cho Cho Train down.

Reason #4: Your House Is A Trap:

Got that house of your dreams in The City of Compton, California? Congratulations, you are now trapped. Even if you get a $100K job offer to wax dolphins in Fiji, you won’t be able to take it. You will be tied down and unable to sell your house at break even. Particularly over the next 2 decades and that is exactly where “Corporate/Government Interests” want you to be. They don’t want you to have the ability to move and get a better job elsewhere. They want you to be tied down, “to have roots”, to be paid less. That wouldn’t be the case if you could increase your salary 25-100% by simply picking up your things and moving across the country.

And that’s just a few of the points. I can keep going, but I think you get the point. The housing myth is just that….a carefully crafted marketing message.

Now, let’s get to the best part.

Here are the reasons why you should be mentally committed if you are even thinking about buying a house. Plus, why you should sell your house NOW if you are misfortunate enough to OWN one.

First, you must understand where we are and the cause/effect behind today’s market.

UNDERSTANDING THE HOUSING MARKET, ECONOMY, SPECULATION AND DRIVERS BEHIND BOTH.

Yes, I called for the real estate crash and credit collapse as early as 2005. While my call was a little bit early and premature, eventually it was right on the money. Now, I am saying that the housing crash is not over.

Before we can understand where we are now and where we are going in the future we must understand where we came from. The Real Estate run up that we have experienced between 1997-2007 has no historical precedent. Real estate data going all the way back to 1890 clearly shows that the US housing market basically appreciated at the rate of inflation. Yes, there were some bubbles and substantial declines, but overall, appreciation at the rate of inflation is an appropriate way to look at the US real estate sector.

A QUICK HISTORY LESSON:

All of that changed in 1997 when Bill Clinton signed The Taxpayer Relief Act into law, basically allowing $250,000 in tax free capital gains in real estate. While real estate was already appreciating at a good clip at that time, that law added fire to the trend.

Later, fearing significant economic slowdown in 2002-2003 the Bush administration added a huge amount of jet fuel to the Real Estate Bubble by cutting interest rates and making mortgage finance available to everyone (yes, even to the dead people). As people used to say, if you can fog a mirror you can get a mortgage. Of course, all of that led to the largest finance bubble in the history of mankind that “kind of” melted down in 2007-2009. I say “kind of” because most of those excesses are still within our financial system and will have to be worked through in the future.

WHERE ARE WE NOW?

Issue #1: US Home Ownership Rate Is Plunging

On historical basis, home ownership rate in the US is in free fall. Take a look at the chart. I think it speaks for itself.

Issue #2: Real Estate Affordability Is Plunging

Take a look at the chart as it speaks for itself. The affordability index is in free fall as well. Most certainly, due to higher interest rates and rising prices.

Issue #3: Interest Rates Are Going Up

The trend has shifted up and the 10-year rate is up 100% over the last 12 months. I gave detailed interest rate analysis here. Please take a look here.

Issue #4: US Economy & The Stock Market Is About To Turn Down (Big Time)

This has been the primary trend in our blog since inception. Based on our mathematical and timing work the stock market will go through a bear market between 2014-2017. Pushing the US Economy back into a severe recession. To learn more about the upcoming bear market please Click Here and read the report. With further job losses , lower incomes and an economic contraction it would be impossible for the real estate sector to sustain any sort of a rebound. On the contrary, as the economy tanks real estate prices are bound to collapse further.

Issue #5: Who Is Buying All Of These Properties For Cash Today?

Chinese buyers, hedge funds, banks themselves, investors, speculators, etc….. Who cares!!! Remember all those Japanese investors buying everything they could in California and Hawaii in the late 1980′s. I wonder how that turned out for them.

In one of my previous reports I have outlined how large hedge funds, including Blackstone Group, are buying tens of thousands of real estate properties across the nation. With some hedge funds and financial institutions going to the extreme and investing in the likes of plumbers and dentist to help them find and manage properties(Click Here To Read). In Las Vegas alone 70% of real estate purchases over the last year have been done by investors. If all of this doesn’t not scream out “Market Top” at you, I really don’t know what will.

On a more serious note, notice that I didn’t say Average American Family. That is the only category that we should track if we want to accurately predict the future trend in the US Real Estate market. Every other category is irrelevant over the long run. And guess what? They are not buying. See the charts above.

Issue #6: Bear Market In Real Estate (sucks people back in)

As I have said in one of my previous posts (US Real Estate At A Turning Point), this is how the bear market works. This is the stage #2 bounce, before the big decline (stage #3). The bear market tends to suck people back in, offer them perceived safety and a high return before slamming the door, ripping their head off, drinking their blood and taking all of their money. The US Real Estate market is topping in Stage #2 run up here. That is why you are seeing so many divergences. The market should turn down soon. Beware.

FUTURE OF REAL ESTATE:

Real estate is not made of Gold. There is a tremendous amount of land available in California, Florida, Nevada and all over the US. There is no housing shortage. As such, expect real estate to decline significantly in order to revert back to its natural inflation adjusted mean. It might take a few years, it might be different for various cities, but one way or another the market will get there.

HOW FAR DOWN?

Let’s do very simple math for the San Diego market. It doesn’t have to be exact for our purposes.

Setup:

San Diego Median Family Income: $61,500
As Per Various Financial Guidelines Families Shouldn’t Spend More Than 30% Of Their Income On Housing. That means a $1,500/monthly payment.
Median Home Price in San Diego: $425,000
Interest Rates: 30 Year Mortgage 4.35% (Rates as of 2/21/2014)

With such fundamental input variables median house value should be $300,000 -OR – A 30% DECLINE ($1,500x360month@4.72%)

What if interest rates go to 7% over the next 5 years, which can easily happen?

The fundamental value of the median house drops further to $225,000 -OR- A 47% DECLINE

Also, don’t forget that markets oftentimes overshoot to the bottom, just as they set blow off tops. In such a case I wouldn’t be surprised to see a median price of $150,000- 200K -OR- A 65%-50% DECLINE

You say impossible….. I say study financial markets. Nothing is impossible. Here is another way to look at this. Have household incomes increased 500% over the last 20 years? Nope. They have barely moved. Therefore, real estate decline in excess of 50% would simply return the prices to their inflation adjusted base.

TIMING:

In one of my earlier reports “I Am Calling For A Real Estate Top Here“ I clearly outlined the fundamental reasons of why the real estate market has peaked and is now in the process of rolling over. I continue to believe that the nationwide real estate prices are in the process of setting in a top. Since real estate is local, it is much more difficult to identify exact tops. As such, we must go back to the stock market in order gage a better understanding of WHEN the real estate market will tank.

Typically, the stock market foreruns the actual economic recession by 6-12 months. In other words, the stock market prices break down 6-12 months before Economic Data confirms a recession. While real estate prices, in theory, should start breaking down in conjunction with the stock market, that is not always the case. As such, it would be prudent for us to say that the housing prices will start breaking down 6-9 months after the start of the bear market in stocks.

As you know, it has been my claim (based on my mathematical and timing work) that the stock market is about to top out, ushering in the final leg of a cyclical bear market. If such is the case, we can safely assume that we will start seeing drops in real estate prices sometime in 2014-2015. Once the market rolls over and confirms, we should see a significant acceleration to the downside in real estate price over the next 3 years (at least).

With that said, we already starting to see evidence that the housing has topped. Please see volume data from RedFin.com below. As always, the volume of sales is first to go. Prices tend to follow.

WHAT SHOULD YOU DO?

That part is somewhat simple. If you do not own a home and thinking about buying one…..just DON’T do it. You will save a lot of cash (and your down payment) by renting and waiting for the market to come down over the next few years.

If you already own a home the situation is a little bit tricky. Listen, I am no fool and understand that your house is a home and is important for family formation/structure. If you are happy with you home and could care less what is going on in the real estate market……stay put. However, if you are thinking about selling your home, right now would be a great time to do so.

If you own rental properties that generate positive cash flow and they are not in any way tied into the upcoming real estate decline, keep them. If you are buying investment and/or rental properties as a “speculation” in hopes of capital appreciation or a “flip” you are better off liquidating all of your positions (right now) and getting out.

CONCLUSION:

Now, I understand and agree that there are various market forces at play that make the picture a lot more complicated. Interest rates, timing, mortgage finance, cash buyers, the FED, foreign buyers, speculation, location, supply/demand, etc…. However, fundamentals will always prevail over time. Everything else is just temporary BS.

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Real Estate Collapse 2.0 Is Starting To Accelerate Google

June 20, 2014October 22, 2014

Dreaming Of A Housing Bubble

Real Estate market continues to deteriorate. A good article from Bloomberg. Housing Falters as Forecasters See U.S. Sales Dropping

“The big housing rally wiped itself out because prices increased too quickly for buyers to keep up.”

What happens next?

There are three primary lines of thought out there. First, the bottom in the real estate market was set back in 2010. There is a shortage of real estate and the real estate market will continue to surge higher for many years to come. Although it is incredibly overpriced. That is the view that Blackstone Group has.

Second, yes the real estate market is going through a bit of a slow down, but it will recover within a relatively short period of time or as soon as the US Economy catches fire. This is the primary view of most people on both the Wall Street and the Main Street.

Then there is my view (that very few people share). That view clear shows that what the real estate market has experienced over the last 4-5 years was a “Dead Cat Bounce” in the overall secular bear market that started in 2006. Further, it suggests that the real estate market is rolling over as it begins it’s stage 3 massive decline. You can read all about it in my comprehensive report Real Estate Collapse 2.0 Why, How & When

Dreaming Of A Housing Bubble Google

April 7, 2014April 7, 2014

Will Real Estate Prices Collapse In Conjunction With The Stock Market?

A comprehensive look (see full article below) at the current state of California real estate market and why, for the most part, most Californians are priced out. With home ownership rates hitting levels not seen since the early 1990, the future of California real estate does not look bright. While the majority of market participants believe we have reached a high plateau in real estate prices and will remain here for the foreseeable future, I do not share their optimism. In fact, I believe the market will decline substantially over the next 3-5 years. To the tune of 30-50%….. in some areas of California. This decline will occur in conjunction or as a result of a severe bear market/recession (2014-2017) that our timing and mathematical work predict. If you need a more comprehensive analysis of the real estate market you can take a look at this comprehensive report Real Estate Collapse 2.0 Why, How & When

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Will Real Estate Prices Collapse In Conjunction With The Stock Market? Google

Dr. Housing Bubble Writes: Welcome to Feudalfornia: the golden sarcophagus and the investor. Acceleration to price out masses.

California housing affordability may seem like an oxymoron. Many younger buyers are priced out in many markets across the state. The latest data from the California Association of Realtors (CAR) finds that still only 1 out of 3 families can actually afford to buy a home in the state in which they live. We also have a record number of young potential buyers (more likely potential renters) living at home with their parents. Starting in 2008 a large portion of housing sales started going to investors. These investors may have different timelines on when they will release property out into the market. In fact, this might be another big reason as to why so little inventory is out in the market. Some investors are looking to securitize cash flows and may be limited in terms of selling. Instead a regular buyer potentially looking to capitalize on equity and move up in more traditional times, you have different motivating factors. Since 2008 over 30 percent of all Californiahome sales went to this group. Another group is baby boomers locked into their golden sarcophagus. This group from what I have found for the most part is house rich and cash poor. The notion that many will sell and cash in their lottery ticket is simply not happening in the market. Many are seeing kids move back home, many still have a desire to keep their place (even if it means living in an area gentrified by dual high income households/investors), and finally a large growing rental base. In essence the continuation of California becoming more feudal is still very much intact.

Welcome renters and growing wealth gap

There is little doubt that people would like to own. The entire 2000s were dedicated to a time when anyone with a desire to buy could. The sales figures reflect this. Yet the home ownership rate is now back to where it was in the early 1990s.

We can argue that the 2000s were a time of excess. Yet remove this excess and we are back to 2000 yet the home ownership rate is now back to levels last seen in the early 1990s. Even as prices rise, the home ownership rate remains depressed:

Now how is this possible during a time when home prices went zooming up? Part of it has to do with the groups of people buying homes. The traditional home buyer is a minority in the California housing game. Low sales volume and a desire to buy from Wall Street and other investors has propelled prices higher:

The bounce statewide is unmistakable although is tapering out as investors begin to pullback. All of this is accomplished on very low sales volume:

The data used in the S&P Case Shiller figures is pulled from the Greater Los Angeles area looking at L.A. and Orange Counties (this area covers close to 13 million people) while the San Francisco-Oakland-Fremont MSA covers close to 4.5 million people. The current sales volume is lower than what we saw in the early 1990s. In fact, current sales are the lowest since the market imploded a few years ago. What gives?

The current trend was driven by low inventory, investor demand, and house lusting buyers. As investors pull-back and affordability falls, it is natural to expect volume to naturally pickup as it has. Yet California is largely becoming a renter state. We have a growing group of people that are deep into poverty:

The recession ended officially in the summer of 2009 yet we have added close to 1.5 million people to the food stamp figures. Does this reflect a booming economy? I think people in pocket markets have blinded themselves to their miniscule areas and forget that for the state overall with rising poverty, stagnant incomes, and a massive drop in housing affordability things are simply getting tougher financially. It would be one thing if prices were rising because of the big addition of good paying jobs and rising incomes. These things are absent but what isn’t is a record number of investors.

Are investors distorting the natural inventory cycle?

Investors have caused a unique boost in the housing market. The bigger play here since the crash was to buy homes for rentals. A modern day Wall Street landlord system. Big investors have been busy buying up distressed property in California:

Even in 2013 big investors were buying up over 60 percent of all distressed property. These are usually better priced deals. A good portion of foreclosures were bought before they even hit the MLS so those thinking they had a chance to buy at rock bottom prices are out to lunch (unless they had full financing to go to auctions and out-bid these people). Plus, many bought with “all cash” and then spent more money renovating – many house lusting households barely have enough to move in and furnish the place after they plop their 20 percent down payment. Clearly the dominant force here was the “all cash” buyers.

Don’t think that these investors will suddenly turn around and sell their properties even with this big rise in prices (or will run when prices correct):

“(LA Times) These are income properties for us,” Rose said. “Eventually we’ll exit, whether it’s an IPO or selling them off. But that’s years down the road.”

That is a very different mindset from the home owner or home debtor crowd. First, we still have a giant pool of underwater owners in California:

1.2 million home owners are fully in the red. Again you should look at the sales volume data above. This market is being driven by very low sales volume, tight inventory, and people simply stretching to buy. The investor crowd is pulling back:

“Prices have gotten to the stage where we cannot buy a house, renovate it, rent it and still make a reasonable return,” said Peter Rose, a spokesman for Blackstone, which owns roughly 41,000 rental houses nationwide. “There was a moment in time where it made sense.”

Among the 20 firms buying the most California real estate since January 2012, purchases are down more than 70% compared with last year in each of the last four months, according to DataQuick. At the 20 biggest foreclosure buyers, including arms of Blackstone and Colony American Holdings, purchases have fallen at about the same rate.”

As we have said big money is not dumb and the numbers just don’t work anymore. However the herd is chasing the past trend and house lusting buyers are always a part of the California market, come boom or bust. But for the large part of households in the state, many are simply looking at renting even if they want to buy based on current home prices and incomes. This isn’t 2006. You have to document your income to buy. Unfortunately the pool here is not as big as some would like to believe – hence the gap being filled by big money investors.

The assumption is that somehow, we have this massive hidden group of people ready to buy. The data shows us something completely. You have a small group that is looking to buy in very targeted markets. Yet the state overall is facing some bigger issues when it comes to housing affordability. Many boomers have underfunded retirement plans and a large part of their money is locked in their golden sarcophagus. I’ve seen it argued that people should forego retirement savings to stretch and buy a home. Some then argue that a reverse mortgage is fitting but now you are eating into any wealth you would pass onto your kids. These arguments are prevalent in California where real estate is a religion for many.

The market is changing and we will see how things go in the typically hot spring and summer months. The weather argument can only go so far. Canada doesn’t exactly have beach weather and they are more manic with their real estate. Other factors are at play here. Most of the e-mails I get are from folks in their 30s and 40s (many dual income high earners) running the numbers and wondering if buying is really a good bet. For some it is if their income is stable enough. Yet some plan on having a family and losing one income for a short period followed by the high cost of good childcare here in California. Plan on sending your kids to college? Not exactly getting cheaper there which means putting money away unless you want your kid deep in student debt.

The flood of boomers selling their homes isn’t going to happen. First, many have kids coming back home. Second, many have no desire to “downgrade” their living situation. The only way to capitalize on the golden sarcophagus is to go where housing is more affordable. From the people I’ve spoken with they have no desire to leave. They can’t even imagine going from L.A./O.C. to the Inland Empire which is less than a one hour drive. It is interesting to hear from some when they say “if I had to pay current taxes on my current home I would be priced out!” So basically what is being said is that they no longer have the income makeup of those living in their current area yet enjoy all the amenities of living in said area (i.e., schools, safety, etc). For example, in Pasadena you may have someone paying annual taxes on a property being assessed in the $200,000 range while next door someone is paying $1 million. So you have someone paying $2,000 a year or so while next door someone is paying $10,000 and more per year for the same benefits (5 times more for a similar property). You don’t see much of this across the state thankfully but it is prevalent in these tiny niche markets were dual income professionals are looking to buy.

Investors? You already got their perspective above and it is unlikely they would flood the market (especially if these are sold off to investors as income streams). Slowly inventory is rising and prices are stalling out but that does not erase the current trend. The bigger picture shows this: a growing renter class, a high number of lower income households, and a smaller group of people able to afford in certain areas. Prices are likely to correct based on the current trend but looking at income figures I doubt this is going to open up buying opportunities for most households in the state. Welcome to Feudalfornia!

March 6, 2014March 6, 2014

California Middle Class Is Priced Out. What’s Next For California Real Estate?

Do not worry my dear friends. The upcoming “severe” bear market in real estate will fix this issue. To read my full report on this matter and to see the “why, how and when” please Click Here

While upscale places like Irvine and Pasadena approaching their 2006-07 highs, the middle class neighborhoods are still down to the tune of 30-40% with higher % of Californians not being able to afford a home.. Plus, over 30 percent of California buyers are cash investors (hedge funds, institutions, etc…). BTW, that number is as high as 75-80% in Las Vegas.

All of this is just another symptom of the enormity of the credit bubble juiced by the FED. While this might be the case now, the upcoming bear market in real estate will resolve this problem sooner rather than later.

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California Middle Class Is Priced Out. What’s Next For California Real Estate? Google

From our friends at DoctorHousingBubble.com

California is a land of booms and busts. Generations ago gold rush fever brought many to speculate and gamble for future glory. In the 1900s the promise of uninterrupted sun and great weather lured families to the area. This trend has only magnified with global forces becoming so dominant and people fully connecting and thinking alike on the technological hive mind. In other words, people are seeking the same goals and dreams. People also love speculating on real estate. Language is hardly a barrier when documents can be translated in the click of a mouse button. California housing is leaving many middle class families behind as the state gentrifies dramatically. Reports are very clear, and that is only one out of three California families can actually afford to purchase a home at today’s prices. Yet the market is attracting investors from all across the country and world. People are willing to leverage their income with low interest rates and funnel upwards of 50 percent (or more) of their household income into real estate. What is interesting is that in many “prime” areas housing prices are inching back close to their former peaks. Yet working class areas, only a few miles away from these markets are still years away from reaching their former peaks. California is a magnifying glass to the slow erosion of the American middle class.

Prime areas reaching peaks while other areas crawl out of recession trough

As mentioned in a previous article, housing is an odd industry where prices are set at the margins. In the US, we have 81 million single family homes. From the latest figures we have something like 2.2 to 2.5 million homes available for sale (existing and new homes). What this means is that at any given point we have roughly 3 percent of all existing inventory on the market for sale. This is nationwide. In some prime markets, you have even lower percentages and this drives up prices especially if speculation is running wild.

Zillow has some great reports on markets across the US. Let us look at a few Southern California cities in terms of the latest housing figures:

Source: Zillow

This chart is very telling. First, you’ll notice that places like Irvine and Pasadena are only 4 percentage points away from reaching their previous peaks hit in 2006-07. These markets pull from local investors, global investors, flippers, Wall Street, and of course professional families. But take a look at areas like Compton (still off by 38 percent from the peak), Inglewood (off by 32 percent), Santa Ana (off by 36 percent), and Santa Clarita (off by 26 percent). Santa Ana is only a few minutes away from Irvine but this is like comparing two different worlds. Of course the majority of people by definition live somewhere in the middle and that is why looking at household incomes is important. Yet these are unlikely to be the current buyers. Over 30 percent of California buyers for close to half a decade are coming from big money investors. Many are stretching out with FHA insured loans but this is likely to be in more working and middle class neighborhoods. Talking with colleagues in the industry they mention that FHA in prime areas is virtually a no-go for buying with sellers.

People might look at a home value of $749,200 in a place like Irvine and scratch their heads. But with ARMs, interest only loans, and dual income families people are willing to stretch to buy. Investors of course are willing to go deep into the game.

Yet we may be seeing a slowdown here, even in prime areas. For example, in Irvine inventory hit a low of 400 late in the fall and is now at 620 (up 55 percent). You’ll also notice that month-over-month prices dipped which is telling but then again, your typical California family is not going to swing a $750,000 home. Which is really the big divide happening across the US, a gutting of the middle class.

Homeownership not available to everyone

I made the argument close to a decade ago that homeownership was not always the best option. For most parts of the US, owning may be a good option (when the median home price is $190,000) but in high cost areas the math isn’t so simple. Renting may make a lot more sense for those starting a career and looking for mobility for work. Yet young Americans are facing a very tough economic climate. Beyond the economics, the homeownership rate has fallen dramatically in California:

Even before the bust, the homeownership rate was already trending back to where it was in the late 1980s. Not much has changed since. In fact, with high levels of investors buying properties and lower sales figures, this trend is likely to continue.

For many families, the quick run-up in prices in 2013 has completely shut them out. We are now seeing investors slowing down given that good deals are harder to find. Some are venturing into lower priced areas but you also deal with lower incomes. This may matter if you are looking at hiking rents or trying to flip to an actual potential long-term homeowner.

Housing starts and future trends

Even if housing were to erase the gains of 2013, California has essentially shut out a good number of middle class families from owning. The market has hit a turning point recently:

You’ll see that across the state, year-over-year prices went up 22.1 percent but fell 6.2 percent over one month. Inventory is up 22 percent from last year and time on the market is up 20 percent as well. More to the point, sales volume has fallen by 13 percent even in the face of rising prices. At current price levels in more selective markets, you really have to be upper middle class to wealthy to own a home. In fact, you will likely need to be in the top 15 to 10 percent of household income (meaning a household income of $150,000 a year is the minimum to play the game without leveraging your entire future on real estate).

California is largely leaving a good portion of the middle class out of the homeownership race. This trend looks to be the case for years to come.

March 4, 2014March 4, 2014

Shocking News: 1.3 Million Homes In California Are Still Underwater

Even though the prices have surged 20-30% in some areas of California last year alone, incredibly, 1.3 million homes are still underwater. If you count the number of houses with 10% equity or less the number should easily approach 2 million homes or 20%.This should come as no surprise to those following this blog.

What is surprising to me is that this level of “undervaluation” still exists in today’s market. Even though the FED pumped in close to $1 Trillion into the US Economy over the last 3 years, this “dead cat” bounce in real estate is failing to impress. With an upcoming severe bear market and recession within the US Economy, real estate market is bound to decline further. You can read both reports and timing associated with both markets Click Here.

Just as quick summary, real estate market is completing stage 2 (bounce, aka…dead cat bounce). Once this stage is over, I believe it is already over, the real estate market will start its stage 3 collapse. Typically, this stage is more powerful and takes the market much lower than the one before it. Get yourself ready.

Our Friends at Dr.HousingBubble:

Does housing policy amount to price fixing from banks? Negative equity, accounting standards, and control of supply. 1.3 million homes in California still underwater.

Housing is an industry made and broken at the margins. This is why in areas like Beverly Hills or Newport Coast, a small number of sales can skew prices dramatically. Housing prices in more homogenous markets where many homes are built in cookie cutter fashion provide a better metric of future appraisal values. How so? If you have a builder building 1,000 identical homes in Las Vegas, it is hard to justify that your 3 bedroom 2 baths home at 1,500 square feet is valued more than an identical one next door even though you might think it is worth more. Also, housing is the biggest purchase for most Americans. You may buy multiple cars over your life but not many homes. This is why the measures to control inventory by banks and the flood of investors has tilted this market into unfamiliar waters. High prices in the face of very low inventory. People struggling to pay mortgages yet banks having no issue buying up a large portion of single family inventory. Given that the Fed is the mortgage market, are we seeing a minor (or major) portion of price fixing in housing?

Price fixing in real estate

First it may be useful to give a standard definition of price fixing:

“Price fixing is an agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given level by controlling supply and demand.”

For housing, most of the definition is met. Banks fully control distressed inventory and the Fed essentially owns the mortgage market. Since real estate is not standard like say a farm product, there is little ability to set prices in a uniform way however by controlling inventory via stunted accounting rules and slowing down on foreclosures over the years, slowly real estate has moved from weak hands (i.e., American consumers) to stronger hands (i.e., Fed backed banks). The main mission of the Fed was to protect member banks (many that owned overvalued real estate and derivatives). All other economic results have been a consequence of this primary mission.

One of the most obvious ways this is revealed is through the number of properties that are still underwater across the nation. First, take a look at how many properties remain underwater in California where home prices jumped last year in a way we have not seen since the last housing bubble:

15 percent of California homeowners are still underwater despite the dramatic jump in prices last year. Throw in those with less than 10 percent equity and you have nearly 20 percent of all homeowners underwater or near underwater. A massive amount of California homeowners have no equity in their homes even though prices surged last year by 20 to 30 percent in some areas.

Yet price gains are tapering off. Investors have lost some of their appetite in the market. Investors buy with the intention of making money off rental incomes or flipping in an ever increasing market. Prices today are stuck where they were back in the summer of 2013. The ability for households to buy is constrained by weak income growth. In California, only 1 out of 3 households can actually purchase a home today at current prices and with their actual earned income.

In California, we have a total pool of housing units of 12,552,658:

Of these 6,781,817 are occupied by “owners” although you will see from the previous chart that 1.3 million of these owners are fully underwater. They are paying more on their asset than it is currently worth. This is typical for a depreciating asset like a car but not a home. Many of these people bought during the last bubble that ended more than half a decade ago!

Banking policy has worked well for banks and investors have done very well over the last few years. Peppered throughout the mainstream press is the grim reality that over 5,000,000 households have lost their mortgaged properties via foreclosure. Many of these homes simply shifted hands to Wall Street, hedge funds, and investors. The single family home market has become a speculative vehicle once again simply in a different form.

We’ve already noted how many homes are “owner occupied” so it might be useful to see how many homes sold in the latest month of data:

January home sales for California: 25,832

Last month, only 0.38 percent of all properties in the owner occupied category shifted hands. If demand, supply, interest rates, and emotions are playing into the trend then these few properties will set the market. The average January sales volume is 31,393 dating back to 1988 in California so demand was much lower (despite more inventory and a much bigger population) yet prices were higher because of heavy investor buying. Investors seem to be pulling back a bit and that is why we are seeing some more inventory creep in and sales inching back. Price gains are also moderating.

It is safe to say that the current housing market has many forms of price fixing through a connection of government policy, banking regulation, and Fed monetary policy. At the moment, this may not be in favor of future homebuyers but it certainly is in favor of current owners and banks. The dialogue now seems to revolve around “do I speculate and jump in?” or “will market forces break through the control and shift prices?” This of course assumes you want to “own” although many are opting to rent now. I don’t buy the arguments from people saying that they simply want to buy for security and then whine how they “missed” the last opportunity and are now locked out forever. If you really believe that thesis, why not buy today? If you are buying for the “long run” meaning 30 years or so this minor jump up is nothing in the full scheme of things. Similar to dollar cost averaging, if you have a long horizon why does the short-term matter? Many however are speculating but don’t want to call it that.

This is fascinating from an economic stand point because we have never been in a situation like this especially with so much riding on housing. Price fixing is not a dirty word necessarily but this is definitely going on to a certain degree.

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Shocking News: 1.3 Million Homes In California Are Still Underwater Google

January 24, 2014January 24, 2014

Why Smart Hedge Funds Are Betting On Further Housing Collapse and Why You Should Do The Same

Bloomberg Writes: Gundlach Counting Rotting Homes Makes Subprime Bear

For Jeffrey Gundlach, the U.S. housing recovery isn’t so rosy.

The founder of $49 billion investment firm DoubleLine Capital LP is largely avoiding the subprime-mortgage bonds that jumped about 17 percent last year after home prices surged by the most since 2006, deterred by the lengthy process to sell foreclosed houses and the destruction that’s creating.

“These properties are rotting away,” Gundlach, 54, said last week on a conference call with investors, about homes stuck in foreclosure pipelines, adding that it could take six years to resolve defaulted loans made to the least creditworthy borrowers before the real-estate crash.

“The housing market is softer than people think,” Gundlach said, pointing to a slowdown in mortgage refinancing, the time it’s taking to liquidate defaulted loans and shares of homebuilders that have dropped 13 percent since reaching a high in May. D.R. Horton Inc., the largest builder by revenue, has tumbled 20 percent.

Read The Rest Of The Article Here

A great read to understand why the housing market is in a Bear Market Bounce as opposed to any sort of a sustained recovery. Well, what used to be a bounce. In a gutsy call, I called for a real estate market top on October 3rd, 2013. You can read about it here I Am Calling For A Real Estate Top Here Further, I believe my call was right on the money and we should see negative year over year numbers once October of 2014 rolls around.

No doubt, just like the stock market, the real estate market is rolling over. While I have already talked about various stages of the bounce and what awaits us in the future, I haven’t really talked about what is driving this housing recovery. There are a couple of things.

1. Cash Buyers (aka. Investors, Hedge Funds, Financials): Nationwide that number stands at around 30%. This staggering number has one driver. Too much credit. In layman’s terms, the FED floods the market with cheap credit, financials/investors take this FREE money and invest/speculate in real estate or other mortgage backed instruments. Driving the recovery and housing prices higher.

“Blackstone Group LP and Colony Capital LLC have been central to the rebound, buying more than 366,200 properties in just a few cities”. — I mean seriously, come on!!! Good luck unloading those.

2. Backlog Inventory: Financials and banks, whether directly or through mortgage backed securities are sitting on a massive stockpile of properties even though the market has rebounded. How many? The article states 1.2 Million, but I fathom the number is a lot higher due to various off balance sheet and accounting tricks the banks are playing.

The bottom line is this. Don’t confuse this “dead cat bounce” with true economic recovery. The real estate market bounce has been driven by cheap credit and speculation. Nothing more. When the steam runs out, expect the housing market to decline below 2010 lows.

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Why Smart Hedge Funds Are Betting On Further Housing Collapse and Why You Should Do The Same

December 17, 2013

What Everyone Is Ought To Know About The Upcoming Real Estate Meltdown

Bloomberg Writes: Pending Sales of Existing Homes Slump by Most in Three Years

Fewer Americans than forecast signed contracts to buy previously owned homes in September, the fourth straight month of declines, as rising mortgage rates slowed momentum in the housing market.

The index of pending home sales slumped 5.6 percent, exceeding all estimates in a Bloomberg survey of economists and the biggest drop in more than three years, after a 1.6 percent decrease in August, the National Association of Realtors reported today in Washington. The index fell to the lowest level this year.

Mortgage rates last month reached two-year highs and some homeowners are reluctant to put properties up for sale as they wait for prices to climb, leading to tight inventories. Those forces are pushing some would-be buyers to the sidelines and slowing the pace of recovery in real estate, giving Federal Reserve policy makers reason to delay reducing stimulus when they meet this week.

Read The Rest Of The Article Here

On October 3rd, 2013 I put my foot down and made a gutsy call. I have called for a housing top at the time. You can read the article here. I Am Calling For A Real Estate Top Here

Even though most people have dismissed this forecast I continue to stand by it. As new data points for the real estate market continue to come in, it looks as if I have made the correct and exact call. Yes, certain markets will roll over and start going down a little bit later, but the overall market is starting to look top heavy here. I would expect to continue seeing weakness over the next few quarters until we begin to see clear indications that the real estate market is heading down. At that time a lot of people will freak out and we should see a real inventory spike followed by even lower real estate prices. Of course this cycle will feed on itself for a long time.

Remember, this will be the 3rd leg down for the real estate sector. The first one was the initial decline between 2007 and 2010. Typically, 3rd legs down are longer and steeper. As such one shouldn’t be surprised to see large drops in housing prices over the next few years. As my previous valuation work here showed, overpriced markets like So. Cal should and could go down as much as 50%.

For now we wait and see as the housing market continues its rolling over process.

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What Everyone Is Ought To Know About The Upcoming Real Estate Meltdown

November 26, 2013

WARNING: The US Real Estate Prices Are About To Decline 45-70%

I HAVE OFFICIALLY CALLED FOR A REAL ESTATE TOP ON OCTOBER 3rd, 2013. CLICK HERE TO SEE

Yes, I called it perfectly in 2006-2007 and now I am saying that it is not over.

Before we can understand where we are now and where we are going in the future we must understand where we came from. The Real Estate run up that we have experienced between 1997-2007 has no historical precedent. Real estate data going all the way back to 1790 clearly shows that the US housing market basically appreciated at the rate of inflation. Yes, there were some bubbles and substantial declines, but overall, appreciation at the rate of inflation is an appropriate way to look at the US real estate sector.

A QUICK HISTORY LESSON:

Later, fearing significant economic slowdown in 2002-2003 the Bush administration added a huge amount of jet fuel to the Real Estate Bubble by cutting interest rates and making mortgage finance available to everyone (even to the dead people). As people used to say, if you can fog a mirror you can get a mortgage. Of course, all of that led to the largest finance bubble in the history of mankind that “kind of” melted down in 2007-2009. I say “kind of” because most of those excesses are still in the financial system and will have to be worked through in the future.

WHERE ARE WE NOW?

Issue #1: US Home Ownership Rate Is Plunging

On historical basis, home ownership rate in the US is in free fall. Take a look at the chart. I think it speaks for itself.

Issue #2: Real Estate Affordability Is Plunging

Take a look at the chart as it speaks for itself. The affordability index is in free fall as well. Most likely due to higher interest rates and rising prices.

Issue #3: Interest Rates Are Going Up

The trend has shifted up and the 10-year rate is up 100% over the last 12 months. I gave detailed interest rate analysis here. Please take a look here.

Issue #4: US Economy & The Stock Market Is About To Turn Down (Big Time)

Please read “The Long Awaited US Stock Market Decline Is Likely Here” as to why.

Issue #5: Who Is Buying All Of These Properties For Cash Today?

Issue #6: Bear Market In Real Estate (sucks people back in)

As I have said here before (US Real Estate At A Turning Point), this is how the bear market works. This is the stage #2 bounce, before the big decline (stage #3). The bear market tends to suck people back in, offer them perceived safety and a high return before slamming the door, ripping their head off, drinking their blood and taking all of their money. The US Real Estate market is topping in Stage #2 run up here. That is why you are seeing so many divergences. The market should turn down soon. Beware.

FUTURE OF REAL ESTATE:

Real estate is not made of Gold. There is a tremendous amount of land available in California, Florida and all over the US. There is no housing shortage. As such, expect real estate to decline significantly in order to revert back to its natural inflation adjusted mean. It might take a few years, it might be different for various cities, but one way or another the market will get there.

HOW FAR DOWN?

Let’s do very simple math for the San Diego market. It doesn’t have to be exact for our purposes.

Setup:

San Diego Median Family Income: $61,500
As Per Various Financial Guidelines Families Shouldn’t Spend More Than 30% Of Their Income On Housing. That means a $1,500/monthly payment.
Median Home Price in San Diego: $500,000 (pushing that level again as per Trulia.com)
Interest Rates: 30 Year Mortgage 4.72% (Rates as of 9/4/2013)

With such fundamental input variables median house value should be $290,000 -OR – A 42% DECLINE ($1,500x360month@4.72%)

What if interest rates go to 7% over the next 5 years, which can easily happen?

The fundamental value of the median house drops further to $225,000 -OR- A 55% DECLINE

You say impossible….. I say study financial markets. Nothing is impossible.

ADVICE:

Your house is not an investment. Don’t be confused. It is the place you live and raise your family. If you are happy with your house, have a fixed interest rate, can afford your monthly payments and don’t care if your house depreciates in value, I would stay put.

If you find yourself in a contrary situation……..I would consider various options.

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WARNING: The US Real Estate Prices Are About To Decline 45-70%

November 20, 2013November 20, 2013

Housing Market…Barbarians At The Gate

Reuters Writes: Home sales fall as prices rise

WASHINGTON (Reuters) – U.S. home resales fell in October to their lowest since June due to an inventory shortage and high property prices that have dampened buying power.

The National Association of Realtors said on Wednesday that sales of previously owned homes fell 3.2 percent last month to an annual rate of 5.12 million units.

Economists polled by Reuters had expected sales to drop to a 5.13 million unit pace in October.

At the same time, the median price rose 12.8 percent in October from a year ago to $199,500. It was the 11th straight month of double-digit gains, and up from last month.

Real Estate fundamentals continue to deteriorate. Over a month ago I went out on a limb and called for the real estate market top. Here is that post and reasoning I Am Calling For A Real Estate Top Here Even though the price is still increasing in certain markets (as I have predicted), I continue to stand by my forecast.

So, what is the future of housing? To understand what’s coming we must first understand overall macroeconomic picture. Most importantly we must understand that….

A. Historically speaking the real estate market is still in a massive bubble driven by cheap credit. There is no reason for housing prices to be at this level. As my earlier valuation work showed a 50% haircut from today’s levels would bring the prices into the “normal range” of where they should be.

B. I know that many people will disagree, but your house is not an investment. It is the place you live. It could be an investment if you view it as a business and generate positive cash flow and ROI from your rental. However, that is next to impossible with today’s market prices. Essentially buying today (or over the last few years) is a speculation where you bet on asset appreciation Vs. positive cash flow. That is a huge difference.

C. The stock market and the economy will tank starting in 2014. The bear market leg will go into 2017. My mathematical timing work clearly shows that. It is now unavoidable. In such a case housing will experience its 3rd leg down. Typically, 3rd legs are much harsher than the first decline. The bottom line is, I wouldn’t be at all surprised to see a 30-50% haircut from today’s prices.

Taking an even longer view, eventually we must get to a point where real estate is not viewed as an investment. Where people feel discussed by the housing market. That will be the bottom. Today we are on the opposite side of that view.

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October 8, 2013October 8, 2013

The Secret Of Upcoming Real Estate Crash

Bloomberg Writes: A Lonely Housing Bear Predicts a Big Tumble

Talk to Mark Hanson about the housing market for five minutes and you may find yourself wanting to sell your home and park the cash in a suitcase.

The Menlo Park, California, real estate analyst, blogger and founder of consultancy Hanson Advisers predicts a decline of 20 percent in housing prices in the next 12 months. Half the gains since the latest housing bottom in 2011 could be erased in the hot areas — Florida, California, Nevada, Arizona and Georgia — by rising interest rates and a thinner herd of speculative private-equity buyers, he says.

Read The Rest Of The Article Here

In my last week’s post I Am Calling For A Real Estate Top Here I have laid out a case of why I believe the real estate market is topping and should decline from this point on. It seems like other people are starting to see the forest through the trees as well.

Even thought I have briefly mentioned it before, I would like to take this opportunity to talk about an important point as it pertains to the real estate market. If you study financial markets, as I have, you soon begin to see patterns and similar structures in all markets. One of the easiest things to understand is that markets NEVER go straight up and down and they RARELY complete their moves in one motion. Typically it takes 3 to 5 distinct moves (up and down) to complete either a bear or a bull move.

As such, what we have experienced in 2007-2010/11 real estate market was only the first leg down. What we are experiencing now is a rebound, 2010/11 to today. Rebound acts as a perfect tool to suck investors or buyers back in by promising that the worst is over and by offering outsized gains. Rebounds are often powerful, yet short lived. When they are over, markets tend to shift fast to continue on with their original move.

This is where we find ourselves today. The rebound is topping and the market is getting ready to reverse itself. As soon as it does (and I believe it is already happening) the market will resume its BEAR MARKET in real estate. The third leg down is typically more powerful than the first one. As such, I would expect significant declines over the next few years in the real estate arena.

Fundamental certainly support this development as well.

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Tag: housing

Real Estate Collapse 2.0 Is Starting To Accelerate

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Dreaming Of A Housing Bubble

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Dr. Housing Bubble Writes: Welcome to Feudalfornia: the golden sarcophagus and the investor. Acceleration to price out masses.

California Middle Class Is Priced Out. What’s Next For California Real Estate?

Shocking News: 1.3 Million Homes In California Are Still Underwater

Does housing policy amount to price fixing from banks? Negative equity, accounting standards, and control of supply. 1.3 million homes in California still underwater.

Why Smart Hedge Funds Are Betting On Further Housing Collapse and Why You Should Do The Same

What Everyone Is Ought To Know About The Upcoming Real Estate Meltdown

Bloomberg Writes: Pending Sales of Existing Homes Slump by Most in Three Years

WARNING: The US Real Estate Prices Are About To Decline 45-70%

Housing Market…Barbarians At The Gate

Reuters Writes: Home sales fall as prices rise

The Secret Of Upcoming Real Estate Crash

Bloomberg Writes: A Lonely Housing Bear Predicts a Big Tumble

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Real Estate Collapse 2.0 Why, How & When

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