Household Incomes now equal to 1989 Levels – Rising Rents Bring Back Feudalism Society

The Fed surprised markets on Wednesday with their taper head fake.  Was it because the economy is booming?  No.  Was it because household incomes were growing?  Not exactly.  Was it because inflation is non-existent?  Not if we look at rents or medical care.  In fact, going through the Fed’s statement it is largely holding back on the taper because of fear of budget negotiations in Congress.  That is, we are hitting our debt ceiling yet again and the Fed wants some leverage here.  Yet the larger signs all pointed to a taper if we consider that rents are rising at nearly twice the rate of the overall CPI.  Also, the Census figures for 2012 were released and household income adjusting for inflation is now back to levels last seen in 1989.  Lost decade?  Try a lost generation.  Also, recent data highlighted that the wealthiest in our country are capturing most of the income gains and given this trend and the Fed’s taper-less September, the feudalism trade is fully on.

Household income

The Fed is the housing market.  Investors are dominating the market and this is their number one client.  It is no surprise that a moderate rise in rates has essentially clobbered the “normal” home buyers out in the market.  Regular buyers need every piece of help buying a home because household incomes have done this:

MedianHouseholdIncome

The above chart shows a full lost decade (24 years of weak income growth).  Even in real terms, household income has plunged since the recovery started in 2009:

2007: $55,627

2008: $53,644

2009: $53,285

2010: $51,892

2011: $51,100

2012: $51,017

The Fed is largely playing the market and ironically, these moves are likely to continue the wealth disparity in the US further as investors once again plow into the real estate market to chase yields.  For regular households, more income is going to go to housing on the rental front:

Rent vs CPI

Keep in mind that rising rents with falling incomes is not exactly a good combination.  Rents are rising at nearly twice the pace of the overall inflation rate.  This divergence has accelerated since 2012.  The Fed has made a one way bet here.  The Fed is operating under a QE forever scenario.  Take a look at the Fed balance sheet and tell me if you think a taper is in serious consideration:

fed balance sheet

The Fed is largely playing one big confidence game.  The too big to fail are even larger today.  Real estate investors are virtually half the market in 2013.  Even in expensive California nearly one-third of all home sales are going to investors (in Las Vegas it is closer to 60 percent).

Reconcile all the facts coming out this month:

-Household incomes adjusting for inflation are back to levels last seen in 1989 (24 years ago – a lost generation)

-50 percent of income generated in 2012 is going to the top 10 percent of earners (highest ever since the early 1900s)

-Rents are rising much faster than overall CPI

-Investors are gobbling up an incredibly large share of all real estate purchases

There has been a serious disconnect going on since the recovery hit and these kind of divergent data points suggest we are in a mania like mode.  Investors are largely chasing yield even on many deals that simply do make sense (i.e., cap rates are simply not panning out in many markets).  The Fed taper is merely a magician’s trick.  The Fed can’t taper to any large degree.  It is an end-game in the mortgage market.  The Fed is the housing market.  The Fed is largely focused on helping member banks so it is no surprise that banks are doing exceptionally well and many financial institutions are the largest real estate buyers in the current market.  For now, the investor trade will continue to play out even if people with common sense realize this is simply one giant shell game and the Fed is on its way to a $4 trillion balance sheet.  Doesn’t seen so farfetched that we are entering a modern age of feudalism.

Dr. Housing Bubble
http://www.doctorhousingbubble.com/federal-reserve-taper-household-income-lost-generation/?

Another Housing Bubble Coming In Los Angeles?

The housing market continues to face a few trends in 2013.  Low inventory, higher leverage because of low interest rates, and high demand from investors.  Take for example the share of foreclosure re-sale properties that are being sold.  In Southern California, the peak was reached in 2009 at 58.3 percent of all sales.  Today foreclosure re-sales make up only 15 percent of all sales.  This of course is one reason why the median home price has soared in the last year.  With such high demand and low inventory, investors are able to poach high quality properties since coming in with an all cash position is much better than relying on a mortgage which most typical buyers will use.  Also, the shadow inventory is being slowly leaked out since there is little reason to flood the market and depress prices.  Banks have figured out that frenzied buying and record breaking low inventory is a good recipe for causing prices to jump up.  Does distressed inventory even matter in Los Angeles anymore?

Los Angeles Distressed Inventory

One interesting point in all of this is that people now somehow think that there are no foreclosures or that somehow the housing market is back to the days of 2005 and 2006.  Let us look at foreclosures in Los Angeles County:

LA Foreclosures
Foreclosures in Los Angeles County – March 2013

Over 17,000 properties are in some stage of foreclosure in the county.  Is this high?  Well let us take a look at the non-distressed inventory that is listed in the MLS:

los angeles county non-distressed

Continue reading “Another Housing Bubble Coming In Los Angeles?”

Moderate growth in Apartment sector will continue

By Natalie Dolce,  GlobeSt.com

ENCINO, CA- On a recent apartment webcast, 57% of participants predict that renter demand will get stronger in 2012, while 2% says it will be weaker, with 40% saying it will stay the same. The 2012 Apartment Market Outlook Video Webcast was put on by Marcus & Millichap Real Estate Investment Services, and was generally optimistic in the sector’s “continuation of modest growth in 2012.”

According to William Hughes, managing director of Marcus & Millichap Capital Corp., from a lenders standpoint, the improving apartment fundamentals have supported their level of confidence in the marketplace. “It has been easy to finance core assets all the way down to C assets across the board,” he said. “It becomes a little choppy as you move into tertiary and smaller assets, but even those are being financed by local and regional banks.”   Continue reading “Moderate growth in Apartment sector will continue”

Keeping the Housing Bubble Inflated

It should be abundantly clear and obvious that thegovernment and Wall Street want nothing more than to keep home prices inflated and are sticking out a giant middle finger to the majority of Americans.

You might have missed the glorious news that our stunningly cunning Senate decided to reinstate the heightened loan limits for Fannie Mae, Freddie Mac, and the FHA (aka the entire stinking mortgage market).  Of course the lobbying arms of the housing industry went gaga for this policy even though it keeps prices further inflated in bubble states like California and New York.  Good job politicians, I’m sure the checks from the FIRE industry will come in just in time for the 2012 election!

Since our politicians care so deeply about working Americans, they are also examining a push at giving residential visas to foreigners looking to buy at least $500,000 in real estate.  Forget about the fact that the median home in the U.S. costs more like $170,000 to $180,000.  Then we have the Federal Reserve artificially keeping mortgage rates at historic lows and you hit the trifecta of housing welfare for expensive bubble ridden states while the overall economy falters.

Continue reading “Keeping the Housing Bubble Inflated”

The Worst Housing Crash Since the Great Depression

This is reposted from an article at DoctorHousingBubble.com.

The worst housing crash since the Great Depression just got worse. What happens when home values pop in other bubble metro areas? New home sales fall 82 percent from peak versus 80 percent during the Great Depression

This is likely to be the first ever global economic disaster caused by real estate sponsored by big banks.  During the Great Depression real estate values collapsed as the economy contracted and millions lost their jobs.  That is the typical pattern of real estate bubbles bursting.  Something in the economy creates a vision of a new paradigm and money starts flowing into real estate as a consequence of this euphoria.  This happened inJapan as their economy and stock market frothed over with mania.  There is no time in history that the entire world from the U.S. to Canada to Australia to Spain to China suddenly went into a massive trance and believed that real estate suddenly would carry the weight of every single economy forward.  Of course what we are seeing is the unraveling of this system.  The bubble has burst.  Yet the banking system that relied on real estate as their game of choice in the casino cannot come to terms with reality because it would render them insolvent (which they are by the way).  So instead, the charade continues yet the public is catching on to this mass deception.  What happens when the worst housing crash since the Great Depression gets worse?

Deepest fall in new home sales ever

new home sales

There is little demand for new home sales because the public with weak incomes and an economy that is still struggling has little appetite for overpriced homes.  Even if the appetite were there, the incomes are certainly not.  The juice that kept the game going was debt.  As we have seen with the debt ceiling bread and circus we might be reaching a limit in regards to what we can take on without adding on subsequent real growth.  I know when the contraction started occurring some could not envision the correction lasting longer than a year or two.  People have been conditioned to quick changes and have a hard time realizing that the housing market of the 2000s was a historical mania.  That is it.  It is done for a generation just like Tulip mania or any other mass delusion.  The fact that home prices are now inching closer to early 2000 price levels simply does not jive with the religion many believe.  During the Great Depression, new home sales fell 80 percent from peak to trough.  In this crisis we have fallen 82 percent.

The chart above is rather startling but makes sense given that we have 6 million homes lingering in theshadow inventory.  The way banks are leaking out inventory we are bound to have a lost decade (or two) in our books.  Unless something radically changes the policy is to bleed the productive economy for the ill-gotten gains of the big bankers running this country.  This is why after trillions of dollars funneled to the banking sector little has been done in terms of boosting incomes or home prices.  Where do you think the money went?  It certainly didn’t go to adding jobs:

civilian population employment ratio

This is a troubling chart.  The civilian employment-population ratio is a better measure of employment success in our economy.  We are now back to early 1980s levels.  What is more troubling is the jump from the early 1950s on had to two with the rise of two income households.  The two main driving forces for this reversal are a poor economy and demographics.  How can people look at these trends and think things will reverse?  Even if things do change the demographic change is built into the system.  Some point to wealthy immigrants as the catalyst for rising home prices but we are unable at the moment to provide quality jobs to the masses of the unemployed.  Unless we find an age reversing pill this trend is sticking around for years.  There are limits in life even though Hollywood and Wall Street would like to convince people otherwise.

Bubble still going on in many U.S. areas

The general collapse in home values has left many believing that the housing market has reached a trough simply by default.  That may be the case in many states where home values never really had excessive bubbles yet many highly populated metro areas are still in significant bubbles.  When these bubbles burst financial losses will be large yet again and you can expect the financial system to dig deep into the pockets of struggling Americans.  What happens when these places pop as they will?  Let us look at some of those overpriced regions:

most overpriced metro cities in united states

Source:  Fiserv

This data is current and you can see even after major price corrections these areas are overvalued.  On both coasts, these bubbles still rage but California is still the leader in bubble metro areas.  Folks are delusional thinking this is sustainable.  These bubbles will pop.  It can happen quickly or drag out for years.  The above ratios are flat out unsustainable.  Just take a look at the median home price to median income ratio.  This will pop.  In addition, many of these areas have high unemployment rates.  Take a look at San Diego that nearly has a double-digit unemployment rate for the county.

What is important to also note is that these prices have already fallen by 10, 20, and even 30 percent in many cases from their peak.  They are still inflated.  The shadow inventory in these markets is dramatic.  At a certain point reality will need to be faced and when that day comes, you will see prices moving lower.  That is the only way out or we can grow household incomes and double it in the next few years but do you see that happening?  I would love to see evidence that our financial system would reward productive behavior instead of putting all the money into the hands of the banking system that largely operates like a vampire on the productive side of the economy.  We do need banks, but investment banks should be spun off and allowed to make their own non-systemic destabilizing bets.  At the moment the financial system is simply looking for ways to pilfer funds from the majority of Americans.  If they could find a method to profit from slamming Americans lower they would do it.  Many a hedge fund made billions by gambling and speculating on the failure of American homeowners.

So what happens next?  It is an interesting side note that during the typically hot summer selling season with mortgage rates at all-time lows that home sales are weak.  Why?  At a certain point it boils down to income.  Many that have their brains cleansed by the 1984 media machine think that just because many people have luxury cars or dress a certain way they are wealthy.  They are not. The data does not back up this phony studio set and many are starting to realize that the financial Wizard of Oz is more smoke and mirrors than anything real or tangible.  Certainly there is tremendous wealth in the country but not enough to support entire metro areas with inflated prices.  Just because the mainstream press isn’t reporting this next bubble bursting doesn’t mean it won’t happen.  Heck, they didn’t start talking about the most obvious housing bubble in generations until it blew up in their face.

Housing Double Dip Helps Apartments, Hurts Economy

By Hessam Nadji

After climbing in early 2010, home prices have dropped once again, and have reached a new eight-year low. According to data from the S&P Case-Shiller Index, prices are down by 3.5% year-over-year, and by 32% from their peak in 2006. Sales activity is also down, by 12.9% year-over-year, albeit from a high level in 2010 that was stimulated by a home-buyer tax credit. The nation’s homeownership rate has dropped from a peak of 69% in 2006 to 66.4% as of Q1 2011, a rapid decline drop in such a short time period.

Los Angeles-Long Beach Housing Price Index

What is driving this downturn?  Two dominant factors: Negative consumer psychology and still-high foreclosure activity.

Households that are under water with their existing mortgage or that have recently been foreclosed upon are not in a good position to purchase a new home at this time. Millions of homeowners whose credit scores dropped during the Great Recession and no longer meet toughened mortgage-lending requirements are also not in a position to buy a new home. Still others look at their finances – or in many cases financial losses – and at the headlines regarding home depreciation, and say “Not now.”

Foreclosure activity remains disturbingly high, despite a drop of 36% in the past year and 45% since the peak in Q1 2009 in sale of homes either owned by banks or in some stage or foreclosure, according to data from RealtyTrac. While the number of distressed sales is down, so is the number of total sales, keeping the percentage that is distressed at 28% according to the most recent data, down from 32% a year ago. And it appears that the distressed-sale factor will remain with us through at least year-end 2012, placing a damper on price appreciation.

The downturn in the housing sector is placing a clear drag on the nation’s general economy. Profits and job growth remain weak in sectors that are related to housing, including construction, building materials, real-estate finance, architecture, engineering and real-estate brokerage. Manufacturers and retailers of appliances, furniture and garden equipment have also been negatively impacted. According to Moody’s, cuts in spending in residential fixed investments accounted for more than 30% of the decline in the GDP in recent years.

But is it all bad news?

Not completely.  We are making progress on clearing the inventory of distressed loans.  The market is finding a new equilibrium. In addition, prices have dropped and fundamentals have improved to the point where the market is now under-priced. For-sale housing costs, which take mortgage rates and prices into account, are low relative to long-term relationships between for-sale housing costs and: (1) incomes and (2) rents.  Total vacancy rates are currently low to moderate, and appear likely to drop into very tight territory in coming years due to a dearth of construction activity. In addition, employment growth is taking place once again.

The for-sale housing market will inevitably correct upward to reflect the new fundamentals. However, we have to wait until consumer sentiment turns positive and/or the inventory of foreclosure product is substantially reduced before we see any major improvement. This could take well into the second half of 2012 and even 2013, assuming job growth returns back to a healthier 200,000 positions a month. At this still lackluster pace, the economy won’t be expanding sharply, but enough demand will be released from demographics-based household growth to improve sales and pricing.

The implications from the recent double dip in the housing market include less-than-normal growth in the economy and in CRE demand during the early recovery years (i.e., 2010, 2011 and into early 2012). However, once the housing market finally begins its recovery, it could stimulate above-normal growth in the economy and in demand for CRE late in the recovery cycle: 2012, 2013 and into 2014. This is a very different pattern from previous recovery periods and will likely be amplified for CRE product that is sensitive to the real estate market, including home-improvement stores, appliance stores and office and retail space geared toward real-estate industry-dependent tenants.  It also will likely be amplified in development-prone communities, such as Las Vegas, Phoenix, the Inland Empire, and parts of Texas and Florida.

Hessam Nadji is managing director, research and advisory services, for Marcus & Millichap Real Estate Investment Services. Contact him at hessam.nadji@marcusmillichap.com.

A Housing Apocalypse is Coming

A Housing Apocapyse is Coming

Source:  Dr. Housing Bubble

There will be no sustainable housing recovery until the shadow inventory is cleared out.  As of April with the latest data close to 6.4 million loans are delinquent or in foreclosure.  This is a massive number of homes.  What is downright disturbing of the 2.2 million homes in foreclosure you have 675,000 homes (31 percent of the pool) that have not made a payment in over two years.  That is right, two full years.  Apparently one-third of the bank’s strategy in dealing with foreclosures is simply to ignore missed payments.  Glad it took them giant bailouts and four years to figure that one out.  The housing crisis strategy is really a banking-centric one and that is why nothing has really been resolved since the crisis started.  Banks are dictating the movement going forward so the idea of keeping prices inflated is simply one to protect banking interests.  Since the market has very little desire for inflated real estate, banks just slip it under the rug for another day.  Keep in mind that many Americans are seeing lower wages so lower home prices are actually good for their bottom line since it eats away less of their hard earned income.  Plus, one-third own their home outright and another 30 percent rent.  So this idea of keeping home prices high just for the sake of keeping them high is a ploy that comes out of the suspension of mark-to-market logic.  Do people finally get that home prices have to fall to reflect local area incomes?

The state of distress in U.S. housing

First, it is probably useful to get a sense of the entire potential shadow inventory out in the market:

us home foreclosures

Source:  Calculated Risk

According to CR we have the following:

-2.24 million loans less than 90 days delinquent.
-1.96 million loans 90+ days delinquent.
-2.18 million loans in foreclosure process.

-For a total of 6.39 million loans delinquent or in foreclosure in April.

That is a large number of homes.  Now keep in mind many foreclosures are now starting to make their way onto the MLS since banks are actually taking full possession of the homes (although the reality that 675,000 people have not made a single payment in two years tells you where things stand).  Think about the above data; you have roughly 600,000 to 800,000 as current REOs (all the way through the foreclosure process) but you also have 675,000+ people in foreclosure who haven’t made a payment in two years:

loans in foreclosure

I’ve seen some pundits argue that many of these loans will cure.  We know for a hardcore fact that if you are behind on your payments for two years it is likely that your home is going to move from the shadow inventory into the REO pipeline.  This also doesn’t examine the fact that we have close to 2.2 million homes in foreclosure.  How many have made no payment in one year?  Keep in mind we are only looking at the foreclosure category so far.  So the entire U.S. banking system is being overwhelmed with 600,000 to 800,000 active REOs yet we have that many in foreclosure without two years of payments.  Here is a good estimate of REO data in the U.S.

LawlerSelectedREO

Source:  Tom Lawler via Calcualted Risk

The above doesn’t cover the entire universe of REOs but does a good job.  I went ahead and took a quick look at active foreclosures in the state of California and found the following:

calif foreclosures

calif foreclosures2

Depending on what data source you look at California has roughly 80,000 to 89,000 homes that are REOs and ready for sale.  That still leaves another 600,000 to 700,000 REOs across the country that need to be sold.  You also have to wonder of the 675,000 foreclosures with two years of missed payments how many are in massively overpriced bubble states like California or New York?  Well I can tell you that California currently has 157,000 homes in the foreclosure process that have yet to go REO.  The bottom line is you have a massive pipeline of distressed properties waiting to make their entrance on the MLS stage.

And the foreclosures will work through the system like a rabbit filtering through a python.  We have another 4.2 million homes delinquent where the foreclosure process hasn’t even started (1.96 million of the loans 90+ days late).  Don’t fool yourself because many of these will end up as REOs at some point (could be years down the road given the absurd timeline we are experiencing).  It can’t be stated enough that keeping the process slow and providing banks with trillions of dollars of bailout money is simply a method of clogging the financial pipes so the FIRE economy can figure out what other sector to gut and inflate into a bubble.  In the end it is the taxpayer that will foot the bill unless something radical changes.

I wanted to draw the current distress universe to show how little of the shadow inventory is being shown to the public:

foreclosures q2 2011

The bars are drawn to scale to show actual magnitude relative to other buckets.  The only homes the public is viewing are those in the purple box above.  But look at what we have coming down the pipeline.  Things don’t seem to be changing so it is looking more and more likely that we will witness a Japan like real estate market with zombie banks walking the Earth in search of easy capital brains.

It is extremely troubling that we have so much money being lobbed at the banks with such horrible results.  But what do you expect?  Someone was going to pay for this decade long orgy in real estate.  As it turns out it is the prudent public and middle class.  The people living rent free are simply the other side of the coin to the morally bankrupt financial sector.  We have to go back to watching archived films to remember a time when banking and finance actually carried a positive connotation.

I’m curious to know how many people are living in million dollar homes rent free.  We’ve seen homes in foreclosure in Beverly Hills so it is certainly happening and readers have sent over confirmation of this in their own neighborhoods.  Talk about a giant mess.  The New York Times had an interesting graph showing how long it would take to move 872,000 foreclosures:

timeline to clear foreclosures

Source:  New York Times

It would take roughly 40 months to clear the current foreclosure inventory (aka the tiny blue rectangle in our earlier chart).  And more will be coming into the pipeline but banks are trying to make their speculative gains in other bubbles to soften the blow here.  After all, they wouldn’t want to spoil the trillions in loot they have stolen from Americans.

California Mortgage Defaults Rise In Third Quarter

This graph shows the Notices of Default (NOD) by year through 2009, and for the first three quarters of 2010, in California from DataQuick.

Although the pace of filings has slowed from the previous two years, it is still very high by historical standards.

From DataQuick: California Mortgage Defaults Rise in Third Quarter

The number of foreclosure proceedings initiated by lenders between July and September edged higher on a quarter-to-quarter basis for the first time since early last year. But the number of home owners who went all the way through that process to foreclosure dipped from the previous quarter and a year ago, a real estate information service reported.

A total of 83,261 Notices of Default (“NODs”) were recorded at county recorder offices during the July-through-September period. That was up 18.9 percent from 70,051 in the prior quarter, and down 25.5 percent from 111,689 in third-quarter 2009, according to San Diego-based MDA DataQuick.

“Over the past year, with some minor ups and downs, financial institutions and their servicers have been processing a fairly steady number of defaults each quarter. That probably has more to do with their capacity to process defaults, than with higher or lower levels of incoming distress,” said John Walsh, DataQuick president.

The number of Trustees Deeds (“TDs”) recorded, which reflects the number of houses and condos foreclosed on, totaled 45,377 during the third quarter. That was down 4.8 percent from 47,669 for the prior quarter, and down 9.3 percent from 50,013 for third-quarter 2009. The all-time peak for TDs was 79,511 in third-quarter 2008.

As prices fall later this year, we might see another increase in NODs. Although NODs will decline in 2010 from 2009, the number will still be very high and 2010 will be the third highest on record (only behind 2009 and 2008).

There are many details in the press release – the median origination month was August 2006, Countrywide made the most bad loans (no surprise), and the top beneficiaries were Bank of America (15,992), Wells Fargo (10,069), MERS (5,292), and JP Morgan Chase (5,172).

It will be interesting to see what happens in Q4. Since this is the first stage of the foreclosure process, and almost all foreclosures in California are non-judicial, I’d expect little or no impact from “foreclosure-gate”.

US Real Estate Market Update from Keller Williams

Commentary:

The economic recovery continues to slowly but steadily deepen its roots.  Consumer sentiment ticked up in March and it appears businesses are feeling more positive as well. According to a CEO Economic Outlook Survey, America’s top CEOs are expecting an increase in sales, along with increased or stabilized capital spending and employment.

Over the past several months, the hot topic of health care reform took much of Congress’s attention.  Now, with the bill passed into law, the government is turning its attention to other matters to help bolster the economy including the job bill and financial reform.

High unemployment and elevated levels of foreclosures and distressed homeowners continue to be two of the biggest factors in preventing a robust recovery.  The government’s attentive attitude toward these obstacles is seen as a positive sign by industry and economic experts.

Existing Home Sales:

Existing home sales softened in February. According to Lawrence Yun, NAR chief economist, the widespread winter storms during the month may have masked underlying demand as “buyers couldn’t get out to look at homes in some areas and that should negatively impact near-term contract activity.” February sales of 5.02 million remained 7 percent above the 4.69 million-units last year.

Median Home Price:

The median price for an existing home was $165,100 in February, a 1.8 percent drop from February 2009. Distressed homes, which accounted for 35 percent of sales last month, continued to skew prices downward as they typically were discounted in comparison with non-distressed homes. Continue reading “US Real Estate Market Update from Keller Williams”