Wolf Richter www.testosteronepit.com www.amazon.com/author/wolfrichter
This is
precisely what shouldn’t have happened but was destined to happen:
Sales of existing homes have gotten clobbered since last fall. At first,
the Fiscal Cliff and the threat of a US government default – remember
those zany times? – were blamed, then polar vortices were blamed even
while home sales in California, where the weather had been gorgeous all
winter, plunged more than elsewhere.
Then it
spread to new-home sales: in April, they dropped 4.7% from a year ago,
after March’s year-over-year decline of 4.9%, and February’s 2.8%. Not a
good sign: the April hit was worse than February’s, when it was the
weather’s fault. Yet April should be the busiest month of the year (excellent brief video by Lee Adler on this debacle).
We have
already seen that in some markets, in California for example, sales
have collapsed at the lower two-thirds of the price range, with the
upper third thriving. People who earn median incomes are increasingly
priced out of the market, and many potential first-time buyers have
little chance of getting in. In San Diego, for example, sales of homes
below $200,000 plunged 46% while the upper end is doing just fine. But
the upper end is small, and they don’t like to buy median homes [read… Housing Bubble 2 Veers Elegantly Toward Housing Bust 2]
Yet
it’s going according to the Fed’s plan. Its policies – nearly free and
unlimited amounts of capital for those with access to it – have created
enormous wealth in a minuscule part of the population by inflating
ferocious asset bubbles, including in housing. But now electronic
real-estate broker Redfin has made it official:
in 2014 through April, sales of the most expensive 1% of homes have
soared 21.1% year over year, while sales in the lower 99% have dropped
7.6%.
And it
wasn’t the first year. In 2013, sales of 1%-homes jumped 35.7%, while
sales of the other 99% rose 10.1%. And in 2012, sales of 1%-homes rose
17.5%, while the rest of the market inched up a mere 2.9%.
The
downtrodden who have to make do with buying the remaining 99% of the
homes, these modern hoi polloi so to speak, whose real incomes have
stagnated or declined as they face the soaring home prices of the Fed’s
second housing bubble in less than a decade, to be financed at still
historically low mortgage rates, well, they’ve hit a wall.
But at
least luxury is thriving. In 9 of the 29 markets Redfin tracked, sales
of the priciest 1% of homes jumped by over 50%. The top three were all
here in the Bay Area – not surprisingly, given the miracles of the
worldwide money transfer machine of IPOs and multi-billion-dollar
startup acquisitions [Momentum Stock Fiasco Pricks San Francisco Housing Bubble].
In
Oakland, sales of 1%-homes skyrocketed 96.2%, in San Jose 91.2%, and in
San Francisco 72.2%. But in all three cities, sales of the 99% are down
so far this year! So this isn’t exactly a booming housing market but a
booming luxury market. A lopsided monstrosity that looks like this:
In a
number of cities, including in some of the red-hottest housing markets
of last summer, sales of homes in the 99% category have plunged. The
worst: Los Angeles -11.7%, San Diego -12.3%, Minneapolis -12.5%, Orange
County -12.7%, Sacramento -15.5%, Phoenix -15.7%, Las Vegas -16.3%, and
Ventura -16.3%.
Some of these cities aren’t exactly cheap places to buy a 1%-home. In San Francisco, themedian price is already over $900,000. But the minimum 1%-home?
$5.35 million, according to Redfin. You’ll need enough after-tax income
– if you’re not plunking down the cash you got from selling your
startup – to cough up a monthly mortgage payment of $21,300. LA is
second in line with the minimum 1%-home setting you back $3.65 million,
or a monthly mortgage payment of $14,600. That’s the minimum. On the
upper end, only the sky is the limit….
Location,
location, location. Prices of 1%-homes vary by neighborhood. In my
crazy San Francisco, Redfin found that Presidio Heights came out on top
at $7.48 million for the average 1%-home, neck to neck with neighboring
Pacific Heights at $7.18 million, and well ahead of Russian Hill at
$6.53. But Presidio Heights was only the 6th most expensive neighborhood
in the report, the top five all being in LA. King of the hill: Beverly
Glen, where the average 1%-home costs a cool $11.86 million.
There are more expensive towns in the Bay Area, like Atherton,
that could compete with the priciest neighborhoods LA has to offer. But
they’re too small to make it into the stats. And these stats are a
perfect illustration of what the Fed has set out to accomplish: the
“Wealth Effect” – a semi-religious doctrine propagated by the Greenspan
Fed and elevated to a state religion by the Bernanke Fed.
The
relentless money-printing binge and zero-interest-rate policy did what
it was designed to do: inflate asset bubbles and make some players rich,
but not all. A home that cost $150,000 and jumps 50% in price will make
the owner $75k. A home that cost $15 million and then jumps 50% will
make the owner $7.5 million. A private equity firm that can borrow at
near zero cost to buy up 40,000 homes might hope to gain around $5
billion. That’s how the Wealth Effect works.
The
problem for the housing market is that there aren’t enough home buyers
in that coddled 1%-category. The few can push up prices for a while but
aren’t numerous enough to push up sales of the overall market. And they
don’t like to buy median homes. Yet, as prices rise, homes move further
out of reach of the 99%, and inevitably, sales drop further. At some
point, something has to give. We already know from the last housing
bubble and bust cycle what will give: prices. And afterwards, we’ll
wonder, as we sort through the debris, how the Fed managed to sucker us
into a second housing bubble and bust in just 15 years.
The
equation might not have gone so horribly awry if each class of college
graduates had seen their incomes skyrocket in line with their student
debt. But that’s a crummy joke in America. Read…. This Chart Is The Fate of Housing In America As Student Loans Bankrupt A Whole Generation
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