Wolf Richter www.testosteronepit.com www.amazon.com/author/wolfrichter
Cities have seen dizzying home-price increases that are giddily
reported and fuse with pandemic housing hype and trillions from the Fed
into a self-propagating force. And it has become accepted wisdom that
the housing market would recover all the way to where it was in 2006,
which would represent a complete recovery, a sign that the Fed
has done its job, that it cured at least one of the ills that has been
dogging this economy for so long.
Alas, not too long ago, everyone had called 2006 “the peak
of the housing bubble,” the apogee of all craziness, one of the causes
of the disaster that followed, and everybody had tales of just how crazy
it was back then. All this is forgotten. The prices of 2006 are
suddenly no longer the peak of the housing bubble, but a goal to get back to.
Electronic real-estate broker Redfin covers 19 metro areas with its Real-Time Price Tracker.
It’s based on sales contracts that are reported to the MLS data bases
upon signing, and thus far timelier than other gauges. It measures
prices per square foot, thus eliminating the issue of larger versus
smaller homes. In its report at the end of August, home prices in San
Francisco soared 27.3% from a year ago; in Riverside, CA, 29.6%; in
Sacramento, CA, 38.8%; and in Las Vegas a cool 39.1%.
Toxic Mix: higher prices and higher mortgage rates
Price increases that make the last bubble appear boring! So in San Francisco, the median list price, according to Redfin, is $832,000. The median sales price is 7.5% higher.
Mortgage rates have jumped too. Combined with higher home prices,
they make a toxic mix. So if our homebuyer in San Francisco pays $16,000
down on his median home and finances $816,000 for 30 years, with a
fixed-rate mortgage at the average rate of 4.80%, the payment will set him back $4,281 a month.
If the price on that unit was up 27%, it would have cost $655,000 a year ago. Back then, rates on equivalent mortgages were about 3.5%.
With the same amount down, he would have financed $639,000. The payment
would have been $2,736 a month. In the course of a year, for exactly
the same unit, the mortgage payment jumped 55%.
Insanity. Homes weren’t cheap last year either. Have incomes jumped
55% to make up for it? Um, no. In other cities, such as Las Vegas, it
would be even worse. In other words, the new housing bubble has been
beautifully inflated – and is approaching full bloom. Thank you
halleluiah, Fed.
What’s next? Repeat of 2007-2009?
“The price increases are crazy,” real-estate agent Amy Downs in the Dallas suburb of Garland echoed to the Wall Street Journal. And it’s not good for business; a lot of her clients stopped searching for a new home.
Homebuilders have pushed to the max. But after raising prices for well over a year, they’re suddenly feeling the heat – suddenly being
in August. Builders are normally able to raise prices in August, on
average by 2% from July, according to John Burns Real Estate Consulting.
But in its survey of 273 builders,
covering about 16% of the new-home sales across the country, 47% of the
builders raised prices in August, 48% kept them flat, and 5% lowered
them.
By contrast, in July, 64% raised prices, 36% kept them flat, and 0%
lowered them. You just down lower prices in the summer. The 5% in August
was the worst score on price reductions since March 2012.
The summer debacle was confirmed by homebuilder Hovnanian Enterprises during itsearnings call on
Monday for the quarter ended July 31. CEO Ara Hovnanian talked about
improving gross margins and “positive operating trends.” And then he
proffered an iffy forecast: the company expected “to report much
stronger results” for the fourth quarter,assuming” – emphasis mine – “that market conditions remain stable.”
But that appeared to be a big IF in his own mind
During the quarter, net contract dollars rose 8%, net contract
numbers only 2%, compared to prior year, he said. “We jokingly wish we
had a June quarter end, so that we could have reported that our net
contract dollars were up 17% and the number of contracts were up about
10%, similar to what many of our peers recently reported that had June
quarter ends.”
Because July was crummy. And August was worse – weekly net contracts
were down 5% from prior year. “To put this slowdown into perspective,”
he said, “we were well ahead of our internal year-to-date budgets for
net contracts going into July, and we are now slightly behind our
year-to-date internal budget for net contracts at the end of August.”
Among the reasons: “significant home price increases, higher mortgage
rates, and a little lower consumer confidence.”
The company had raised prices “aggressively” in 80% of its
communities. For example, in a single-family detached community at
Roseville, CA, they’d implemented a series of price increases, each time
watching how sales responded. At one point, sales did slow down but
then picked up again on their own, “as people adjusted to the prices,”
he said. The last price increase in June brought the cumulative price
increases for the 12-month period to $141,000, or 40%.
It triggered a backlash. “We got a little over-exuberant with the
last price increase,” he explained. Sales ground to a halt – they sold
one home in the following 7 weeks, as opposed to one home per week.
Hence, they made “a small downward pricing adjustment” – and a week
later, they sold another unit.
Their strategy was to raise home prices “to the point of
significantly slowing down sales pace,” he explained. And that point has
been reached. Homebuyers are maxed out. That’s what ultimately pricked
the last housing bubble. And that’s what will eventually prick this
bubble too.
While Texas hadn’t experienced the crazy run-ups in home prices
during the prior housing bubble, it did experience a collapse in demand
for new homes afterwards. For builders the story was bloody. In Dallas,
half of them didn’t make it. But now, prices in the delayed Texas
housing bubble hit all-time highs. Builders are giddy. And cracks are
forming. Read….. “If You’re Average In This Business” You Die – Grand Homes CEO
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