Tag: Financial Gimmicks

The New Housing Bubble

The Daily Escape:

Shakers Creek flowing into the Mohawk River, Colonie NY – April 2021 photo by M’ke Helbing.

We’re hearing about bidding wars for single family homes, often with winning bids that are substantially above already high asking prices. In fact, house prices have risen by 11.2% from a year ago, the largest increase since housing bubble #1 in 2006, according to the National Case-Shiller Home Price Index for January.

The Home Price Index measures “house-price inflation” by comparing the sales price of a house in the current month to the price of the same house when it sold previously. It’s tracking the dollars it takes to buy the same house over time.

But house price inflation isn’t part of the Consumer Price Index (CPI). While about one-third of CPI is based on housing costs, it only tracks rents, not home prices. So, you can see what’s going on: Everybody knows that the costs of home ownership are surging, but only a portion are included in our inflation measures, so inflation is being understated.

Let’s look at the NY metro area. It covers NYC and numerous counties in the states of New York, New Jersey, and Connecticut. Here’s the spike in prices over the past six months:

House prices rose 11.2% for the year. There were big differences between price tiers, with low-end house prices surging by 14.9%, while condo prices remained in a tight range for the past three years, and the NYT reports that Manhattan condo developers are selling units at big discounts.

There’s another factor driving prices. The WSJ reports that: (brackets by Wrongo)

“From…individuals [with]a few thousand dollars to pensions and private-equity firms with billions, yield-chasing investors are snapping up single-family houses to rent out or flip. They are competing for houses with ordinary Americans, who are armed with the cheapest mortgage financing ever, and driving up home prices.”

The WSJ quotes John Burns, a real estate consultant: (emphasis by Wrongo)

“You now have permanent capital competing with a young couple trying to buy a house.” Burns estimates that in many of the nation’s top markets, roughly one in every five houses sold is bought by someone who never moves in.”

Houston is a favorite location, with investors accounting for 24% of home purchases. More from Burns: (emphasis by Wrongo)

“Limited housing supply, low rates, a global reach for yield, and what we’re calling the institutionalization of real-estate investors has set the stage for another speculative investor-driven home price bubble…”

This is the second try by institutional investors to play in the single-family home market. Starting in 2011, they bought foreclosed homes at steep discounts, accounting for about a third of sales in some markets and setting a floor for then-falling home prices.

It turned out that renting suburban homes proved very profitable. The pandemic has brought a new race for suburban housing. And the big new-home builders like DR Horton and Lennar Corp, are working directly with institutional investors. They’re building blocks of homes, and selling them to the investors, who rent them out.

Horton built 124 houses in Conroe, Texas, rented them out and then put the whole community up for sale. It was purchased by an online property-investing platform, Fundrise LLC, which manages more than $1 billion on behalf of about 150,000 individuals.

Lennar just announced a rental venture with investment firms including Allianz and Centerbridge Partners to which it will sell more than $4 billion of new houses.

This is late-stage capitalism at work. Young working couples are increasingly shut out of buying homes, and that’s both depressing and disturbing.  America has failed them. It would be helpful for families to buy homes instead of renting, and pricing families out of home ownership carries risks to a cohesive society.

And the Right wonders why young people are turning to socialism. Freezing young people out of the housing market could have disastrous social consequences.

We should have tax policies that disincentivize ownership of multiple single-family homes, especially by investment funds. The way to remedy this is to steer investors to other assets that don’t directly impact individual welfare to the same degree as housing.

Back in the 2006-2009 housing bubble, we had plenty of speculators and an excess of housing inventory. It was so bad that Wrongo’s barber owned nine rental houses in three states before the bust.

This time around, we have very low inventory, the lowest rates ever, and big money chasing yield. Once pension funds are investing in an appreciating asset class, you know the bubble is about to burst

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Will Take-Home Pay Grow?

One of the big questions that we must force Hillary Clinton and Donald Trump to address is: Where will growth in take-home income come from?

If we look at pay, despite recent improvements, real average hourly earnings have declined since the 1970s:

Real Hourly Earnings 2016

Source: Advisorperspectives.com

At the same time, the average hours per week have trended down from around 39 hours per week in the mid-1960s to a low of 33 hours at the end of the last recession. It is 33.7 hours today. After eight years of economic recovery, it is only up by 42 minutes.

So, take-home pay has stagnated (or worse) for the average American since the Nixon administration. People have coped by having both spouses work, by borrowing under a Bank of America heloc, and by refinancing mortgages when interest rates declined.

But, by 1995, spousal participation in the job market had peaked, at about 60%. Borrowing under home equity lines of credit peaked in 2005 at $364 billion. These loans that were used to pay for remodeling, education costs, or new Ford F-150s were less than half of that amount in 2015, at $150 billion.

After the Great Recession, The only remaining way to boost household cash was mortgage refinance. There were windows to refinance a mortgage in 2009, and again in 2013. The reason was that mortgage interest rates stayed very low. In fact, US 10 year treasuries were at a 60 year low in 2013 at 1.50%, and mortgage rates are tied to the treasury rate. Refinancing mortgages can happen to many people, this is where companies like Polar Mortgage come in to help homeowners out. Homeowners also have the ability to get financial help from the government through the use of federal credit union home loans in order to refinance their homes.

As an example, a 1.5% decline in a mortgage payment on a $250,000 house would save $3750 a year, or a little over $300 a month added to the pockets of the average hourly worker. Taking income tax into consideration, it would take an additional 17.5 hours of work at the $21.45 rate to equal that amount. But that’s not practical. It would require a 52% increase in hours, if you are working the national average number of hours, which isn’t going to happen.

So, if the Federal Reserve raises interest rates, as they seem set to do this month or next, mortgage refinance will no longer be helpful to the vast number of working people. CoreLogic tracks the interest rates on outstanding mortgages, collecting data from mortgage servicers. Their data track the volume of outstanding mortgages by interest rate level for both the number of mortgages, and the unpaid principal balance on those mortgages (UPB).

Their analysis says that few mortgages will be refinanced if rates go up: Most borrowers have mortgages with rates below 4.50%, with 62% of mortgages and 72% of UPB in this range. There are an additional 14% of borrowers and 13% of UPB with mortgage rates between 4.5 and 5.0%.

Since refinancing has costs (legal, title search and insurance, and points), a simple rule of thumb is to add 1% to the current mortgage rate to get a rate at which borrowers would have a financial incentive to refinance. The current Freddie Mac mortgage rate is 3.57%, so the point of indifference for a borrower would be ~4.5%. CoreLogic estimates that only about 28% of the UPB of America’s outstanding mortgage loans are worth refinancing today. And should the Fed live up to their plan, and increase rates by ½% in 2016, an additional 5.5 million borrowers will lose their incentive to refinance.

So, if mortgage rates rise in 2016 as predicted, refinancing won’t improve the financial situation for very many of us.

New Deal Democrat sees all of this and says:

So the bottom line is, we are already in a period…where real gains by average Americans won’t be available from financing gimmicks, but must come from real, actual wage growth. At the moment I see little economic or political impetus to make that happen, even though average Americans understand via their wallets the issue all too well.

We’ve killed our economy.

You’d think after 8 years where most US job growth was in part-time jobs, where hourly income is at the same level as in the Ford administration, where we have the most people ever in poverty, where student debt exceeds credit card debt and automobile debt, people would catch on.

Maybe, but not unless we demand real answers of Hillary Clinton and Donald Trump, and not let the candidates say the plan is to rearrange the deck chairs on the Titanic.

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