The Tampa Bay Times reports from Florida. “Is this a new bubble, or what? It’s easy to see how today’s housing market could trigger flashbacks to the frothy mid 2000s boom. Bidding wars are rampant, deals are quick, and investors and flippers abound. But economists say there are plenty of reasons to be skeptical that the market is blowing bubbles. ‘It’s all part of this metamorphosis from the downtrodden housing market to something that resembles normalcy again,’ University of Central Florida economist Sean Snaith said. ‘It looks like, as we’re coming out of the depths, that there’s a bubble forming, when really we’re still trying to get back to the surface.’”
“April was Tampa Bay’s busiest sales month in seven years. More than 1,500 sales so far this year sprang from contracts signed within three days or less. And buyers aren’t hesitating to pay full price. ‘It’s like the O.K. Corral. It’s like ‘06 and ‘07 all over again,’ Keller Williams agent Scott Samuels said. ‘People are just paying crazy money.’” “‘Prices seem to be being driven by something other than the fundamentals,’ like more jobs or higher wages, that traditionally steer a healthy market, senior economist Mark Vitner said. ‘I just don’t think that’s sustainable, or the kind of housing recovery we want to see.’”
“‘We’re emerging from a historical period that was rife with outliers in terms of behavior and how things were functioning,’ Snaith said, ‘and now we’re trying to transition back into something that’s closer to normal — whatever that normal might be.’” The Tampa Tribune. “One of South Tampa’s prime corners at Bayshore and Bay to Bay boulevards, will house a luxury condominium tower if a developer’s plans come together. Bill Robinson of Citivest Construction tried to develop the tower in 2008 but shelved the project amid the real estate crash. Now, he’s once again marketing a 15-story tower with high-end real estate broker Toni Everett and expects to begin recruiting buyers for presales shortly, Robinson said.”
“Everett said the proposed tower will have 32 units, floor plans from 2,600 to 3,500 square feet and floor-to-ceiling glass offering views of downtown and Tampa Bay. Prices will be ‘north of a half-million, easily,’ Robinson said.” The Sun Sentinel. “The housing market has soared past recovery and is bearing down on chaos. Buyers in control during the bust now are on the defensive, racing from home to home and making offers on the spot before somebody else swoops in with a better deal. The insanity has even created a new sales category of sorts: Flash sales. It’s a home that gets listed in the morning, and is under contract by nightfall. ‘We’re literally running to houses and as soon as you get there, there are three other people,’ said Terry Story of Coldwell Banker in Boca Raton. ‘Buyers are very anxious to get something quickly.’”
“In the past week, rates have inched up to over 4 percent, which will cause even more people to jump into the market, said Jim Heidisch, broker at Campbell & Rosemurgy in Deerfield Beach. ‘There’s a sense of urgency,’ he said. ‘I always tell people, ‘You’re not buying a house, you’re buying money, and you want to get the cheapest rate you can.’” “Pembroke Pines resident Angela Medina and her husband were driving north to look at two homes in Palm Beach County when her smartphone buzzed with a text alert about a three-bedroom home that had just been listed in Palm Beach Gardens. The couple toured it, made an offer and signed the contract, all within 24 hours. The sale of the Medina’s own four-bedroom Pines property went the same way. It was listed and under contract in one day. Both deals are scheduled to close July 1. ‘From the time it hit my phone to the time we saw it, maybe an hour passed,’ said Medina. ‘You’ve got to be proactive.’”
The Miami Herald. “Property values in Miami-Dade County rose for the second year in a row – welcome news for South Florida municipalities, which derive much of their revenue from property taxes. ‘It’s a good thing for anybody in government,’ Miami City Manager Johnny Martinez said.” “Jack McCabe, a housing analyst in Deerfield Beach, said he saw property values rise across the board, partly because hedge funds were eager to invest in real estate. ‘While the rate of appreciation is coming to a more historical norm, the forces driving it are entirely different,’ McCabe said. ‘It’s not individual owner-occupiers buying homes to live in. It’s corporations buying homes to rent out to people.’” “‘The big question is, how long is it going to last?’ said McCabe. ‘There are some people who believe that we may see these price increases for the next three to five years – and then interest rates are going to sky rocket, the hedge funds will start selling off their acquisitions, and we may have something similar to last decades. This could be the start of another bubble.’”
The News Press. “Southwest Florida housing markets may be in danger of going through another boom-and-bust cycle because of the Federal Reserve’s loose money policy and overly lax bank capitalization rules, according to the former Federal Deposit Insurance Corp. chairman. ‘South Florida’s starting to look a little frothy’ as low interest rates tempt investors to overvalue assets such as real estate, Sheila Bair warned in the keynote address to the Urban Land Institute Florida Forum in Naples.” “Bill Valenti, executive VP for IberiaBank’s Lee County operations, said he agrees that in Southwest Florida, ‘Cheap money is still in play. I think people think prices are right, but they’re going to go up. People are in a rush to invest.’”
CBS Miami. “Checks for thousands of Florida foreclosure victims will finally be going out next week, with hundreds of millions of dollars more earmarked for new housing programs statewide. But there’s a growing debate on where most of the money’s going and if foreclosure victims are really getting their fair share. Some of the money was used by the banks themselves to lower their customers’ monthly payments.” “Weston foreclosure defense attorney Roy Oppenheim said millions will be going to the courts, and will actually help speed up future foreclosures statewide. ‘A lot of money’s going to the court administrative process to speed the foreclosure process even more, to fund the rocket dockets. It’s a complete and utter joke,’ said Oppenheim.”
The Herald Tribune. “The American dream of owning a home is slowly fading across the country, as a growing demographic of young families opts to rent either out of necessity or by choice to avoid the headache of a mortgage. The generation grew up seeing parents fight over a suffocating home loan, with hopes the equity would one day finance a retirement, and seeing the disappointment as those hopes never panned out. They have seen real estate values climb to historic heights in 2006, and then swiftly crumble two years later, sending shock waves through the economy.” “‘The real estate industry wants us to think the American dream starts with homeownership, and the baby boomers bought into that,’ said Patrick Bet-David, a real estate author and CEO of the financial services firm PHP Agency. ‘But the reality is that owning a home is not the American dream. It is just $400,000 worth of debt. Now we’re seeing the repercussions from it.’”
“The rate of homeownership among Americans has slowly declined since the onset of the Great Recession, slipping to 65 percent in the first quarter — the lowest ratio since 1995, according to recent data from the U.S. Census Bureau. Recent troubles in the real estate market, and new increases in home prices that stir fears of another bubble, have fewer potential buyers willing to take on the risk.” “The slide has been especially prevalent among young families and consumers aged 35 to 44 — a group that has seen a homeownership rate decline of 8.2 percentage points since 2007. That is the sharpest fall of any demographic, Census figures show. ‘I constantly see young families who used to own homes and now they’re choosing to rent,’ said Laurie Rastovski, a rental agent with Michael Saunders & Co. ‘For a lot of them, it’s because they just can’t afford to own.’”
“Since last fall, the foreclosure market has been dominated by institutional investors — such as Wall Street’s Blackstone Group and Colony Financial — which have been buying up distressed homes on the auction block for use as rentals. That trend, too, has made homeownership less obtainable for the average Floridian by taking inventory off the market and pushing prices higher, said Jack McCabe, a real consultant in Deerfield Beach.” “‘There’s a paradigm shift in the market right now, where homeownership is shrinking and rental activity is on the rise,’ McCabe said. ‘The number of full-time owner-occupiers buying homes is actually going down. Many young families have seen their parents and grandparents lose their retirement or inheritance from a house, and they don’t want to deal with that.’”
Bill Kamka retired to Sarasota in April with his wife, Mary. The 69-year-old entrepreneur from a suburb of Chicago was not so sure about the housing market. Kamka sold his house in Illinois for $100,000 less than what it was worth just a couple years earlier. He shopped around Lakewood Ranch for a retirement home, but with that loss still fresh on his mind, he opted to rent in Palm-Aire instead of purchasing quite yet. But he does not rule out the idea of becoming a future homeowner. “‘Why rush?’ Kamka said. ‘We love the home we’re in.’” SOURCE
The Case Shiller data is showing a steady increase in home prices across the United States. The headline figures are clear but rarely make the connection that much of this gain is coming on the back of unprecedented Federal Reserve intervention. Data is clear that household income is not making any significant gains. These gains are coming largely from added leverage produced by lower mortgage rates. We’ll go into the details on this but you will see how a tiny drop in mortgage rates can supercharge home prices especially in a market where inventory is tightly managed as the year comes to a close. The Case Shiller is a better measure of home prices because it looks at repeat home sales. Yet even here we are seeing signs of bubble like activity in a handful of markets. An echo housing bubble is a possibility in many markets.
Echo housing bubbles
The Case Shiller figures reveal some strong gains in certain areas. Let us take a look:
Phoenix is an interesting case because since the bubble first burst, it has been a market dominated by investor money. The first boom was brought on by easy money in the initial round of the housing bubble. Prices collapsed but big investor money has flowed into the market pushing home prices up 21 percent in the last year as measured by the Case Shiller. This is interesting because Arizona household income is actually down 13 percent from the peak in 2007:
So doesn’t it seem odd that home prices suddenly shot up 21 percent in the last year when incomes have actually gone down? Of course much of the activity is coming from investment funds and investors. About 40 percent of all buyers in Phoenix last month were investors. Other places like Miami and Las Vegas are seeing similar trends. That is, local households have seen their income fall yet home prices are now rising sharply courtesy of external forces. The Fed with low interest rates has pushed big money to flow out of the banks to chase yield in real estate. It is ironic that Wall Street that typically looked down on being a landlord is now very much in the game.
You’ll also notice big jumps in California home prices. Again, the push is coming from all other sources except strong household income growth. There are those naïve and wedded to this new housing bubble that they are using the same denial tactics used during the first housing bubble. Some have even claimed incomes are going up! Let us look at the data:
That does not look like rising household incomes. Yet a good number of buyers are foreign buyers; in some markets like in California many are from China. So these figures do not hamper their buying ability. Wall Street money is still chasing yield and we have our hipster flippers back at it once again. Yet these rapid gains in price are unsustainable without real household income gains. Even the 4.3 percent gain across the US is merely a reflection of the tight inventory and Fed pressure on the 30 year fixed rate mortgage. But the Fed is now pushing at a $3 trillion balance sheet and we are already seeing leakage into other financed markets like higher education where easy access to debt is making costs soar. So what about the future home buyers that are now saddled with massive college debt? Interestingly enough college debt is much more expensive than mortgage debt which is an indication of our current priorities as a nation. After all, if we are targeting specific sectors for specialized low rate privileges why not target a sector that will education our future citizens? Then again, why not allow every American direct access to zero percent loans for anything they would like to purchase? This is the kind of logic some people will use to justify artificial low rates.
It might help to illustrate what has happened in the last year with an already low mortgage rate:
In the last year, the Fed has pushed rates from 4 percent to 3.3 percent. Big deal you might say but look at what it does in terms of price:
$500,000 mortgage @ 4%
PI = $2,387
$500,000 mortgage @ 3.3%
PI = $2,189
$545,000 mortgage @ 3.3%
PI = $2,387
In other words, the person qualifying for only $2,387 a month last year can now take on $45,000 more for the same monthly payment. People blindly think this is coming for free or have a religious like veneration of the Fed. Keep in mind the Fed is the reason we had the first housing bubble by not doing their job of monitoring member banks and stoking the flames of the mania by lowering rates. In the rubble of 5 million foreclosures, some seem to forget history. The Fed will now have to do everything it can to keep rates low but look at our current government and the current fiscal issues they are unable to resolve. Step back for a second and think reasonably here. We are spending more than we are taking in. That is simply a fact. If we enjoy the current level of services, guess what? You need to pay for it. If we don’t, then we need to cut. Seems reasonable enough but of course, the government is largely controlled by big interests and wants it both ways. That is why we are here only a few days away from the New Year with no plan on the table. It is likely a last second plan will emerge but will be a half-baked can kicking exercise that we have grown accustomed to.
Anyone bothering to read the details of what is being discussed realizes that once sacred items like the mortgage interest deduction or Prop 13 are now fully on the table. At the very least, major modifications will be coming down the road. I recently was seeing talk about doing away with 401k tax benefits. When you have many that are struggling the smoke and mirrors of increasing housing prices is simply a way of keeping banks from dealing with the ramifications from the housing bubble bursting in the first place. Who is really benefitting here? I’ve gotten countless e-mails from people being outbid for homes that they would like to purchase to live in and start a family because a flipper or a big Wall Street fund is seeking a better yield got their first. This is a modern problem in our housing market. Remember Paulson on his knees begging Congress for the banking bailouts to help the working and middle class? So much for that because many of these same banks are offloading properties to other financial institutions so they can jack prices up and rent them out or flip them to Americans that actually bailed out the financial sector in the first place. Higher home prices do very little good if incomes are not rising. That was lesson number one from the first housing bubble.
The Fed is picking winners and losers. One lesson you quickly learn in real estate is you do not have a win until you close escrow and a check is in your hands. Like all those that had paper gains in the first bubble, many tapped equity out and many did not sell at the peak. Why? It is hard to time manipulated markets but also, many wanted to sell and cash out and buy a larger (more expensive) place. In higher cost areas it is rare to see someone buy and then downsize. So this time around, unless you stay put for longer than the average five to seven years, you better hope the magic tricks of the Fed are still going on deep into the future. Seven years ago we were still in the mania of the first housing bubble and five years ago we were barely entering the recession. A lot will happen in that next timeframe but human behavior will not change in such a short duration. In the mean time, enjoy the echo housing bubble. SOURCE
Nationwide the amount of homes available for sale is increasing spurred on by rising home prices and the healthy rise in home values. Yet many areas in California were still in a severe drought when it came to the amount of inventory available for sale. The rise in inventory started late last year nationwide but we are now seeing it in certain areas in California. Even in sought after areas like Irvine the amount of inventory has picked up. At a certain point the market will return and the current mania is making some reluctant sellers come out of the woodwork to offer their goods to the highest bidder. Home prices in areas like Irvine have gone up significantly and many are now being enticed to sell. At the same time, Americans are back to their non-saving ways so the current market seems uniquely familiar. Let us take a look at some of the inventory coming back into the market.
Irvine sees a surge in inventory
From early 2011 to March of 2013 inventory only went in one direction:
The number of homes available for sale virtually disappeared from the map in many prime areas of Southern California. Typically, inventory picks up in the spring in anticipation for the upcoming selling season. But for nearly two years this entire trend was bucked. That is why the recent surge is worth noting. Inventory in Irvine is up 88 percent from the low in March nearly doubling the number of homes on the market available for sale. Is this a turning point for low supply? Hard to say but what is certain is that more inventory is being added into the market and this was something missing for 1.5 years.
According to Zillow home prices in Irvine are up 22 percent over the last year and are approaching their peak levels from 2006. The bust of the housing bubble is still fresh in the minds of many. Could it be that many potential sellers are remembering a little bit of history and are trying to get out while the market is blistering hot? The Irvine market is manic at the moment with local families, foreign money, and big pocket investors vying for the same properties. All of this with low interest rates makes the current jump in inventory all the more fascinating.
Americans overall are back to their non-saving ways:
The personal savings rate is 2.5 percent near all-time record lows. Even in California, higher incomes are spent on more expensive living. The cost of living eats away the paycheck of many professionals. Bigger mortgages and bigger leases. In Irvine the Zillow Home Index prices a regular single family home near $700,000. That is near the 2006 peak. The best selling month in Irvine was in 2005 when 629 homes were sold. Last month, a solid sales month 258 homes were sold.
It is hard to parcel out the investor share in one specific city. We do know however that last month 33 percent of buyers paid all cash for their home purchase in SoCal. This is much higher than the typical range of 10 to 15 percent. Foreign money is a big player in this region.
Is this trend happening in other prime areas like Pasadena?
Inventory in Pasadena is up 28 percent from March. Certainly not at the pace of Irvine but a similar thing might be emerging (certainly nationwide). It looks like we reached an inventory bottom. The fact that lower interest rates provide major leverage is not lost on many:
Source: Slate
So you can understand why the recent rise in interest rates might be troubling for the housing sector especially in very expensive California. You have to ask yourself why is there a sudden addition of inventory to prime markets like Irvine. It isn’t for the lack of people wanting to live there. Could it be the 22 percent rise in home prices in one year and that it is nearing record levels? Or is it the fact that prices are out of reach for many of the local families trying to compete with investor money both locally and abroad?
A more balanced market is better for all concerned. No one wants to live in a market where housing prices are imploding one minute and sellers are begging for buyers or surging in a manic manner causing people to grovel at open houses. A feast or famine real estate market is not a healthy environment. Instead of financial institutions seeking out the next innovative idea or breakthrough in medical science to fund, hot money is trying to crowd out local families for a quick flip or a rental. Not exactly the best way to create a robust economy. The silver lining does appear to be that inventory is creeping back into the market and this is very necessary. SOURCE
It is no secret that investors are pouring money into the real estate game. What is interesting is the kinds of investments being taken on are highlighting a bolder more aggressive approach. For example we are seeing more money flowing into flips in Southern California since rentals are unlikely to cash flow in many prime areas of Los Angeles and Orange County. The appreciation trade is back on. With supply at record lows and sentiment near a point of giddiness, money is being made in many different ways. Early on many of the flips we were seeing involved very minor cosmetic work and most of the gains were made on the low purchase price. Today, some flippers are doing some major work and are going for giant gains. Let us take a look at a potential flip in Boyle Heights.
The Boyle Heights Flip
One of the great things about Google Maps is that you can take a look at a property prior to any work being done. Google Maps only updates at longer intervals so you can see older pictures. Let us first take a look at this Boyle Heights flip:
Not exactly a home that will pop up on Lifestyles of the Rich and Famous but someone was able to snag a deal on this place last year for $94,000. Nice touch with the three stacked tires in the front sidewalk. Some major work was done on this place:
748 South MOTT St
Los Angeles, CA 90023
Beds: 4
Baths: 2
Square feet: 1,281
Clearly some investor put in a lot of work here since the place is not even recognizable anymore. Let us take a look at the current listing for the place:
“Completely remodeled house – the entire property was down to the studs. This home is 95%+ new. Completely new plumbing (including water main from the street), new electrical, new flooring, walls, windows, cabinetry, even a car port – everything! An additional 499 sq ft was legally added with permits to bring the sq ft to almost 1300. Master bed has a large walk in closet that is approximately 6 x 10. Close to transportation, downtown and schools. Must see to appreciate.”
The original place was built in 1917 and from the first picture, it doesn’t look like much work had been done prior to the purchase last year. If they legally added 499 square feet the original place only had 782 square feet. What is interesting is the big gamble being taken on this place since clearly a good amount of money went into this investment. Let us take a look at the sales history here:
The current list price is $315,000. Do you think $221,000 in value was added over the last few months? Hard to say but the fact that this kind of investment is being made in Boyle Heights is showing that investor money is flowing to all areas of Los Angeles. It’ll be interesting to see what the eventual sales price on this place ends up being. $315,000 is nothing to sneeze at here. Local area 2 bedroom rentals go for $1,000 to $1,200 in this market.
What I do find fascinating is the willingness for many flippers to go after these kinds of deals. Only the investors really know how much money was sunk into this deal and how much of a buffer they have to play with here. At $315,000 there is definitely a lot of profit to be had. The question is, will someone bite at this price point? The reemergence of the flip for appreciation was a hallmark of all the SoCal flipping shows where buying and flipping was done into a momentum of manic euphoria. If you read many of the housing forums people seem to think that they missed the boat on the true and final bottom and now must capitulate and do whatever it takes to buy in this current market.
Having lived through the booms and busts of California, it appears that short-term memories are abundant and real estate reaches deep into our emotional core. I’ve started seeing ads connecting family “wellness” with purchasing a home. I was wondering how long it would take to start seeing these. Yet these are still rare given that sales volume is still low in comparison to the former boom days. Are you seeing more flips in certain neighborhoods? Do you think this place will fetch the asking price? SOURCE
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