IS THE BUBBLE BACK?
8 October 2009 by Cullen Roche
18 Comments
Many of you probably saw this over at Calculated Risk, but it hit me like a ton of bricks. People are buying homes in Southern CA for 20% more than they did just a few months ago….Has Ben created a bubble in record time?
* Thanks to CR
TPC,
20% more is surprisingly high! I know that the inventory has been kept artificially low for months and buyers are rushing to cash in on the $8K by overbidding on a lot of houses, but I had no idea the prices have heated up this much already. I just had dinner with a friend of mine last night. Her sister bought a condo just two streets from me, which closed last week at $480K. They didn’t want to miss out on Uncle Ben’s free gift. The house was appraised at $450K but since there were multiple bids they had to raise the offer. Another friend of mine cashed in on her $8K this past April. Her REO condo closed at $111K (can be rented out for at least $1250/mo) and is now at $126K. Not too shabby for her investment. Maybe I should sell my house now.
Same thing here in North CA. (crazy Bay Area). People are rushing to buy houses below 800K, some just pay it with cash. When I visited open house, I also see “investor groups” to buy house as investment property. The house price is still below the peak price by 10 to 20% roughly.
On the inventory, I have a realtor friend told me that the banks are sitting on a lot of REO and not releasing them to the market in hope for a better price later.
TPC, are you still in the deflationary camp? Ben is pushing hard on the reflation, I think.
Thanks,
C
Crazy isn’t it? The government offers you 8K to buy a 400K house (that’s a whopping 2% of the total cost) and the buyers act like they’ve won the lottery or something. This housing credit is almost as bad as cash for clunkers.
I also want to add: what happened to tight credit, banks not lending, unemployment, credit defaults, and those millions strapped for cash? Apparently millions are able to purchase homes and get the loans to finance the overbid deals. I don’t see these people hurting for cash. Granted the houses are a lot cheaper than 3 years ago. My landscaper tells me his business is much better than last year. He went shopping for some furniture this past weekend and reported that tons of people are buying. This was to counter my pessimistic view of the economy. He is seeing the opposite. I guess all those who bought homes now need to furnish and landscape their backyards. These anecdotes seem to coincide with the improved consumer/retail reports, home price index, pending/new home sales, and construction.
@BGray: So your friend’s sister overpaid by $30k to get an $8k credit? That makes perfect sense. Also, what bank approved a purchase price $30k over the appraisal?
Lula,
I believe deflation has a long-term hold on the economy. It is not as strong as it was last year (due to money printing), but I don’t believe the Fed can reflate us back to full health. At some point we have to pay the piper and pay down the massive debts. That will be a deflationary process. All Ben is doing is prolonging the inevitable and reflating a bubble that is guaranteed to burst again.
TK,
The more important question is – what bank WOULDN’T approve a price $30K over the appraisal? Everyone thinks things have changed, but the regulatory environment and the banks haven’t change one iota. We’re right back to 2007….
lulala,
Apparently there is a lot of cash sitting on the sidelines. I’ve heard that droves of Chinese and other wealthy Asians are coming in just buying up houses with cash. They all want fast close and no financing. Some of my wealthy friends are considering putting money into buying investment properties. In the end, the rent can provide the means to meet living expenses in their retirement age. They’ve been burned a couple of times in the stock market so they no longer trust the stock market.
It is indeed crazy. In some cases, house buyers are like sharks that taste blood in the water again, start bidding the house price up and higher, but it is not as bad as in 2006/7. I think many people in the Bay Area has been waiting for the 10 to 20% down for years and are afraid it would disappear in a blink. To me, I think they are catching a falling knife. Time will tell.
One thing for sure is that tighter lending standard does keep unqualified people off the market, that is a good thing.
They will get burned again in RE. The laws of supply and demand simply don’t add up. The income growth does not support even the current housing prices in most cities….
TPC,
Totally agree. There is another bubble symptom.. I heard several people talking about how they made money by taking HELOC money in March and buying stocks. The “get rich” story is attracting a lot of their friends to put money in the stock market.
BGary, indeed, a lot of hot money are sloshing around in the system. I for one will be buying a residential when the price is right, I have been renting for 5 years and I do believe patience will finally pay off.
C
Maybe the money came from gains in the stock market and they took their profits and want to put it into something that at least is better than stocks..which is real estate. I would rather put it in foreign securities since at least their FX should hold up.
As for the reason to bid up a house (say 10k) just to take advantage of the 8k credit…thats doesnt make sense at all. I guess fools do rush in.
i’m with you tpc. note jim the realtor’s emphasis on cash buyers.
i’m sure the tax credit is helping, as an $8k tax credit is a relief of $8k of capital, which can be levered into (especially with a 3% FHA loan) a whole hell of a lot of borrowing power.
but this seems to be driven by investment cash at the low-to-mid tier of the market. not just for renting — i’m sure many see this as an epic buy-low opportunity which they will be able to offload into a pending recovery at a handsome annualized profit. being unlevered, they have huge staying power.
these are also the first people into any housing bust, and they — like any eager speculator — often get waxed. the fact that the speculative housing mentality is clearly still there might be a tell. but the pervasive supply issue with homes — which is still worsening! — likely means this is a false dawn.
something rather like this apparently happened in japan in 1996. foreign buyers joined domestic cash investors to plunge into residental urban realty following the initial crash because positive carry (ie price-to-rent) had become compelling. it looked like the economy had turned and with it asset prices.
then the hashimoto government in 1997 put an end to fiscal stimulus in the name of inflation fears and fiscal prudence. even though BoJ zero policy rates remained, residential property proceeded to collapse another 55% from 1996 values through 2003.
people forget the power of compounding on the way up AND the way down. a 75% decline is really two 50% declines strung together — or three 37% declines. just because you’re down doesn’t mean the water is now safe.
i’ve had in the back of my head for years now john templeton’s quote from his 2003 interview with equities magazine when all this was still on the way up:
“After home prices go down to one-tenth of the highest price homeowners paid, then buy.”
90% down is a series of three consecutive 55% drops, or four consecutive 45% drops. think for a moment about the kind of investment cash such a drop can consume and annihilate.
this might be just the first of a diminishing series of waves of investment cash into housing.
gaius
Well put. My thoughts exactly. The govt manipulations and subsidization is skewing markets once again and will only lead to tears. I also thought of the housing market in Japan after the bubble burst, on the way down. These people are likely to have their clocks cleaned before this thing is over with. They just don’t understand the forces at work here and that once the govt support is withdrawn (as it has to be eventually) it will implode again because the deleveraging will continue. Another analogy is the stock market in Japan and in ’29-’32. Even if they missed the crash those who tried to buy on the dips were crushed before it was all said and done.
We’re on the same page Gaius….
I guess you all have read that congress may extend tax credits for first-time buyers. If this government were half as good in creating jobs as they are in creating bubbles there woudn´t be any unemployment.
By the way do anyone have a link to a good article of The recession of 1920–21?
You are all smart people.
But Gov will try everything to keep houses from falling big again.
Don’t fight the Gov.
It always amaze me when these scams continue to work. In order to take advantage of 8K incentive, people forget that they can buy the same house for 20K less couple months ago. It’s like people would go into Circuit city and buy a TV with a sign that says 20% off when the discounted price is much more than what they can get a week prior. Nobody is doing the math anymore???