DEBTOR NATION

VIDEOS

Wolf Richter On The Keiser Report
"Debtonomics and the NSA"

Wolf Richter on the Keiser Report
"Where Is The Fear"

Wolf Richter on Max Keiser's "On The Edge" 
"The Pauperization of America"

Wolf Richter on the Keiser Report
"Where the Money Goes to Die"

Clarke and Dawe: European Debt Crisis
Two favorite Australian Comedians

Clarke and Dawe: Quantitative Easing
Big industrial-strength printers, all facing the window

The Fastest Drive Ever Through San Francisco
Don't try to do this yourself
 

humanERROR - by "Frying Dutchman"
Powerful, lyrical appeal to the Japanese. Slams nuke industry, MSM, bureaucrats, and politicians.

« Are You Really Retired Just Because You Stopped Working? | Main | The Story on the Booming Auto Sales No One Is Talking About »
Wednesday
Sep112013

Housing Bubble In Full Bloom, Zany Price Increases, And Now A Sudden Slowdown

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 its earnings 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

Wolf here.  I would love to hear from you. You can send me an email to:

testosteronepit [at] gmail.com

I will post some of the comments, articles, corrections, points of contention, etc. under the tab “Readers Speak Up,” if I find them relevant, interesting, awesome, civilized, etc. Funny is always good.

- Include the title or link of the article you’re responding to.

- Let me know the name (alias is ok) under which you want me to publish your writing.

- If you have a blog, include a link (self-promotion is ok)

- I’ll try to send you confirmation once it’s published.

- If you DON’T want me to post your writing, if you want me to keep it private, please let me know!

- I will NEVER publish your email address!!!

- Spam, nonsense, hateful stuff, etc. will be deleted.

EmailEmail Article to Friend