Here are a few headlines you might want to mull-over before you plunk 20 percent down on that $500,000 Tudor in Rancho Mirage:
"Mortgage Applications Drop for Seventh Straight Week," "Homeownership slides to 18 year low," "Investors start to move out of housing," "Sellers Worry Rising Rates Will Lower Demand," "PE Scrambles To Exit Housing Market," "Higher mortgage rates lead to softer home demand, Beazer exec says."
Of course, all you're reading is stories about the 12.2% year-over-year price surge that's started the buzz about the next housing bubble. And it's true too, housing prices have gone up. Financial manipulation and corporate propaganda DO work, even in an no-growth, high unemployment economy where half the college graduates under 30 are shackled to loans they'll never repay, where one-in-six people scrape by on food stamps, and where "four out of 5 U.S. adults struggle with joblessness, near-poverty or reliance on welfare for at least parts of their lives." (AP News) Hurrah, for the American Dream! Hurrah, for propaganda!
So, what is the truth about housing, aside from the fact that the fundamentals (wage growth and low unemployment) are weak, weak, weak?
Conditions in the US housing market are rapidly deteriorating. Mortgage applications dropped for the seventh week straight while refinance activity is down 57% from its peak. Refis are now at a two-year low having slipped another 4 percent in the last week in July. The rate-sensitive housing industry has been pummeled by the Fed's announcement in June that it planned to scale back its asset purchases (QE) by the end of the 2013 ending the program sometime in 2014. The announcement triggered a sharp sell-off of US Treasuries which pushed mortgage rates more than a full percentage point higher in less than a month. The 30-year "fixed" mortgage rate is now 4.58 percent, a mere 10 basis points below a two-year high hit earlier in July. The higher rates have dampened demand by prospective buyers who have decided to either hold off on their purchase or abandon their search for a home altogether. Either way, fewer mortgage apps mean reduced sales in the months ahead. If sales fall, prices will follow.
Droopy mortgage apps is just one of many headwinds facing today's Potemkin housing market. There's also shadow inventory, the 5 million-plus homes that are not presently listed on the MLS, but are expected to enter foreclosure sometime in the next few years. Millions of homeowners have been living for 3 years or more without making a mortgage payment. The banks have slowed the process to stem their losses on non performing loans and to conceal the condition of the bulging ("overbuilt") market from the public. According to Census data released last week, the number of homes that are currently vacant and being held off market is LARGER NOW than 2009, the year financial system collapsed. The nation's largest lenders have been assisted in their game of hide-n-seek by the compliant Fed and the other regulator-accomplices who simply look the other way. The banks have been able to report record profits even though a sizable portion of their asset base has lost 40 percent or more of its original value leaving their balance sheets deep in the red. (If the assets were marked to market, which they aren't!)
Another headwind facing housing: First-time homebuyers. Check this out from the Wall Street Journal:
"First-time home buyers, long a key underpinning of the housing market, are increasingly getting left behind in the real-estate recovery.
"Such buyers, typically couples in their late 20s or early 30s, have accounted for about 30% of home sales over the past year. They represented 40% of sales, on average, over the past 30 years, and accounted for more than 50% in 2009, when recession-era tax credits fueled the first-time market, according to data from the National Association of Realtors.
"'First-time buyers are important to get the housing market to move to a new plateau,' said Steven Ricchiuto, chief economist with Mizuho Securities USA Inc. 'Without them, you just get stuck at a marginal recovery environment.'
"In June, first-time buyers accounted for 29% of purchases of existing homes, compared with 32% in June a year ago, according to the NAR's June existing home-sales report released Monday.
"FHBs, along with investors, are key sources of new housing demand and chief enablers of the upgrader market, since upgraders typically sell to FHBs or investors. If demand from FHBs is restrained, then logically it could have flow-on effects up the chain, potentially stifling the housing recovery." ("Housing Recovery Increasingly Prices Out First-Time Buyers," Wall Street Journal)
First-time home buyers are scarce because the economy stinks. Wages are falling, unemployment is high, and 40 percent of traditional FHB's are so loaded with debt from student loans they'll never enter the middle class. The fundamentals which supported strong housing markets of the past no longer exist. You can't buy a house with paycheck from Burger King. It's that simple. The upward redistribution of wealth has widened the chasm between the nation's rich and poor which has weakened demand creating conditions for a long-term and irreversible slump. Here's a clip from the New York Times which explains what's going on:
"Wages have fallen to a record low as a share of America's gross domestic product. Until 1975, wages nearly always accounted for more than 50 percent of the nation's G.D.P., but last year wages fell to a record low of 43.5 percent. Since 2001, when the wage share was 49 percent, there has been a steep slide.
"'We went almost a century where the labor share was pretty stable and we shared prosperity,' says Lawrence Katz, a labor economist at Harvard. 'What we're seeing now is very disquieting.' For the great bulk of workers, labor's shrinking share is even worse than the statistics show, when one considers that a sizable -- and growing -- chunk of overall wages goes to the top 1 percent: senior corporate executives, Wall Street professionals, Hollywood stars, pop singers and professional athletes.