More Stupid Money in Housing

Fritz Pfister
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Posted: May 31, 2013 12:01 AM

From the Wall Street Journal May 28: NEW YORK — The dizzying 2013 stock market rally was reignited Tuesday by multiyear highs in home prices and consumer confidence, a sign the four-year bull run reflects a healing economy and not just the Federal Reserve’s easy-money policies.

Either investors are looking for any excuse to buy or they aren’t looking deep enough into the cause for rising home prices and consumer confidence.

Sure everyone was giddy over the Case Shiller index reporting their 20 city price index was up 10.9% in March. That is good news on the surface, however is this sustainable?

The answer may come from ZeroHedge who posted this from the Fitch: “the recent home price gains recorded in several residential markets are outpacing improvements in fundamentals and could stall or possibly reverse.” Simply put, “demand is artificially high… and supply is artificially low.”

A theme presented here over the preceding year and a half. Demand coming from manipulated interest rates drawing pent up demand to market, investors looking for higher rates of return, and foreclosures being withheld from the supply.

While prices were down hedge funds jumped into the market for greater returns as rental prices were rising. Now that home prices have risen that investment is losing appeal with major players dropping out in May.

CEO Bruce Rose of Carrington one of the first major players in have dropped out saying: “We just don’t see the returns there that are adequate to incentivize us to continue to invest“. He continued: “There’s a lot of — bluntly — stupid money that jumped into the tradewithout any infrastructure, without any real capabilities and a kind of build-it-as-you-go mentality that we think is somewhat irresponsible.”

In California flipping has returned to the highest level since 2005. This is fueling another bubble that can easily pop when you consider Fitch’s analysis: in Los Angeles, prices are up more than 10% in the past year despite a stubborn unemployment rate that remains above 10% and real incomes that have declined over the past two years. Prices are now more than 75% above pre-2000 levels.

In other words there’s no there there. Easy money chasing returns.

More evidence of the major role investors is playing in the housing market came from Lawrence Yun chief economist for the National Association of Realtors who reported that 30% of all sales were cash in April. Who has more cash? Investors or your average middle class family shopping for a home?

If more groups like Carrigan withdraw from the market, and other major players like Blackstone stop their purchases as they report major renovations are still underway with 51% of their purchases remaining unrented, one third of the sales driving the market would be in jeopardy.

Another ominous sign is mortgage applications. ZeroHedge reported again this week that mortgage applications continue to fall saying: The year-to-date shift in mortgage applications is now the worst since 2009 and the divergence between home sales and application for a mortgage is growing wider every week.

The obvious divergence is due to the cash purchases by investors. If Joe Six Pack isn’t applying for mortgages with major investors ending their purchases, we may know the tale of the housing market for 2013 by the third quarter.

Should the number of home sales begin to decline then the faith investors placed in the consumer confidence rating will also have proven a false positive.

Mainstream media were beside themselves reporting Consumer Confidence had unexpectedly jumped to 76.2 in May on expectations of 71 up from a revised 69 in April. Good news certainly, but again; is it real, or sustainable?

Pray tell what could have caused consumers to suddenly have this burst of positive future expectations? Are wages up? Are jobs being created in droves? Is an average price for a gallon of gas at $3.62 inspiring? Are record high beef prices encouraging? Are the 23% increased health insurance premiums bringing them joy?

We have seen this act before. Confidence has been up and down like a hard headed blind boxer not knowing where to go, or where the next punch is coming from.

This might be a reason for the unexpected rise in confidence; after Obama said he was focusing like a laser on jobs again, he became distracted with the IRS, AP, Rosen, Fox News, and Benghazi scandals. People know the more Obama leaves jobs alone the better chance they have for jobs.

All I have to say to those investors driving the stock market based upon rising home prices and consumer confidence is; good luck with that.

The opinions expressed here are solely those of Fritz Pfister or identified sources, and not necessarily those of RE/MAX Professionals of Springfield or RE/MAX International.