The Fed Helped Create Housing Bubble I And Then Helped Create Housing Bubble II: The Sequel (Case Study Of Phoenix AZ Home Price Bubble)

Phil Hall of Benzinga wrote a series of excellent articles in four parts for MortgageOrb (although “The Orb” has removed his name). Here are the links to his stories.

After re-reading these excellent articles on the housing bubble and crash, I thought I would take the opportunity to present a few charts to highlight the housing bubble, pre-crash and post-crash.

Here is a graph of Phoenix AZ home prices. Note the bubble that peaked in mid 2006. The Phoenix bubble correlates with the large volume of sub-620 FICO lending and Adjustable-rate mortgage (ARM) lending. Bear in mind, many of the ARMs prior to 2010 were NINJA (no income, no job) ARM loans.

What happened? Serious delinquenices at the national levels spiked as The Great Recession set in and unemployment spiked.

Since the housing bubble burst and surge in serious mortgage delinquencies, The Federal Reserve entered the economy with a vengeance. And have never left, and increased their drowning of markets with liquidity.

The Fed whip-sawing of interest rates in response to the 2001 recession was certainly a problem. They dropped The Fed Funds Target rate like a rock, then homebuilding went wild nationally and home prices soared thanks to Alt-A (NINJA) and ARM lending. But now The Fed is dominating markets like a gigantic T-Rex.

Oddly, then Fed Chair Ben Bernanke never saw the bubble coming. Or the burst.

Speaking of pizza, Donato’s from Columbus Ohio is my favorite. Founder’s Favorite is my favorite, but they do offer the dreaded Hawaiian pizza (ham, pineapple, almonds and … cinnamon?)

Bleech!

New Home Sales Beat Expectations As Median Prices Soar 20.1% YoY (Green Man!)

New Home Sales beat expectations thanks to the massive monetary stimulus in the system that The “Hawkish” Fed seems to not want to withdraw. Aka, Greenman!

(Bloomberg) — Aug. new home sales rose 1.5% to 740,000 annual rate
Forecast range 650k-784k from 60 estimates, median 715k
New home sales rose 11k in Aug. from prior month, the Census Bureau said
Median new home price rose 20.1% y/y to $390,900; average selling price at $443,200
New home sales on pace for 842k this year compared to a 2020 total of 822k
Houses for sale in Aug. rose 3.3% m/m to 378,000
Months’ supply at 6.1 in Aug. compared to 6.0 prior month
The Commerce Department is 90 percent confident that new residential sales were between 644,540 and 835,460.

Greenman!

US Homeowner Equity Surged +29.3% YoY (California The Biggest Gainer) Thanks Mostly To Federal Reserve

Since Q2 2020, US homeowners have been big winners in terms of home price gains and equity in their homes. Unfortunately, this means that renters are big losers. Once again, The Federal Reserve is benefiting once segment of the population while punishing the other segment.

Homeowner Equity Q2 2021

CoreLogic analysis shows U.S. homeowners with mortgages (roughly 63% of all properties*) have seen their equity increase by a total of nearly $2.9 trillion since the second quarter of 2020, an increase of 29.3% year over year.

*Homeownership mortgage source: 2016 American Community Survey.

National Homeowner Equity

In the second quarter of 2021, the average homeowner gained approximately $51,500 in equity during the past year.

California, Washington, and Idaho experienced the largest average equity gains at $116,300, $102,900 and $97,000 respectively. Meanwhile, North Dakota experienced the lowest average equity gain in the second quarter of 2021 at $10,600.

Figure 4 National Homeowner Equity Average Equity Gain

10 Select Metros Change

CoreLogic provides homeowner equity data at the metropolitan level, in this graphic 10 of the largest cities, by housing stock are depicted.

Negative equity has seen a recent decrease across the country. San Francisco-Redwood City-South San Francisco, CA, is the least challenged, with Negative Equity Share of all mortgages at 0.6%.

Loan-to-Value Ratio (LTV)

The graph represents National Homeowner Equity Distribution across multiple LTV Segments.

Figure 6 National Homeowner Equity Loan-to-Value Ratio

Since growing home equity lead to lower default risk (or at least losses to the mortgage holder), we are seeing mortgage delinquencies fall after the Covid surge.

Of the top ten cities, Chicago leads in negative equity.

Maybe Fed Chair Jerome Powell is trying to soothe us, like Sam and Dave.

Hold That Tiger! US Existing Home Sales Decline As Prices Soar Thanks To Limited Inventory And Fed Stimulus

I certainly hope The Federal Reserve starts normalizing interest rates. Hold that Fed tiger!

(Bloomberg) — Sales of previously owned U.S. homes fell in August, suggesting that demand is moderating as lean inventory and high prices squeezed out some buyers.

Contract closings decreased 2% from the prior month to an annualized 5.88 million, in line with economists’ estimates, figures from the National Association of Realtors showed Wednesday.
“Clearly the home sales are settling down but above pre-pandemic conditions,” Lawrence Yun, NAR’s chief economist, said on a call with reporters.

Lawrence Yun is correct. There was a huge spike in existing home sales (EHS) following the Covid outbreak and the overreaction by The Federal Reserve (aka, when the ain’ts went marching in). Despite continuing stimulus, but EHS has simmered down.

At least the median price of EHS YoY slowed to 12.1% YoY as The Fed slows M2 Money growth.

Inventory remains relatively low compared to historic levels while price zooms with Fed stimulus.

Want home price growth to slow its insane growth? Hold that tiger! That is, The Fed has to start normalizing interest rates.

U.S. Housing Starts Rose by More Than Forecast in August (Home Price Growth >4x Hourly Earnings Growth) Will The Thrill Be Gone When Stimulus Is Remove?

The unorthodox monetary stimulus from The Federal Reserve and stimulypto-level spending by the Federal government has resulted in a surge in US housing starts. But that thrill may be gone if the stimulypto is removed.

(Bloomberg) -By Olivia Rockeman- U.S. housing starts rose by more than expected in August, suggesting that the supply and labor constraints that have been holding back construction eased in the month.

Residential starts rose 3.9% last month to a 1.62 million annualized rate after an upwardly revised July print, according to government data released Tuesday. The median estimate in a Bloomberg survey called for a 1.55 million pace.

Building permits, meanwhile, increased 6% in August, the biggest gain since January, reflecting a sizable jump in multi-family units. Permit applications for single-family homes also edged higher.

The data suggest that builders are making some construction headway despite limited availability of land, labor and materials, which has slowed residential starts from a 15-year high in March. Despite the bottlenecks, housing starts remain mostly above pre-pandemic levels, which is expected keep construction activity elevated for some time.

1-unit (single family detached) starts got a tremendous jolt from The Fed’s monetary stimulus and Federal governments fiscal stimulus. But government stimulus wears out.

Given the high cost of housing in the USA, particularly in coastal metro areas, we see home price growth raging at over 4 times hourly earnings growth.

As a result, we are seeing a burst of 5+ unit (multifamily) housing starts. Note the burst of 5+ housing starts prior to Covid striking in early 2020.

Permits for 1-unit housing are up only slightly but 5+ unit permits are up 19.7%.

Remember, the withdrawal of fiscal stimulus will lead to a big fiscal cliff.

Is the thrill gone from owning a single-family detached home?

Urkel Economy! US Consumer Confidence Lowest In Decades Thanks To Rising Prices (Home Buying Conditions Fall To 60)

This is the Steve Urkel economy where The Federal Reserve and Federal government screw everything up with their policies (or follicies) and say “Whoops! Did I do that?”

(Bloomberg) — U.S. consumer sentiment rose slightly in early September but remained close to a near-decade low, while buying conditions deteriorated to their worst since 1980 because of high prices.

The University of Michigan’s preliminary sentiment index edged up to 71 from 70.3 in August, data released Friday showed. The figure trailed the median estimate of 72 in a Bloomberg survey of economists.

Buying conditions for household durables, homes and motor vehicles all fell to the lowest in decades. The report said the declines were due to complaints about high prices. Consumers expect inflation to rise 4.7% over the coming year, matching the highest since 2008.

September’s UMich Buying Conditions for Houses fell to 60 … thanks to superheated house prices.

I can just picture Fed Chair Jerome Powell channeling Steve Urkel and saying “Whoops!! Did I do that?”

US Workers Made Only 8 Cents More Per Hour, Inflation-Adjusted, Than In January 1973 (While Real Home Prices Soar)

The US Bureau of Labor Statistics released their Real Earnings Report for August yesterday. And is it pretty depressing for US workers.

Real average hourly earnings for all employees increased 0.4 percent from July to August, seasonally adjusted. This result stems from an increase of 0.6 percent in average hourly earnings combined with an increase of 0.3 percent in the Consumer Price Index for All Urban Consumers (CPI-U).
Real average weekly earnings increased 0.3 percent over the month due to the change in real average hourly earnings combined with no change in the average workweek.

If we look at REAL US housing prices versus REAL average hourly earnings for production and nonsupervisory employees, we can see waves of imbalance between the two measures (also known as “bubbles”). Such as today.

But the real horror chart is the following (courtesy of Mish). It shows that real hourly earnings have barely changed since January 1973.

Of course, labor outsourcing to lower labor cost countries is the chief culprit. Karsten Manufacturing, maker of Ping golf clubs, no longer makes their castings in Phoenix AZ thanks, in part, to EPA regulations. Ping clubheads are now made in Asia.

August US Inflation At 5.3% YoY, Real Avg Hourly Earnings At -0.9% (Gasoline Up 42.7% YoY, Used Cars And Trucks Up 31.9% YoY, Home Prices Up 18.6% YoY)

US inflation remained about the same in August as it was in July. CPI YoY fell ever so slightly from 5.4% in July to 5.3% in August. Real hourly earnings remain negative.

The source of consumer inflation? Gasoline prices rose 42.7% YoY while used cars and trucks rose 31.9% YoY.

Shelter rose 2.8% YoY. That is odd since the Case-Shiller national price index is growing at a torrid 18.61% YoY pace and the Zillow Rent Index YoY has recovered to a sizzling 9.24% YoY pace.

The YoY heatmap of inflation.

However, with the exception of home prices and rent, we are seeing a slowing of used car, foodstuffs and regular gas prices over the summer.

Yikes! Time to trim The Fed’s asset purchases!!

Palm Beach Developer Tries To Flip Island Mansion For $120 Million, 41% More Than It Sold For In July

From ZeroHedge:

The South Florida housing market is sizzling with hot money from the North East, pushing up homes values sky high over the last year. One example of the mania is in Palm Beach, where a private island was bought in July and was relisted months later for a whopping 41% premium, according to WSJ.

One of Miami’s top real estate developers, Todd Michael Glaser, is taking advantage of the bubble, fueled by Wall Street bankers and other elites who have the economic mobility to leave the Northeast for the Sunshine State.

Glaser purchased 10 Tarpon Way, also known as 10 Tarpon Isle, for approximately $85 million in July and has since relisted the tiny 2.5-acre island for $120 million, or $35 million more than he paid a few months ago. The island was created by dredging crews in the 1930s and is only accessible by bridge. Glaser bought the island from private investor William M. Toll and his wife, Eileen, who paid $7.6 million for the property in 1998.

Tarpon Island

The real estate developer said potential buyers have two options: pay the $120 million now or wait ten months for a new renovation for $200 million.

Concept Drawing Of New Renovation

He said with all the hot money flowing into the Palm Beach area, “a $100 million house isn’t that crazy anymore, believe it or not,” adding that in the last 18 months, eight $100 million homes have been sold.

If a potential buyer wants to wait ten months and pay an additional $80 million. The developer will completely redesign the mansion by doubling it to 25,000 sqft, with 14 bedrooms, in addition to a hair salon, gym, and spa. A new pool, octagonal tennis pavilion, and a golf practice area will be installed on the outside.

Some ask how long will this speculation fever last as the Federal Reserve could embark on tapering its extensive bond-buying program later this year or early 2022.

One real estate expert believes the peak of the South Florida housing market could be nearing:

Dr. Ken Johnson, a real estate economist with Florida Atlantic University’s College of Business, told local news WPLG that a peak in the housing cycle could have already arrived, but he believes a crash is not in the mix because demand still outpaces supply.

It remains to be seen if some greater fool will pay the $120 million for the island mansion or $200 million tens months later after renovations.

Time for The Fed to start tapering the punchbowl?

Greater fools?

Rent Inflation: National Average RENT Rose 10.3% YoY (Fed’s Got A Line On YOU!)

Not only after home prices screaming at near 20% YoY growth, but apartment rents are surging as well.

(Bloomberg) — Apartment rents were up in August from a year earlier in all the top 30 U.S. metro areas, the first time that’s happened since the start of the pandemic, according to a new report by Yardi.

The national average rent in multi-family buildings rose 10.3% from a year earlier to $1,539 — the first double-digit rise in the dataset’s history — after a $25 increase in August, the real-estate firm said. Over the past 10 years, the average pace of growth has been 2%.