Wednesday, June 07, 2017

The Housing Market Manipulation

Seems pretty obvious that the media meme for a hot housing market is out there. Get out there and buy folks, because now is the time. This is true to a certain extent. This is not the whole truth though. As I wrote on Monday about using construction as an indicator of immigration effects, there are data points that explain this hot housing market and how it is not all that it seems. The system has rigged a market to make it appear healthier than it is.

This is simple supply and demand. America has 25 million more people in it compared to a decade ago so the transactions of buying and selling should increase in absolute numbers. Add to this the secular decline in family size and you have fewer people per home. Readers undoubtedly have single friends that buy homes with no romantic prospect in sight or children. I've connected with single childless friends who have bought 1800 square foot homes and looked slightly confused why they needed a 4 bedroom home at that time. Add to this retirees that stay in their homes because multigenerational living is so lame and terrible, and the demand is there.

Supply is a problem. The banks had a lot of foreclosed homes on their books and slowly parceled them out so they would not have to write the loss on them. They even foreclosed slowly on larger homes in California because the loss would have been too big for their books. Irvine Housing Blog would spotlight homes that had not made a mortgage payment in three or four years with the homeowner still residing in them. The banks had a ton of REO inventory to sell.

Years ago I wrote how big investors were taking their ZIRP money from the FED and big banks and scarfing up properties to rent. This was a hunt for yield in a 0% world. Everyone is chasing yield. Rents had appetizing cap-ex rates, so creating a rental portfolio was seductive to big capital. This has created rent backed securities for private equity, which now has some government guarantees. These homes are off the market and rented, therefore leaving supply a problem.

This of course allows the holders of those rental properties to charge more rent. They are doing so at a high rate beyond the rise of not just inflation but many other goods and services. How are you going to save up for that down payment if your rent eats at your salary at higher and higher rates? Shucks, you can't exit that market though because construction just is not happening to supply you with affordable housing to move into. It is a racket for the oligarchs. Conslidation of banking had a point and goal, and make no mistake, it was never about you.

This all works to save the banks ass though just like eliminating mark to market did. Loans to big biz to rent out homes takes home off the market, which boosts the book value of those REO homes. Banks then can act in another way to help themselves: they can deny lending for developments and new construction. Buried in this article on new home construction, a developer mentions how loans have not been out there for new construction. Hmmm, no loans for new construction but the loans were out there for private equity and hedge funds to buy existing homes to rent, hmmm.

In Monday's post, I shared an image on home construction. The actual new unit construction has slowly risen from the catastrophic lows of 2009. This made some sense as the inflated construction of over 2 million units of the mid-'00s would have hangover inventory that needed to be worked off. Still construction is not at historical averages or levels that one would expect in a hot housing market if you look at longer dated charts that track booms and busts. Little talked about item is that all the regional construction firms of the mid-'00s got cleaned out wit the housing bust. Now just the big boys dominate. The big boys also bought land at firesale prices from bankrupt regionals. They are building higher end to lock in diamond quality buyers.

This is centralization and the elite helping themselves and never taking a loss. This is why a local small town councilman mentions developers wanting to put in $400K housing units when his or her city needs $200K starter homes. They don't care if the land was cheap or bought at a firesale price from the last crash. They are locking in a set buyer with a particular income level. There are corn field where the farmland gets turned into 100 homes at $400K a pop with no reasoning besides the buyer profile.

There is not a hot market in the mode of prior booms. There are just many buyers looking for homes in a suppressed supply. This is not about affordable family formation. There will be no consequences for the high end. They will continue to extract from you the monthly nugget that they feel entitled to, and will have a system completely designed to maximize their gains.


EisAugen said...

"This is centralization and the elite helping themselves and never taking a loss. This is why a local small town councilman mentions developers wanting to put in $400K housing units when his or her city needs $200K starter homes."

This is exactly what is going on in my area - I'm in a smaller city in the outer orbit of a very large regional hub (10 mil area population). Housing is extremely expensive in that city and its immediate suburbs, as in $450k-$800k for a 70s vintage split level sub-2,000 sq ft depending upon the zip code. Even 60 miles away, at the edge of this end of the sprawl, a similar house goes for $225k-$275k.

We have a lot of retirees in my town, and several big employment hubs, so there is demand for housing, but a decent amount of land, yet they're only building extremely high density apartments for the lumpenproles, $325k and up 1,600sq ft boxes crammed together, or $400k-$550k houses with actual yards.

$200k starter homes? Surely you jest!

Portlander said...

Excellent. We need more of these. FIRE economy is a Ponzi that depends on perverse gov incentives to keep the thing running.

IMO we need a general strike among the young and a buy-nothing silent strike among the old.

The 1%'s Achilles Heel is their wealth is entirely in highly-leveraged assets that are dependant upon the 99%'s labor and consumption to make a return. If the 99% refuse to buy, refuse to work, refuse to play the game, those assets aren't worth one thin dime and all their wealth is up in smoke. What is Disney worth if everyone decided to cancel their ESPN and quit Disney cold-turkey. Macy's made a nice proof-of-concept IMO.

Now sadly "everyone" won't do this, but with the leverage they've built into the system I believe it would take far fewer than most people consider. Look how fast the sand-state housing ponzi imploded. IIRC, at their worst the default rates were ~12% in local markets and sub-5% nationwide. Trump got half the electorate. Half of that half would be 2-5x the mortgage meltdown. Plus unlike the mortgage meltdown it would be the half that actually Gets. Shit. Done.

There you go... mobilize the GitShitDone army. We're the 45-95% that work, create goods, and pay taxes.

Playing off Adam's high-road persuasion, "If you're not striking it's because you're not one of the Productive Class."

Sell your financial assets and pay-down as much outstanding debt as possible. Buy only that which can be paid for with literal cash... what good are Visa & Mastercard w/o being able to make a 3% vig on every purchase the 45-95% class make? The (((Fed))) would sh*t their shorts faster than yesterday.

Laguna Beach Fogey said...

They'll just import new consumers and homebuyers.

Portlander said...

Of course, I'm open to other's ideas as well.

Though, I really, really like the idea of a Silent Strike. The 34-64 demographic has kids to feed and bills to pay. They won't go along if they think it will put their financial dependants at risk of penury if they get an employment blacklisting.

Portlander said...

That's their fallacy.

They can import new voters, voting don't cost nuthin'. But importing new wage slaves that will be as productive as the old ones, and willing and able to make the monthly nut that the wealthy's ROI spreadsheets are all dependent upon is considerably harder.

Houses that cost 5 times white median family income (up from 3 I might add) are going to be hard to resell when they cost 7 or 8 times your imports' family median income.

They are papering it over in the near-term by using gov's credit card, but that's only as good as the ROW think us working stiffs are still willing to play along.