There is some foolish money swirling in the real estate market.  In particular, there is a growing flood of small time investors trying to enter the market at a turning point and others are simply looking for a quick way to make a buck.  It is amazing how many people are waiving inspections just so they can win a property.  Some people are going to get a dark reality check when they are hit with major unexpected repair bills.  To bring this back to frothy California, the euphoria of 2005 and 2006 is back in the air.  People are trying to tap out equity to leverage into additional real estate.  Keep in mind many of these people have no idea about real estate investing and many wouldn’t know how to use a tape measure or a hammer if it hit them over the head.  Emotions are stronger than fundamentals in the current marketplace.  Take a look at some shifting trends.
There has been some great discussions in the last few posts. Some comments are worthy of being articles on their own. One topic that consistently came up was the lack of public protests. First, Americans historically believe in the system even if it goes into full meltdown mode. Just look at the Great Depression.  While nations around the world switched to radical ideologies and turned the tables upside down, we simply went forward and elected another President. This belief is deeply entrenched. Or go back to the implosion days of 2008 when CNBC was caught off guard as if they were watching Ben Bernanke twerking on a Wall Street trading floor. Even a full market meltdown did not change things and this certainly wasn’t because of a lack of real-time data. So it is no surprise that we are left with policies that have favored the large banks. An easy transition from the foreclosed to the investor class. In truth, all of this has been a subtle bailout of those horrible loans that were made by said banks. A slow methodical banking chess game yet the impact is being felt on the middle class. The dirty little secret is that this housing recovery is fully artificial and a roundabout way of bailing out the banks.
After scouring the newly released Census data many things stood out but one of them continues to reflect a growing disconnect in housing. The US is adding many more renter households. This of course is occurring in spite of record rising home prices. For regular buyers, the mortgage market is still checking carefully for income and other requirements yet “cash buyers†continue to be the dominant force in 2013. In expensive areas like California, more people are using jumbo loans. Ironically, the market has now adjusted once again to the Fed’s obtuse language on tapering. While this language might come off difficult to decipher, the stats are very clear. Over the last six years we have added millions of households as renters. What are the longer term implications of this?
The Fed surprised markets on Wednesday with their taper head fake. Was it because the economy is booming? No. Was it because household incomes were growing? Not exactly. Was it because inflation is non-existent? Not if we look at rents or medical care. In fact, going through the Fed’s statement it is largely holding back on the taper because of fear of budget negotiations in Congress. That is, we are hitting our debt ceiling yet again and the Fed wants some leverage here. Yet the larger signs all pointed to a taper if we consider that rents are rising at nearly twice the rate of the overall CPI. Also, the Census figures for 2012 were released and household income adjusting for inflation is now back to levels last seen in 1989. Lost decade? Try a lost generation. Also, recent data highlighted that the wealthiest in our country are capturing most of the income gains and given this trend and the Fed’s taper-less September, the feudalism trade is fully on.
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