The amount of all cash offers being made across the country is deep into record territory. Once again, the real estate market is crawling into unchartered waters here. We all know about the flood of money coming from hungry Wall Street investors ravenously chasing yields in the rental game. What about foreign money floating into the market? Data on this is hard to come by but anecdotally we know that money from China is flooding into California. How much? Hard to say but some good data was recently released regarding the buying habits of foreigners. Some will remember when Japan lived through their boom and money flooded into California then as well. The big difference this time is that China has more than 1.3 billion people versus 127 million for Japan. In other words, the potential for a high volume of activity is now starting to be seen in dramatic fashion.
On Friday the mortgage markets had another historical move reaching a multi-year high when it comes to the 30-year fixed rate mortgage rate. The move was gloriously inspired by an employment report that witnessed a record surge in part-time workers. This all seems to fall into the longer term challenges of extreme quantitative easing given that Japan with many years on us in the QE game has an enormous part-time workforce. Yet this dramatic reversal in mortgage rates is going to impact the market. To what degree? That will be seen but we are already seeing a decline in mortgage applications and of course refinancing activity is slowing down dramatically. A big change is going to come in the psychological department. Many were starting to venture into the market with ARMs but with rates rising, these affordability products are now much more risky. Also, the amount someone can buy has just been squeezed (around 30 percent) with the recent move in the mortgage markets.
The housing market is now fully out of control in California like a rising Hollywood actress. People are stomping over one another with cashier’s checks falling out of their back pockets to purchase a home and the psychology has shifted to “I should have bought a few years ago to cash into this party! I’m not missing this real estate Metro bus!â€Â Of course, and the case remains, you do not lock into property gains until you sell. So unless you plan on buying and selling on a routine basis, the fast rise is really nothing to scream home about especially when underlying fundamentals are so out of sync with a normal market. You can also get a pulse on the mania by looking at how aggressive flippers have become. I’m starting to see some incredibly epic flips and many are sitting for a good amount of time on the market. Inventory is also increasing including in sought after neighborhoods. Today we’ll look at a home in Pasadena that demonstrates what is truly happening in the housing market in Southern California.
When you turn housing into a hot stock packaged nicely with a red ribbon and newly installed granite countertops, you have added neon lipstick to the biggest purchase most will make but don’t expect it to act as some kind of button down conservative asset class. Wall Street since 2000 has found a new asset class to inflate and invest (gamble) on. No surprise then that housing has had a religious conversion into the church of Boom and Bust. This is exactly what you are seeing in some markets where ravenous speculators are essentially the largest players in the game. The wealth gains in housing are largely distorted because of the massive entrance of investors into the game. For example, millions are buying homes with 5 percent down or less. To keep it simple, someone buys a $150,000 home and puts down $7,500 that goes directly into the equity of the property. An investor buys the home with all cash. For each one of these purchases, you would need 20 of the conventional purchases simply to match up the level of equity. All cash means 100 percent equity from day one at least when it comes to data being reported on housing. This is why as we will discuss in the equity chart later on, that this has been incredibly distorted in favor of investors. And where are these gains really going? 5 million Americans have lost their homes (if you can call it that since many were in debt up to their eyeballs with little to no equity) since the crisis hit and a good number have gone to investors. With rates shooting up, you are going to see the appetite of many investors sour quickly.
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