The mortgage markets had one of their biggest moves in US history. According to Freddie Mac, the 30-year fixed mortgage rate posted its largest move in more than 25 years. No doubt this got the serious attention of the mortgage market. What is interesting is that each piece of good economic news nationwide is likely to add fodder to the Fed exiting QE. Yet moves like this make it much more expensive for inflated markets that completely rely on easy money flowing in and are built around crazy low rates. The Las Vegas market is one of those fascinating markets where hedge funds and investors have been going in hand over fist for the last few years. Yet when you look at the data, what you find is a market that is essentially trading homes to one another in a large game of musical chairs. I think it would be useful to examine why Las Vegas home prices have boomed in the last couple of years.
If you weren’t paying attention, you might have missed one of the most dramatic moves in the history of the mortgage market. There was a sense that the Fed had all the power in the world to push mortgage rates to whatever level they desired. This seemed to be the case when rates touched a low around 3.25 to 3.29 percent. Slowly, rates have crept back up even before Ben Bernanke mentioned a tapering off of the Fed’s MBS purchasing binge. How dramatic was the move? The 30 year fixed rate mortgage is now up by 40 percent in the last 52 weeks. We now get to test the resiliency of the housing market without the full unbridled support of the Fed. The bond market movement is stunning. I love the mentality out in the current market. “Well the Fed is devaluing money so might as well borrow, buy something tangible, and ride this puppy until the wheels come flying off in a blaze of glory.â€Â Sounds like a good foundation for a strong economy right? The Fed realizes that the market is overheating for all the wrong reasons. The financially connected have leveraged incredibly low rates to play this game to a point where hedge funds are buying rentals to lease out all in the name of higher yields. So how dramatic was this move?
There has been little information on the makeup of the all cash buyer in Southern California. Sure, we know that for the last few years hedge funds have been swooping in on markets in Arizona and Nevada but also in the Inland Empire of Southern California. The markets went into a short panic this week at the hint that the Fed would slow down their MBS QE program. This is a big deal for markets in California where home prices are already at bubble levels and people are stepping over one another to get into open houses. Logic is now set aside. It is a fever. The headlines read that sales have hit a 7 year high in SoCal and that the median price is the highest in 5 years. So we are out of the woods right? Well much of this is built on record low rates and we see that the Fed will need to be in this game for years to come otherwise the market will retreat. Most are now buying with the belief that prices will continue to go up. When this is the default mindset, you know we are reaching a tipping point of sorts. Some data was released on the all cash buyers for SoCal. Let us look at this data.
One of the oddest things about this current housing market is the dwindling amount of supply. For areas like Los Angeles and nationwide, total housing supply has been on a downward trajectory since 2010. While an environment of rising home prices, less supply, and hungry buyers would lead you to believe that more home building would be occurring, not much of that has actually happened. Only recently have we seen the trend reverse nationwide and some areas that are in full mania mode like Irvine and Pasadena are seeing some inventory expansion. This is an interesting trend because it really highlights the consequences of allowing banks to essentially circumvent historical accounting standards and the use of the Fed as some temporary bad bank for loans. Constrain supply and demand (certainly prices) will rise. Punish the dollar and make access to debt via low rates a method of growth. So builders are walking slowly into this new environment trying to read the tea leaves. Los Angeles inventory is still at record low levels however. Where is the inventory going to come from for a county of 10 million?
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