One of the oddest pieces hitting my e-mail box in the last few days is regarding an analysis of homeownership and the number of Americans that supposedly own their homes free and clear. The slant is odd because Americans are massively in debt with mortgages and more have gone into deep debt with FHA insured loans that require only 3.5 percent down. These loans went from a tiny portion of the market to a dominant force over the last five years. The research starts out by pointing out that nearly 30 percent of Americans own their homes free and clear. Okay. But that isn’t something new. In fact, in 2000 the rate was 30 percent and in 1990 and 1980 it was at 35 percent, in 1970 it was 39 percent, and in 1960 it was up to 42 percent. Of course none of this is listed in the analysis because hey, everyone owns their home free and clear right? In fact, the official figure is 29.3 percent so it actually is at the lowest on record when looking at data going back to 1960. The numbers are what they are but it is interesting how people viewed this as some kind of dynamic shift. Let us dig into the actual figures.
This weekend I was reading through the print edition of Bloomberg’s Businessweek magazine. The cover story is titled The Great American Housing Rebound. It is an interesting piece that digs deep into the boom, bust, and now boom of the Arizona real estate market. It is very clear throughout the article that investor money is having a very significant impact on the current housing market. It is well worth a read and simply highlights how low interest rates, investor demand, and very little supply can cause prices to move back up very quickly. We are seeing this here in Southern California especially in niche markets. I’m seeing properties being snapped up as potential flips in areas like Silver Lake where investors buy a place, fix it up, and try to turn around and create a quick flip. You can spot these homes when they hit the market rather quickly.
The story in the housing market continues to center around inventory. More to the point, the lack of inventory. This is a nationwide trend but in many parts of California inventory has fallen by 50, 60, and 70 percent in the last couple of years. A good part of this is driven by sales but the modest increase in sales does not reflect the significant drop. Historically, in normal markets, you would have a steady stream of buying and selling. This was embedded in the process. Someone selling a home would typically move to another place causing a dual reaction (a buy and sell). Stable prices also created a market where virtually every homeowner was above water on their mortgage. So selling was a matter of life decisions versus economic considerations in many cases. That seems to be lost today in many markets. A big part of the market right now is being driven by investor money and low down payment buyers. The little inventory on the market is being fought after like a group of hyenas trying to wrestle away a carcass from a lion. In essence, that is our market today. Historically low inventory being fought after by big Wall Street funds and those seeking to buy. Where does inventory stand?
The Federal Reserve has made it mission number one to create a low interest rate environment. The PR campaign claimed that this was to help average indebted homeowners but in reality, it had more to do with providing incredible banking leverage and also to support our massive national debt. The Fed’s balance sheet recently crossed the $3 trillion mark. In essence, the Fed became the bad bank without any open vote or congressional debate. That much is obvious but what isn’t certain is where things go from here. The ability of inflation to erode purchasing power is a real problem. Since the recession ended it is clear that profits in the financial sector have soared. Yet household incomes remain stagnant. This is important to understand and Professor Robert Shiller has talked about being cautious about the unbridled optimism now being seen in the housing market. The housing market for the last few years has been supported by massive amounts of investor money. Is the Fed simply creating a different kind of speculative fervor this time around?
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