2012 was a flashback to 2005 real estate. Bidding wars, flippers, and hungry investors all diving into the market with many purchasing homes without fully analyzing the numbers. There is a very clear trend in the current housing market and how banks are processing foreclosures. It is a parallel to what Mr. Getty once said about large loans owed to banks; the bigger your mortgage, the more likely it is that the bank will not foreclose on you in a timely fashion. I usually browse Beverly Hills real estate as a source of a prime Los Angeles market and also, because many people can understand that this is a selective area. Today I was looking at my data feed and found it amusing the mix of foreclosures and MLS listed properties.
60 percent of the people in the state of California live within the 56,512 square miles that make up Southern California. 22 million people in a car obsessed region. Take a trip on any of the major highways or boulevards during rush hour and you will definitely get a taste of this congestion. From the looks on people’s faces, they are not doing this simply for pleasure. Most Californians spend a good amount of time driving to and from work. The cost of commuting for many has been blindly accepted as a cost of doing business to live in the area. Many middle class Californians simply accept this as a part of their daily reality. It is amazing how many hours of lost productivity occur by people stuck in traffic or driving to and from work. The employment hubs usually have very little residential housing and most Californians opt to live miles away from work. We have many commuting from the Inland Empire into downtown Los Angeles and Orange County on a daily basis. What is the true cost of the commuting culture in Southern California?
Supply and demand. A basic fundamental point of any course in introductory economics. With housing most people go with what they see. Distressed inventory is a silent issue because you really do not know how deep problems are in a certain area unlike a home that is listed for sale with a big red sign in the front lawn. Yet we know that over 10,000,000+ Americans are currently underwater on their mortgages and another 5,000,000+ have stopped paying their mortgage or are currently in the foreclosure process. What people see however, is prices going up, available inventory going down, and their ability to buy more house expand courtesy of mortgage rates. Today I want to focus on the inventory side of the equation because it has fallen dramatically in the last few years and is causing bidding wars in certain metro areas.
The Case Shiller data is showing a steady increase in home prices across the United States. The headline figures are clear but rarely make the connection that much of this gain is coming on the back of unprecedented Federal Reserve intervention. Data is clear that household income is not making any significant gains. These gains are coming largely from added leverage produced by lower mortgage rates. We’ll go into the details on this but you will see how a tiny drop in mortgage rates can supercharge home prices especially in a market where inventory is tightly managed as the year comes to a close. The Case Shiller is a better measure of home prices because it looks at repeat home sales. Yet even here we are seeing signs of bubble like activity in a handful of markets. An echo housing bubble is a possibility in many markets.
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