The bailout of the FHA is making its way here during the holiday season. As we’ve reported many times the FHA insured loan program was essentially a back door program of getting people into homes with ridiculously low down payments. FHA defaults were soaring to record levels as herd mentality buyers were entering markets to compete with flippers, foreign money, and Wall Street investors. Even with low interest rates FHA mortgage insurance premiums increased dramatically but the problems were already too deep. Essentially new buyers were footing the premium for all the nonsense loans made from 2008 onwards. So it should come as no surprise that the bailout is getting closer even though housing prices have gone up.
The Southern California housing market is tearing a path into the fall real estate season. As we detailed in a previous post many families will have a hard time saving $100,000 for a down payment so the market is being flood with foreign investors, flippers, baby down payment buyers, and big pocket investors. Let us call this the FFBB crowd. Since foreclosure resales are making up a smaller part of the selling mix the median price is ripping a path across the mainstream press creating a self-fulfilling vortex feeding into the real estate money piranha machine. It is an interesting mix because household incomes are stagnant yet a tremendous amount of subsidies and interest is causing prices to move up. Let us examine the latest sales data for Southern California.
Foreign money is flowing heavily into US real estate markets. Now some think that foreign money is going to prop up the entire market but this is simply not the case. The money flowing in from abroad is going specifically into targeted markets. This isn’t necessarily a US trend only. Canada is experiencing a massive housing bubble from money flowing in from China in particular. Here in Southern California many cities are seeing solid money flowing in from Asian countries. You have this occurring while big fund domestic investors are buying up low priced real estate cross the country as investments. What occurs then is the crowding out of your typical home buyer. I get e-mails from local families looking to buy saying they were outbid by $50,000 or $100,000 for properties that had nothing special. Even after the crash, why does it seem hard for domestic buyers to purchase a home?
One of the biggest reasons I see given for people buying a home today is the rent versus buying calculation. However, it is rather clear that people are overstating the benefits of the tax breaks. Many of these assumptions are based on a sizeable down payment. In California the down payment is a very large chunk given the high price for homes in many desirable markets. You have your FHA buyer that is diving in with barely 3.5 percent down or your investors going in all cash. The sweet spot number of someone with a high down payment, solid household income, and a high credit score is not exactly a big portion of the current sales market. A few readers ran these calculations and I appreciate the thorough analysis from both sides. It is actually a good sign that people are breaking these numbers down but we should examine it from all sides. In many areas like the Inland Empire, the numbers are supporting buying over renting. However, in more expensive markets the numbers are not exactly so clear.
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