The rumbling that you are hearing is the sound of an echo boom in the housing market. Mark Twain was absolutely correct in observing that history may not repeat itself but it certainly rhymes. I don’t even need to dust off economic books from the Great Depression for this evaluation since what is occurring in the current market only happened in the 2000s. It is an interesting parallel especially for California but for places like Arizona and Nevada investor action is off the charts. You might have noticed that the mixture of home sales has now pushed the median home price in Phoenix Arizona up by 30 percent in the last year. This kind of shifting and erratic behavior is part of the odd management of the housing market. Since the shadow inventory is being leaked out courtesy of modified accounting regulations, you now have a limited selection of homes on the market and a feeding frenzy occurring from investors. The numbers are worth noting and the stories are reminiscent of the early days of the bubble.
The housing market is throwing out mixed signals. The Federal Housing Finance Agency (FHFA) came out this year with a REO-to-rental type program. The initial program was aimed at a small pool of 2,500 properties in eight distressed states targeting shadow inventory. Wait. I thought shadow inventory was no longer a problem? So why is the government actively soliciting bids from large investors, many connected to the same large banks that set the foundation for this financial crisis, in a market where active inventory is incredibly low? This is part of the core mission of the modern day real estate feudal system where even small investors are locked out of the market or pushed to gamble if they want to compete. There is no shortage of investors looking to buy property today with their own money. Just look at the hipster mania here in California. So why try to devise these complicated programs where rents will be securitized for easy selling to Wall Street? If this sounds familiar a similar thing occurred with MBS and even the more toxic CDOs.
I want to start this article by first stating that I enjoy living in Southern California. This is my home. I’m sure it is home to many of you as well. When I started writing this blog, it was as an attempt to figure out what was going on in the market. Prices simply did not make sense and the loans that were being made were comically outrageous. This is also why the full title of the site is “Dr. Housing Bubble – How I Learned to Love SoCal and Forget the Housing Bubble.â€Â I get the distinct impression that many people are not fully “happy†until they own a home. So this second round mania is suddenly making people feel as if happiness is getting further out of their reach. Yet we all know this is a choice. If you really want to buy and you have a deep void because of this, go for it! Heck, all you need is a 3.5 percent down payment and you’ll get a low rate mortgage as well. Yet make no mistake, prices in many SoCal cities are demonstrating mania like behavior. As you will see, you are essentially stepping into another mania in SoCal where inventory is being driven into the floor. Ultimately the question then becomes, how badly do you want to own a home?
There is an interesting dynamic unfolding in the housing market. Real estate agents in places like California are arguing that there is a lack of inventory and are also generally against the government unloading blocks of properties to big investors. Why? There has been bulk selling and buying to the investor class and a large amount of crowding out has occurred. This brings about an interesting set of problems for your average buyer in the current market. They are competing with swaths of big investors but also local flippers trying to make a quick buck once again courtesy of low interest rates and another mania in some markets. SoCal is now in a mania again as you will see with some of the patterns occurring. This is also happening in many other states as well. A new feudal system has emerged. The banks were bailed out by the Fed, were allowed to circumvent accounting standards, and now deep pocket investors in the financial class are buying up these places either to increase prices on flips or to hike up rents. In the end, if you want to compete in today’s market you need to bow down to the Fed, put on a football helmet and go head-to-head with big investors, flippers, suckers, and take on a massive mortgage.
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