Low down payment mortgages are creeping their way back into the market like a cat sneaking up on an unsuspecting mouse. The only difference here is that the mouse is a million dollar crap shack with a 30-year mortgage attached to it. People forget that Freddie Mac and Fannie Mae, the massive Government Sponsored Entities were nationalized U.S.S.R. style during the Great Recession. Now that times are good all caution is being thrown into the wind and we are setting up the stage for Irrational Exuberance Part II. The U.S. economy is built for boom and bust cycles. Massive credit expansion is occurring and while people are working, their dollars are not stretching as far as they would expect. In San Francisco, you are now considered “low income†if you make less than $117,000 a year. That makes sense when a standard home sells for $1.5 million. So now we have Freddie Mac attempting to push 3% down mortgages on a much larger scale since many people are priced out. What can possibly go wrong?
The notion that somehow an affluent set of Millennials is going to shift the housing market is not happening. What is happening is rather clear; historically low housing inventory is causing prices to inflate in the face of what has been very low new home building. If you want to buy, your options are usually an outdated crap shack that is already at an inflated price or in some new areas, glorified condos where builders are trying to max out every square inch of development where you can smell what your neighbor is cooking. The fact remains the same, over the past decade there has been a dramatic shift of renter household formation (not homeownership). For Millennials, tastes are dramatically different. Sure, you have Taco Tuesday baby boomers glued to Fox, MSBC, or CNN (typical age of viewers is 60+) so many are simply out of touch with the wants of younger Americans. Builders however understand this dynamic and multi-family unit construction has been running briskly for the last few years. Many large cities have now converted into renting majority locations.
There is a homelessness crisis in Los Angeles County. The homeless population has surged by 75% in the last six years all the while home prices are back to peak levels. Yet the home ownership rate still hovers near generational lows. California has seen massive growth in rental household formation. Surveys continue to find that Millennials prefer different living styles than their baby boomer parents. Forget about surveys, just look at the actual market. Record low inventory is being driven by baby boomers staying put and the lack of home building thanks to hardcore NIMBYism. So it is no surprise that we now have a homeless crisis in L.A. County. Recently, in Orange County a large group of homeless encamped in various areas where set to be moved into affluent areas of the county and people went ballistic. So where do we go from here?
It was only a matter of time that people started using their homes as ATMs. It is clear that the housing cheerleaders are drinking a mega dose of housing Kool-Aid and somehow think that people are immune from repeating past mistakes. But here we are seeing cash-out refis hitting pre-crisis levels. And this assumption is based on the underlying mentality that yes, a home is really worth that amount and now people are locking in these high price levels. But guess what? You have to pay that money back on your glorified crap shack. This was one of the many reasons for the last housing bubble where people believed the hyped and went into deeper debt because of this notion that a home was an ATM with a roof on it. The overall tone is incredibly housing positive even though there are major issues in the housing market. For example, the homeownership rate is near generational lows and much of the household formation since the bubble burst has come in the form of rentals. Now homes are being used as ATMs. What can go wrong?
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