One gut check that you need to do when markets reach this fever pitch in mania, is simply look at the product. People get fully disconnected from value and simply assume that every crap shack is going to sell because every single second a sucker is bred into our economy. There is now a blind consensus that prices will not drop. And if they drop, it will be a tiny drop. What is telling however is that virtually all large US metros are seeing price increases. This is a nationwide trend despite house humping beer belly cheerleaders acting as if it is only happening in their tiny niche market. So the euphoria is running rampant across all areas. This brings back the idea of decoupling. The markets are as coupled as an old Taco Tuesday baby boomer couple that is building up heart disease on a massive cruise ship. There is too much bubble psychology in the current environment. Have people already forgotten that the unexpected tends to happen (just look at our President!). Yet people just forget about Black Swans and keep on trucking forward taking on mega risk. Let me show you what is happening in Compton.
Foreign money has been a key ingredient in propping up home values in many cities across the United States. There is no doubt about this. If you look at places like Irvine, many new home communities are being sold largely to investors from China. This also applies to house mania happy San Francisco. Yet even if you question your own sanity regarding California crap shack prices, things may look affordable to certain people abroad. The amount of investment flowing in from China into the United States is amazing. A large part flows into real estate. This is how you get lower homeownership rates and also a drop in mortgage application volume yet somehow, you see home prices surging on low inventory. In a global market money can flow in and out of systems easily.
Who doesn’t love a great sequel? The housing market is blistering hot and people are itching to get a taste of the hot porridge served right from an upgraded stainless steel stove. You all know the story of Icarus and the perils of flying too close to the sun. Well there is also a story about getting too deep into the crap shack Kool-Aid pool. This is now a mania. I have a fairly good sense of Southern California living in multiple parts and making it my job to understand various markets by actually visiting open houses in wealthy areas and gentrifying markets as realtors would like to say. Most people like staying in their confined bubbles and really don’t venture out. So once again, we see astronomical prices decoupled from actual value. Today we take a trip into the heart of Los Angeles.
Have you heard the good news brothers and sisters? The housing ATM is now back in working order. Hallelujah! Black Knight Financial Services reported that in Q4 of 2016 44 percent of refinances were cash-outs. Meaning, people are now using their homes like ATMs which flies in the face of all the house humpers who continually act as if people are acting prudent in buying crap shacks. No, people are sucking on the teat of housing mania and now they are drinking from the nectar that is being produced. This percentage was the highest level of cash-outs in the last eight years. What was happening eight years ago? The housing market was imploding in epic fashion and nearly 8 million people lost their homes to foreclosure. Many lost their homes because they took out HELOCs and Home Equity loans to live beyond their means. I have to make this point since people always forget – the vast number of foreclosures happened on traditional vanilla 30-year fixed rate mortgages.
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