The blame game is now out in full force for the slow start to housing in 2014. Nationwide, we’ve been hearing about the polar vortex impacting real estate. Unfortunately it cannot be applied to California given that we’ve been in a full on drought. Winter never came to SoCal. I can’t remember a year with such little rain but hey, who needs water when you can purchase a World War II Cracker Jack box for $750,000 right? Like in most manias, the folks on the ground are the last to get the memo and many are still going out for ARMs to stretch their already impaired budgets. In 2004 one thought that was inescapable to me was the incestuous nature of real estate that was unfolding. That is agents, brokers, banks, builders, home owners, home buyers, Wall Street, tax collectors, and everyone tied to the machine got a mega-boost thanks to ever accelerating prices hikes. Few thought about what happens when a reversal occurred especially since incomes were not going up.  The same has happened over the last few years in more subtle ways. The economy is weak and a big boost has come from home prices going up. Yet much of this is now driven by Wall Street and hedge funds. Housing is off to a slow start in 2014 and you can’t blame it on the polar vortex, especially here in a sunny and drought hit California.
I think it is safe to say that investor activity in the housing market has changed the face of real estate buying. Back when the crisis hit in 2007, some analysts were cheerleading the hedge fund crowd as a tiny blip in the market. It is hard to call it a blip when 30 to 40 percent of all purchases are going to investors for close to half a decade. A recent analysis from RealtyTrac found that the estimated monthly home payment for a regular three bedroom home (costs include mortgage, insurance, taxes, maintenance, and subtracting the income tax benefit) rose an average of 21 percent from a year ago in 325 US counties. What about household incomes? That is another story. So it is no surprise that we are largely becoming a nation of renters. It is also no shocker that young households are largely unable to begin household formation via buying a home. Many are living with parents well into “young†adulthood. For the first time in history, we had a six year stretch where we added more renter households than that of actual homeowners.
It is common knowledge that banks have metered troubled real estate inventory out into the market in a slow drip fashion. This practice over the years has caused an artificially low supply to be present in the market. Add into the mix a low rate environment and years of investors buying up properties and you get our current stalemate of a market. Virtually no one in the press with a voice is even expressing a possibility that prices may sway lower. The only options making the rounds involve a couple of scenarios where prices will go up slowly in 2014 or prices will move sideways. No option for a decrease. This lack of perspective is odd given the resurgence of interest only loans and the fact that a well known bank is dipping back into the subprime market. One surprising statistic that I did see was the resurgence of foreclosure starts in California.
The latest housing data highlights a stagnant market in Southern California. January home sales came in at a three year low logging in 14,471 sales. With a low number of foreclosure resales now making up the pool of total sold homes, there is little reason to use the excuse that foreclosures are depressing home prices on aggregate. Home prices retreated back to levels last seen in June primarily because investors are having a tougher find picking out good low priced properties and modestly higher rates are still hurting the market with cash strapped buyers. The market is caught in a Catch-22; if the stock market goes up this adds fuel for the Fed to retreat from QE and this will likely push rates higher. If the stock market pulls back, the Fed is likely to dive back in and interest rates are likely to stagnate or fall but investor activity is likely to take a hit. Yet there is little action to be had overall with such an artificially low amount of inventory and crowding out regular buyers with investors is still common. It is more likely that we have a month in 2014 with a negative year-over-year median price versus a repeat of 2013.
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