Euphoria unlike housing inventory is in plenty supply when it comes to 2014 real estate forecasts. The glue holding the housing market comes from investors and generous banking policy. The one thing about economics unlike other hard sciences is that it happens in real-time. It also assumes certain rules are fixed but that really act more like clay to fit the whims of the power structure. It was interesting to see how few analysts at the end of 2012 predicted the massive run-up in real estate prices during 2013. What is typical of course is that analysts usually go with the momentum so it is no surprise that predictions for 2014 are rosier than they were for 2013 even though most are forecasting higher interest rates and most will acknowledge that this current pace is unsustainable. Yet higher rates will add pressure on income constrained households. Investors are already showing signs of pulling back in certain markets. Let us examine the 2014 real estate forecasting landscape.
The real estate market has slim pickings for traditional buyers. Funny thing that we have to use the “traditional†preface since the market is overrun with a hoard of investors. I am seeing this with my own two eyes. You are seeing it as well. In most ordinary cases a rise in prices would be accompanied with some sort of rise in supply. Yet this is no ordinary situation. Scouring over a few reports I found that nearly half of foreclosed homes are still occupied. In places like California and Miami this number is closer to 60 percent. When these homes finally get fully repossessed, they are likely going to big money investors that end up holding on to the property, removing it completely from the market. There is little doubt that investors are a big part of the market. Since 2011 they have purchased over $1 trillion in real estate. With razor thin inventory, this is a big deal.
A plague on both of your houses. Unless of course, you are buying a few extra homes as investments and then the market is conveniently setup for you. The Fed has created a housing market dominated by a herd of investors. There is no hyperbole in this statement when the latest report shows that for the latest month of home sales, 42 percent of sales went to “all-cash†buyers. Keep in mind this data reflects sales where no loan is recorded at the sales date thus eliminating most traditional home buyers. The all-cash segment of buyers has typically been a tiny portion of the overall sales pool. The fact that so many sales are occurring off the typical radar suggests that the Fed’s easy money eco-system has created a ravenous hunger with investors to buy up real estate. Why? The rentier class is chasing yields in every nook and cranny of the economy. This helps to explain why we have such a twisted system where homeownership is declining yet prices are soaring. What do we expect when nearly half of sales are going to investors? The all-cash locusts flood is still ravaging the housing market.
The Fed’s archaic language makes it very clear that there will be no taper anytime soon. To the contrary, the Fed will still be buying something like $75 billion a month in bonds instead of $85 billion. What bold movement right? Of course this sent the stock market into another easy money induced rally. However, during the same period we find that existing home sales took a hit and prices are definitely softening. Over the summer, the popular FHA insured loans took a giant hit via mortgage insurance premiums increasing dramatically. This action certainly impacted the origination volume of one product that was leveraging buyers into homes with as little as 3.5 percent down. Even in expensive SoCal, FHA insured loans made up 20 percent of purchases last month. In 2014 there will be new fees hitting vanilla mortgages as part of the Federal Housing Finance Agency (FHFA) trying to push private lenders to take on some of the mortgage market which is fully dominated by the Fed and government. These fees will happen at a time when home owners are already leveraging up to compete with big money investors.
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