The absurd deformation evident in the latest data on housing bubble 2.0 sticks the fork in monetary central planning. In the attached post, Wolf Richter provides a succinct display of existing home sales on an April YTD basis versus prior year for 30 major markets. The pattern is stunning: Among homes sold to the top 1% of households, volume is up by 20-100% in most markets. By contrast, transaction volume during the last four months was down for the entire remaining 99% of the market in 26 out of 30 cities. And the bottom 99% volume was off by double digit amounts in places like Phoenix, Orange County and Los Vegas.
Moreover, a quick peruse of the chart shows that the pattern of soaring volume among the 1% is not just a regional aberration owing to the social media and technology stock boom in the San Francisco Bay area. Volume of top 1% home sales on Long Island, for example, was up by 72% during the first four months of 2014—bad winter weather notwithstanding. Contrariwise, volume among the less well insulated 99% of Long Island home buyers actually dropped below prior year levels.
Likewise, it is always cold during January-April in Minneapolis and this year was apparently no exception. So it is not the weather factor which explains the 50% gain among top 1% home transactions there versus a 13% decline in transactions among the 99%.
No, it was not an artic blast coming down from the polar north that explains the pattern below, but the financial storms emanating from the Eccles Building on the Potomac. To wit, the fundamental impact of ZIRP and QE has been to massively levitate the value of existing financial assets—-nearly 50% of which are owned by the top 1% of households and more than 80% by the upper 10%.
Since stocks rose by 30% on average last year, and by upwards of 100% in many of the red hot momo categories like social media, cloud stocks, biotech and much of the Russell 2000, it is evident that the Fed’s vaunted “wealth effect” has been busy at work. But hardly in the mechanistic Keynesian sense of goosing the cash registers at Red Lobster Inn or even Coach and Macy’s. The wealth effect, in fact, was an in-house wealth transfer: The 1% are taking winnings from the Wall Street lottery and bidding up the price of mansions in the tony neighborhoods where they live.
Once upon a time even mainstream economists understood that the secret to sustainable economic growth and real wealth generation is investment in new productive assets, not the inflation of existing financial paper and its derivatives and re-hypothecations. But we are now so deep in the Keynesian ukase proclaimed by the self-perpetuating academics and monetary policy apparatchiks which control the Federal Reserve System, that we have reached this strange pass: Namely, that even by their own dim Keynesian lights, the Bernanke/Yellen cabal claims that $1 of wealth pumping translates into only 4 cents of added consumer spending!
That’s right. Another graph below shows that to buy into the top 1% of the residential market in say Miami it takes a home purchase of about $3 million, and volume was up in that particular market by about 56% over prior year. So maybe a few dozen households chartered a yacht for 10 days rather than a week this past winter.
The fact is, ZIRP (zero interest rates) in the current American economy is an economic blasphemy. Cheap interest rates were the historic tonic by which the Fed induced the middle class to bury itself in debt by ratcheting up its debt-to-wage-and-salary ratio year after year for the better part of four decades.
But now that baleful work is over and done. Main street households have reached peak debt. This means that the only thing being leveraged-up today is student balance sheets which are backed by no income or assets and an increasingly evident hoax about future earnings gains; and by non-existent balance sheets among sub-prime auto debtors who are borrowing more than the car is worth at the closing.
Yet in some form of ritual incantation, the Keynesian zealots who run the Fed can’t get their collective feet off the monetary accelerator. Indeed, they loudly assure that they will push ZIRP and “extraordinary accommodation” into its seventh year running in 2015. That means that monetary policy continues to work red hot through the Wall Street gambling channel. That is, free money to the carry trades and a central bank put under risk assets.
But such massive and unrelenting deformation of financial markets does not announce itself in just an S&P price index that is now pressing 20X reported GAAP earning. What it actually does is invite speculation into the most rarified precincts of the financial universe where the privileged few get to experience gains of not 8% owing to stock investing for the long-run, but 100% owing to speculation in the moment.
After five years of incumbency, we now have an Obama Fed. Yet the irony is truly insensible. The Fed has now succeeded in creating a rip-roaring real estate boom in those rarefied neighborhoods that surely need no help from the state.
By Wolf Richter at Testosterone Pit
This is precisely what shouldn’t have happened but was destined to happen: Sales of existing homes have gotten clobbered since last fall. At first, the Fiscal Cliff and the threat of a US government default – remember those zany times? – were blamed, then polar vortices were blamed even while home sales in California, where the weather had been gorgeous all winter, plunged more than elsewhere.
Then it spread to new-home sales: in April, they dropped 4.7% from a year ago, after March’s year-over-year decline of 4.9%, and February’s 2.8%. Not a good sign: the April hit was worse than February’s, when it was the weather’s fault. Yet April should be the busiest month of the year (excellent brief video by Lee Adler on this debacle).
We have already seen that in some markets, in California for example, sales have collapsed at the lower two-thirds of the price range, with the upper third thriving. People who earn median incomes are increasingly priced out of the market, and many potential first-time buyers have little chance of getting in. In San Diego, for example, sales of homes below $200,000 plunged 46% while the upper end is doing just fine. But the upper end is small, and they don’t like to buy median homes [read… Housing Bubble 2.0 Veers Elegantly Toward Housing Bust 2.0]
Yet it’s going according to the Fed’s plan. Its policies – nearly free and unlimited amounts of capital for those with access to it – have created enormous wealth in a minuscule part of the population by inflating ferocious asset bubbles, including in housing. But now electronic real-estate broker Redfin has made it official: in 2014 through April, sales of the most expensive 1% of homes have soared 21.1%, while sales in the lower 99% have dropped 7.6%.
And it wasn’t the first year. In 2013, sales of 1%-homes jumped 35.7%, while sales of the other 99% rose 10.1%. And in 2012, sales of 1%-homes rose 17.5%, while the rest of the market inched up a mere 2.9%.
The downtrodden who have to make do with buying the remaining 99% of the homes, these modern hoi polloi so to speak, whose real incomes have stagnated or declined as they face the soaring home prices of the Fed’s second housing bubble in less than a decade, to be financed at still historically low mortgage rates, well, they’ve hit a wall.
But at least luxury is thriving. In 9 of the 29 markets Redfin tracked, sales of the priciest 1% of homes jumped by over 50%. The top three were all here in the Bay Area – not surprisingly, after the miracles of the worldwide money transfer machine that are IPOs and multi-billion-dollar startup acquisitions [Momentum Stock Fiasco Pricks San Francisco Housing Bubble].
In Oakland, sales of 1%-homes skyrocketed 96.2%, in San Jose 91.2%, and in San Francisco 72.2%. But in all three cities, sales of the 99% are down so far this year! So this isn’t exactly a booming housing market but a booming luxury market. A lopsided monstrosity that looks like this:
In a number of cities, including in some of the red-hottest housing markets of last summer, sales of homes in the 99% category have plunged. The worst: Los Angeles -11.7%, San Diego -12.3%, Minneapolis – 12.5%, Orange County – 12.7%, Sacramento -15.5%, Phoenix -15.7%, Las Vegas -16.3%, and Ventura -16.3%.
Some of these cities aren’t exactly cheap places to buy a 1%-home. In San Francisco, the median price is already over $900,000. But the minimum 1%-home? $5.35 million, according to Redfin. You’ll need enough after-tax income – if you’re not plunking down the cash you got from selling your startup – to cough up a monthly mortgage payment of $21,300 (so 55.7% of them were cash sales). LA is second in line with the minimum 1%-home setting you back $3.65 million, or a monthly mortgage payment of $14,600. That’s the minimum. On the upper end, only the sky is the limit….
Location, location, location. Prices of 1%-homes vary by neighborhood. In my crazy San Francisco, for example, Redfin found that Presidio Heights came out on top at $7.48 million for the average 1%-home, neck to neck with neighboring Pacific Heights at $7.18 million, and well ahead of Russian Hill at $6.53. But Presidio Heights was only the 6th most expensive neighborhood in the report, the top five all being in LA. King of the hill: Beverly Glen, where the average 1%-home costs a cool $11.86 million.
Now there are more expensive towns in the Bay Area, like Atherton, that could compete with the priciest neighborhoods LA has to offer. But they’re too small to make it into the stats. And these stats are a perfect illustration of what the Fed has set out to accomplish: the “Wealth Effect” – a semi-religious doctrine propagated by the Greenspan Fed and elevated to a state religion by the Bernanke Fed. The relentless money-printing binge and zero-interest-rate policy did what it was designed to do: inflate bubbles in all asset classes and make those who own them rich, but some more than others. A home that cost $150,000 and jumps 50% in price will make the owner $75k. A home that cost $15 million and then jumps 50% will make the owner $7.5 million. A private equity firm that can borrow at near zero cost to buy up 40,000 homes might hope to gain around $5 billion. That’s how the Wealth Effect works.
The problem for the housing market is that there aren’t enough home buyers in that 1%-category. The few can push up prices for a while but aren’t numerous enough to push up sales of the overall market. And they don’t like to buy median homes. Yet, as prices rise, homes move further out of reach of the 99%, and inevitably, sales drop further. When sales suck for 99% of homes, something has to give. And we already know from the last housing bubble-and-bust cycle what will give: prices
Published at Testosterone Pit.
