Home Prices In 80% Of US Cities Grow Twice Faster Than Wages... And Then There"s Seattle

According to the latest BLS data, average hourly wages for all US workers in November rose at a stubbornly low 2.5% relative to the previous year, well below the Fed"s "target" of 3.5-4.5%, as countless economists are unable to explain how 4.1% unemployment, and "no slack" in the economy fails to boost wage growth. Another problem with tepid wage growth, in addition to crush the Fed"s credibility, is that it keeps a lid on how much general price levels can rise by. With record debt, it has been the Fed"s imperative to boost inflation at any cost (or rather at a cost of $4.5 trillion) to inflate away the debt overhang, however weak wages have made this impossible.

Well, not really. Because a quick look at US housing shows that while wages may be growing at roughly 2.5%, according to the latest Case Shiller data, every single metro area in the US saw home prices grow at a higher rate, while 16 of 20 major U.S. cities experienced home price growth of 5% or higher: double the average wage growth, and something which even the NAR has been complaining about with its chief economist Larry Yun warning that as the disconnect between prices and wages become wider, homes become increasingly unaffordable.

And while this should not come as a surprise - considering we have pointed it out on numerous occasions in the past - one look at the chart below suggests that something strange is taking place in Seattle, which has either become "Vancouver South" when it comes to Chinese hot money laundering, or there is an unprecedented mini housing bubble in the hipster capital of the world. Also worth keeping an eye on: price appreciation in Sin City has quietly surged in recent months, and in September home prices surged 10.2% Y/Y, the only other double digit price increase in the US after Seattle. Considering that Las Vegas was the epicenter of the last housing bubble when prices exploded higher only to crash, it may be a good idea to keep a close eye on price tendencies in this metro area. 

Confirming the recent jump in home prices, at the national level in Octoner home prices for the Top 20 metro areas rose 6.4% YoY according to Case Shiller, the fastest rate since June 2014. As Bloomberg adds, "a lingering shortage of previously owned homes is keeping housing prices elevated. That’s allowed homeowners to recover the equity lost during the housing collapse and recession a decade ago."

“Home prices continue their climb supported by low inventories and increasing sales,” David Blitzer, chairman of the S&P index committee, said in a statement. But that climb may be interrupted by the Federal Reserve hiking interest rates next year, he said. “Since home prices are rising faster than wages, salaries, and inflation, some areas could see potential homebuyers compelled to look at renting."

Meamwhile, for those looking to buy for the first time, conditions are less favorable. Growth in property values is outpacing wage gains and limiting affordability, representing a headwind for the market.

Finally, putting the above data in context, here are two charts courtesy of real-estate expert Mark Hanson, the first of which shows how much household income increase is needed to buy the median priced home in key US cities...

... while the next chart shows the divergence between actual household income, and the income needed to buy the median priced house.

 

"Hong Kong House Prices Could Soar Another 10% Next Year" - Have They Just Rung The Bell?

Hong Kong property was in Algebris Investments’ top tier of six most inflated bubbles from its longer list of the world’s fourteen biggest bubbles. The territory is ranked as the most expensive housing market in the world for the seventh successive year in 2017, with the medium home price selling for 18.1 times the median household income, according to Forbes. Last week, we discussed how the record price per square foot for a Hong Kong residence was smashed twice on the same day by the same buyer. The buyer paid HK$600 million, or HK$131,000 per square foot for an apartment in the exclusive “The Peak” district. Later that day, the same buyer paid HK$560m for another apartment measuring 4,242 square feet, equivalent to HK$132,000 per square foot. These two purchases beat the previous record of HK$105,000 per square foot paid on 17 September 2017.

In his analysis, Algebris portfolio manager, Alberto Gallo, used a variety of measures to identify irrational behaviour, two of which are “The trend is your friend” and “Sky is the limit”, both which apply to the latest prognostications for Hong Kong property prices from three of its leading real estate agents. According to Bloomberg.

Hong Kong’s red-hot housing market shows no signs of cooling anytime soon. Prices in the city have climbed 11 percent this year, defying skeptics waiting for the bubble to burst and government attempts to rein in the world’s most expensive housing market through a raft of taxes and mortgage curbs.

If anything, the frenzy has intensified in recent months as investors have poured money into property. Buyers have set new records for everything from luxury homes in the exclusive Peak neighborhood to undeveloped residential land. There have also been blockbuster deals for commercial property in the heart of Hong Kong’s central district. “Now it is very hot, because of the hot money rushing in,” said Raymond Ho, deputy senior director of residential development and investment at Savills Plc. “There is more record-breaking coming.”

Runaway growth has put the city in bubble risk territory, according to the UBS Global Real Estate Bubble Index. Even so, mass-market home prices will rise 8 percent to 10 percent next year, according to property consultancy Colliers International Group Inc. Real estate consultant Knight Frank LLP expects prices of such homes to climb 5 percent next year, while luxury housing advances 8 percent.

Helpfully, Bloomberg has conducted a survey of Hong Kong property bulls to discover their reasoning as to why the “Sky is the limit” for prices.

Here are five reasons why property bulls say the city’s housing market will continue to defy expectations of a slowdown:

1. Demand Outstrips Supply
An average 20,000 new private residential units come to market each year, barely enough to cover the 20,000 mainland Chinese who become permanent residents each year -- allowing them to avoid the punitive stamp duties slapped on foreign buyers -- let alone anyone else. The number of unsold apartments in the third quarter fell to the lowest levels since 2015, according to Bloomberg Intelligence.

2. Money’s Easy
Cash-rich developers are pulling out all stops to entice buyers. At its Cullinan West project, Sun Hung Kai Properties Ltd. is offering buyers finance of as much as 120 percent of the purchase price: 90 percent toward buying the new property, and 30 percent to pay down their existing mortgage. More than 95 percent of the 321 units offered over the weekend sold, Sun Hung Kai said. They were priced about 11 percent higher than a March sale at the same development, according to BOCOM International Holdings Co. Other developers offer rebates to buy furniture or interest-only loans for the first three years.

3. ... and Cheap
In a sign that mortgage wars between banks are raging even amid the prospect of rising interest rates, HSBC Holdings Plc is offering to match low rates from rival lenders. Hong Kong’s largest mortgage lender is offering some clients a rate of Hibor plus 1.28 percent if they get similar terms from other banks. That works out to less than 2 percent.

“These rates are highly affordable and will continue to be, even if the U.S. pushes up rates 25 or 50 basis points,” said Marcos Chan, senior director of head of research for Hong Kong, Southern China and Taiwan at CBRE Inc.

 

4. The Bank of Mom and Dad
The biggest obstacle for new home buyers is coming up with the minimum 40 percent down-payment required by Hong Kong Monetary Authority loan-to-value ratios. Step in the Bank of Mom and Dad. Hong Kong’s de-facto central bank has warned young buyers are increasingly turning to their parents, with home purchases being financed partially by proceeds from refinancing mortgages. That also makes it harder for others whose families aren’t asset-rich to get on the property ladder.

The average number of monthly refinancings rose to 3,100 in the first three quarters of this year from 2,200 in 2016, according to HKMA data.

Through August, the value of refinancing was equal to almost 50 percent of primary sales, according to Cusson Leung, head of research for Hong Kong property and conglomerates at JPMorgan Chase & Co. “We have the sense that most of the financing is going into buying property.”

5. Soaring Land Prices
Aggressive bids by mainland developers keen to build up land banks have pushed Hong Kong prices to records. Non-local developers account for 68 percent of all government land purchases this year, according to Colliers.

In February, two mainland companies paid a record HK$22,118 per square foot for a waterfront site. Those costs will ultimately result in higher apartment prices once developments are completed, causing neighboring property owners to raise their own expectations.

“People translate a land sale into the final built price, and when it is way above the market everyone will raise their own prices,” said Denis Ma, head of Hong Kong research at consultancy Jones Lang LaSalle Inc.

We don’t know when the HK property bubble will burst, but the cascading selling we’ve seen in Chinese financial markets – from government bonds to corporate bonds to equities following October’s Party Congress – is hardly reassuring. Furthermore, as was noted above, Hong Kong mortgages tend to be priced off Hong Kong interbank rates and 1-month HKD Hibor has recently spiked to its highest rate since December 2008, in the midst of the last crisis, which hardly augurs well.

 

The Republican Tax Plan Will Crush These Housing Markets

For the past few weeks, Chuck Schumer and Nancy Pelosi have screamed to anyone who would listen that the GOP tax plan is nothing more than a tax break for millionaires and an attack on middle class working families.  But, as the Wall Street Journal points out this morning, America"s millionaire, billionaire, private jet owners living in expensive urban areas are set to lose "bigly" if Trump"s $500,000 cap on the mortgage interest deduction survives.

But in the priciest markets, concentrated in some of the nation’s largest coastal cities, the impact could be significant. In the San Jose, Calif., metropolitan area, 75% of new mortgage loans thus far in 2017 were for more than $500,000, according to an analysis by CoreLogic Inc., a housing data provider. The median home price there is more than $1 million, and even small starter homes can climb well above the proposed cap.

 

In the San Francisco metro area, 60% of new loans were for more than $500,000, while in Los Angeles and San Diego, the figures were 44% and 37%, respectively.

 

The impact wouldn’t be limited to California. In Honolulu, 48% of loans were greater than $500,000, while the figures for the New York area and Seattle were 22% and 25%, respectively.

 

An analysis by ATTOM Data Solutions yielded similar results. In the Washington, D.C., area, 35% of purchase and refinance loans in 2017 thus far were for more than $500,000. In Hawaii, 15% of loans fell into that category, while in California 12% did.

In addition to capping the mortgage interest deduction, the current GOP bill also limits the amount of property taxes that households can deduct to $10,000 annually.

Not surprisingly, the assault on McMansions has angered the realtor lobby which we"re certain will fight tooth and nail to preserve the status quo.

Jeff Barnett, a California realtor and vice chairman of the National Association of Realtors’ large-firm real-estate services committee, said his area will be hit “very, very hard” if the tax bill passes. Even if corporate tax cuts help boost the economy, he doesn’t think that will be enough to compensate.

 

“You’ve taken away so many incentives for housing, they can’t spend” the money from any extra economic growth, he said.

Of course, as we pointed out earlier this week (see: Trump Is About To Crush Home Prices In Counties That Voted For Hillary: Here"s Why), Clinton won the vote in the top 45 counties in the country with the highest median home prices which has resulted in rampant speculation that the mortgage cap is nothing more than a clever punishment levied on Democratic voters.

As Dennis Lee calculated, "assuming that all of these homeowners are taxed at a marginal rate of 39.6%, we find that the increase in tax burden during the first 12 months of homeownership driven solely by the mortgage interest and property tax deduction caps varies from $0 for the county with the 20th highest median home price (San Miguel County, Colorado) to approximately $7,200 for the highest-priced county (San Francisco County, California)." Barclays" conclusion: these counties - all of which are largely pro-Clinton - would need a 0-11% decline in their median home prices to keep the after-tax monthly mortgage and property tax payments the same for would-be buyers.

Of course, only time will tell whether the swamp (a.k.a. "The National Association of Realtors" in this case) will allow this particular component of the GOP tax bill to survive...

"Innovative Mortgages": Lennar Lures Millennials With Offer To Repay Student Loans

Homebuilder Lennar has come up with a genius strategy to partially eliminate the massive bubble in student loans that has crippled recent graduates and forced them into a life devoid of the American dream of home ownership...it"s a "two birds with one stone" kind of solution.  Yes, rather than struggle to make those monthly student loan payments, Lennar has developed an "innovative mortgage" designed to allow millennials the opportunity to convert their student debt into an "investment" in America"s "Housing Bubble 2.0."

So how does it work?  According to the Wall Street Journal, Lennar is set to introduce the new promotion tomorrow that will make a payment on a buyer"s student loans, equal to 3% of their purchase price up to $13,000, in return for purchasing a new Lennar home...it"s as simple as that.

Student-loan debt has been an obstacle for many potential home buyers. Now, Lennar Corp. is trying to do something about it.

A subsidiary called Eagle Home Mortgage plans to introduce on Tuesday a program under which Miami-based Lennar will pay off a significant chunk of the student loan of a borrower who purchases a home from them.

Housing observers said other builders are likely to look to mimic the program, which could help lure more of the critical first-time-buyer segment into home purchases.

“Obviously there’s a benefit to bringing more people into the home buying market. We’re trying to design something here that supports affordability and creates that path to homeownership,” said Doug Cropsey, a senior vice president at Eagle.

Lennar will make a payment to a buyer’s student loans of as much as 3% of the purchase price, up to $13,000. The contribution doesn’t directly increase the purchase price of the home or add to the balance of the loan.

Meanwhile, and to our complete "shock" no less, the WSJ also explains that Fannie Mae, a government sponsored enterprise, has agreed to back the new "innovative" loans from Lennar.  All of which means that millennials will effectively have their private student loans, which can"t even be expunged in bankruptcy, converted into brand new mortgage debt, backed by the full faith and credit of U.S. taxpayers, that will be socialized when the current housing bubble inevitably collapses yet again.

Consumer advocates are wary the program sounds too good to be true. They point to builder incentive programs during the last boom that helped inflate the price of new homes. Those programs allowed sellers to pay a portion of the buyers’ down payment, which in turn tended to drive up the price that people could afford to pay for their homes.

“We’ve had bad experiences when home sellers get involved in mortgages, particularly innovative mortgages,” said Dan Immergluck, a professor at the Urban Studies Institute at Georgia State University, who studies the housing market, mortgage finance and foreclosures. Mr. Immergluck said if the program drives up home prices, buyers without student loans will end up sharing the burden with those who do.

Mortgage-finance company Fannie Mae has agreed to back the loans and will monitor the program to ensure that the value of student-loan payment isn’t included in appraisals of the home, which in turn can help drive up values.

“This is not without risk,” said Jonathan Lawless, vice president of customer solutions at Fannie Mae. “Builders always want to provide more money and incentives for people to buy their homes. It has the potential to start distorting values.”

On a side note, and somewhat ironically, the WSJ used a Texas family that already owns a home and simply intends to upgrade to a larger McMansion as an example of the potential of a program designed to help recent graduates who have had a hard time breaking into home ownership.

Christopher Oquendo and Jeri Coate are
planning to use the program to virtually eliminate their student debt. The couple, who are in their mid-30s, wanted a bigger house but were reluctant to take on more debt. Ms. Coate, who works in a notary’s office, still had outstanding student loans from training she had done to be a medical administrative assistant and the couple had other unpaid bills as well.

“We needed to get something bigger and upgrade but it was kind of a rough decision to make considering our status with bills and all,” Mr. Oquendo said.

The couple are now in the process of closing on a Lennar home in the city of La Marque, Texas, about 50 miles south of Houston, with two more bedrooms than they had before.

Of course, if home ownership is important to millennials than another idea would be for them to actually save their money for a down payment rather than spending it all on the new iPhone every year...but what do we know.

Here Are The Cities Of The World Where "The Rent Is Too Damn High"

In ancient times, like as far back as the 1990s, housing prices grew roughly inline with inflation rates because they were generally set by supply and demand forces determined by a market where buyers mostly just bought houses so they could live in them. Back in those ancient days, a more practical group of world citizens saw their homes as a place to raise a family rather that just another asset class that should be day traded to satisfy their gambling habits. 

But, thanks to the efforts of global central banks, the days where home prices roughly reflected the ability of the marginal local buyer to afford those homes, is long gone.  As a general rule of thumb, a house was historically considered "affordable" if it was less than 2.5 times a family"s annual gross income...by those metrics, at least according to the UBS Global Real Estate Bubble Index released earlier today, the median buyer can"t afford housing in pretty any of the major cities of the world.

Buying a 60m2 (650 sqft) apartment exceeds the budget of people who earn the average annual income in the highly skilled service sector in most world cities. In Hong Kong, even those who earn twice the city’s average income would struggle to afford an apartment of that size. House prices have also decoupled from local incomes in London, Paris, Singapore, New York and Tokyo, where price-to-income multiples exceed 10. Unaffordable housing is often a sign of strong investment demand from abroad, tight zoning and rental market regulations. If investment demand weakens, the risk of a price correction will increase and the long-term appreciation prospects will shrink.

Meanwhile, the price-to-rent ratios below further reflect the insanity of global real estate bubbles where yields have gradually trended toward 0% as speculators are once again utilizing cheap mortgages to bet on price appreciation with complete disregard for underlying fundamentals. 

Zurich and Munich have the peak price-to-rent ratios, followed by Stockholm and Vancouver. Extremely high multiplies indicate an undue dependence of housing prices on low interest rates. Overall, half of the covered cities have price-to-rent multiples above 30. House prices in all these cities are vulnerable to a sharp correction should interest rates rise.

 

Price-to-rent values below 20 are found only in the US cities of Los Angeles, Boston and Chicago. Their low multiplies reflect, among other things, higher interest rates and a relatively mildly regulated rental market. Conversely, rental laws in France, Germany, Switzerland and Sweden are strongly protenant, preventing rentals from reflecting true market levels.

 

But stratospheric price-to-rent multiples reflect not only interest rates and rental market regulation but expectations of rising prices, for example in Hong Kong and Vancouver. Investors anticipate being compensated with capital gains for overly low rental yields. If such hopes do not materialize and expectations deteriorate, homeowners in markets with high price-to-rent multiples are likely to suffer significant capital losses.

But there"s probably nothing to worry about...everything worked out just fine in 2009.

These Are The Best And Worst U.S. Cities To Own A House

In its latest, January, update of US home prices, Case-Shiller reported that the unadjusted 20 city composite index, rose at a 5.9% annual rate, up from 5.7% last month and setting a 31-month high. Perhaps even more notable is that in 17 of 20 metro areas, the pace of home appreciation over the past year was 5% or higher, or more than double the pace of core inflation. And with rents continuing to soar across the country, in many cases at a double digit clip, not to mention exploding healthcare costs, one wonders just what the BLS "measures" with its monthly CPI update.

In any case, for those lucky Americans who can afford to own a house instead of being stuck renting the New Normal American dream where they are prohibited from peddling fiction as their annual rent increases by 10% or more each year, here is the breakdown of the best and worst cities for home price appreciation in the U.S.

At the top, with annual price increases of 10% or more, we find the usual west coast (and thus closest to China) suspects: Seattle and Portland, followed close behind by Denver and Dallas, which appears to be enjoying the recent revival in shale. What is more surprising is that on the other end we find Cleveland, Washington and - of all places - New York, which was dead last with only 3.2% annual price appreciation.

Here are some more observations from Case Shiller on the top 3 cities:  Seattle, Portland, and Denver reported the highest year-over-year gains among the 20 cities over each of the last 12 months. In January, Seattle led the way with an 11.3% year-over-year price increase, followed by Portland with 9.7%, and Denver with a 9.2% increase. Twelve cities reported greater price increases in the year ending January 2017 versus the year ending December 2016. 

The below charts compare year-over-year returns for Seattle and Portland with different ranges of housing prices (tiers). Tier level analysis from 2011 to present for both Seattle and Portland’s year-over-year returns show housing prices in the high tier to be the most stable, while housing prices in the low tier are the most volatile

So Who's Pumping Up This "New Normal" Housing Market?

Via Wolf Richter of WolfStreet.com,

America becomes “Landlord Land.”

“A housing recovery that is highly dependent on real estate investors is a bit of a double-edged sword,” explained Daren Blomquist, senior VP at ATTOM Data Solutions. “Rapidly rising home values have been good for homeowner equity, but also have caused an affordability crunch for the first-time homebuyers the housing market typically relies on for sustained, long-term growth.”

So the housing market is “starkly different than a decade ago,” said Alex Villacorta, VP of research and analytics at Clear Capital. “As such, it’s imperative for all market participants to understand the nuances of the New Normal Real Estate Market.”

They were both commenting on a joint white paper by ATTOM and Clear Capital, titled “Landlord Land,” that analyzes who is behind the US housing boom that drove home prices to new all-time highs, and in many markets far beyond the prior crazy bubble highs – even as homeownership has plunged and remains near its 50-year low.

First-time buyers are the crux to a healthy housing market, but they aren’t buying with enough enthusiasm. In 2012, buyers with FHA-insured mortgages – “who are typically first-time homebuyers with a low down payment,” according to the report – accounted for 25% of all home purchases. In 2013, their share dropped to about 20%, in 2014 to 18%. Then hope began rising, briefly:

However, in January 2015, FHA lowered its insurance premium 50 basis points, and there was a modest resurgence in FHA buyers – a trend perhaps indicative of loosening credit requirements or of a desire to re-enter the housing market for those displaced during the crash.

Their share of home purchases ticked up to 22.3%. Alas, “the FHA resurgence was short lived” and in 2016 eased down to 21.7%.

With first-time buyers twiddling their thumbs, who then is buying? Who is driving this housing market?

Institutional investors? Defined as those that buy at least 10 properties a year, they include the largest buy-to-rent Wall Street landlords, some with over 40,000 single-family homes, who’ve “picked up the low-hanging fruit of distressed properties available at a discount between 2009 and 2013,” as the report put it. That was during the foreclosure crisis, when they bought these properties from banks.

In Q3, 2010, institutional investors bought 7% of all homes. In Q1 2013, their share reached 9.5%. As home prices soared, fewer foreclosures were taking place. By 2014, when home prices reached levels where the large-scale buy-to-rent scheme with its heavy expense structure wasn’t working so well anymore, these large buyers began to pull back. In 2016, the share of institutional investors dropped to just 2% of all home sales.

But as institutional investors stepped back, smaller investors jumped into the fray in large numbers, “willing to purchase in a wider variety of market landscapes and operate on thinner margins.”

To approximate total investor purchases of homes, the report looks at the share of purchases where the home is afterwards occupied by non-owner residents. In 2009, according to this metric, 28% of all home purchases were investor-owned properties. In 2010, it rose to 30%. In 2011, 32%. Then as big investors pulled out, it fell back to 30%. But by 2015, small investors arrived in large numbers, and by 2016, investor purchases jumped to 37%, an all-time high in the ATTOM data series going back 21 years.

The chart shows the share of purchases in a given year. Note the declining share of first-time buyers (blue line), the declining share of institutional investors (gray bars), and the surging share of smaller investors (green line). In other words, smaller investors are now driving this housing boom:

The pie chart below shows the share of properties owned by investor size. Among investors in today’s housing market, small landlords that own one or two properties own in aggregate the largest slice of the rental housing pie – 79%:

However, Wall Street landlords are concentrated in just a few urban areas. For example, Invitation Homes, the 2012 buy-to-rent creature of private-equity firm Blackstone, which owns over 48,000 single-family homes and has nearly unlimited financial resources, including government guarantees on some of its debt, is concentrated in just 12 urban areas, where it has had an outsized impact.

Whereas small investors own properties across the entire country, in urban and rural areas, in cheap markets and ludicrously expensive markets. They own condos, detached houses, duplexes, and smaller multi-unit buildings.

So when the industry tells us about low inventories and strong demand in the housing market, it’s good to remember where a record 37% of that demand in 2016 came from: investors, most of them smaller investors. And when the financial equation no longer works for them, they’ll pull back, just like institutional investors have already done.

In what are now deemed the most expensive multifamily rental markets in the world – San Francisco and New York City – the commercial property bubble is already deflating. Read…  Here are the Top “Sell Markets” in an Overpriced World as “the Apartment Cycle Draws Closer and Closer to the End”