Saturday Graphic: Housing Hype

At the risk of being called a crank, put me on record as not buying this housing recovery.  I  think that graphic below is a false card.

Not saying up isn’t better than down, but all things housing must be kept in perspective.  Continued ‘up’ isn’t a guarantee, despite the Federal Reserve’s distortion of the mortgage market (QE3), and despite all the real estate industry blather about home prices “hitting the bottom and finding a new uptrend”.  That may turn out to be so, or in the words of that great American Col. Sherman T. Potter it may be “horse hockey”.  Home prices are only at levels last seen in 2004, and that was a good six years into the pricing bubble, as you can see in the graphic.

There’s a lot of real estate agent and federal government generated hype out there designed to part you and your money.  Tread slowly and surely if you’re getting the urge to buy a home, and remember all real estate is local.  National trends mean nothing in Bakersfield or Duluth or Jacksonville.  North Dakota is red hot at the moment.  Southern Florida is not.

These three comments to follow are speculative.  I may get around to digging out data to confirm or deny someday.  Or not.  It seems to me, however, that a lot of this price bounce is coming from three sources, the first of which is a statistical illusion, the second of which is deeply, systemically and inherently unstable and the third of which is partly what got us into this mess to begin with.

First, a lot of foreclosed housing has been purchased in the last 6-12 months by investors for renovation and rental.  The WSJ has reports of large REIT organizations sucking them up dozens, even hundreds of properties at a time.  Those units are by definition on the fire sale end of the price curve.  Just removing them from the sale statistics would cause the ongoing average sale price on true owner-occupied units to rise.  This would be true even if these owner-occupied houses were bought at rock bottom prices.

Second, there are still millions of owner-occupied homes underwater, and it’s a long way back to “normal” for them.  How many properties will be abandoned in the future, or rolled into rental use, or held off the market by owners refusing to take money to the closing table is completely unpredictable.  It will be years before the housing market returns to a predictable equilibrium.  Price stability at this point is a roll of the dice.  These underwater homes will be a wild card, a volatility producer in the pricing curve for a long time.

Finally, this from the LA Times

Home flipping is back — and it’s going upscale.

The rapid-fire buying, fixing and reselling of houses played out on a mass scale during the bubble years, when prices were soaring. Back then, flippers could reap fat profits by adding little more than a fresh coat of paint. The practice all but vanished in the mortgage meltdown as values plummeted.

Now with prices on the rise in many areas and top-quality homes in short supply, home flippers are flooding back into the market. Nearly 100,000 homes flipped nationwide in the first half of the year, up 25% from the same period last year, according to real estate information firm RealtyTrac, which defines a flip as a house resold within six months of purchase.

When “flipping” gets started anywhere, particularly in the high end homes, it can distort the “average” price on that graphic above badly.  Besides, what works in Beverly Hills probably doesn’t work nearly as well in Manhasset Village Subdivision in Mason, Ohio.

So no rush, Mr & Mrs Potential Homeowner.  Shrewd, hard-headed caution, not getting caught up in the stampede the real estate mavens and government bureaucrats are trying to create, is well advised.


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