Cracks Forming In Housing Bubble II (But This Time It’s Different)

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If the world has learned anything at all since the financial crisis – other than that crimes at the highest levels of finance aren’t actually crimes – it is that heroic money printing and a relentless zero-interest-rate policy by central banks re-inflate asset prices, no matter what the assets are, until they form new bubbles … and a whole new body of rhetoric about why, this time, it’s different.

So, the two most determined money printers in the world, the Fed and the Bank of Japan, redoubled their efforts in 2013. To their immense credit, in a world where miracles have become awfully rare, their flood of new money sloshing through the markets has performed one miracle after another.

The Nikkei closed with a 56.7% gain for the year, the most phenomenal jump since 1972, and the highest close in six years. However, converting your loot from devalued yen into less devalued dollars might cut your gain in half. But hey, devaluing a currency only looks pretty. The S&P 500 is likely to end the year with a gain of nearly 30%, one more year of torrid gains since the March 2009 low of 756.

Then there is housing, another miracle. During the run-up to the financial crisis, a few intrepid souls called it a bubble and predicted its eventual blowup. Everyone else, including the Fed, denied the existence of the bubble, and when it did blow up, they still denied its existence. “Plateau” and “taking the froth off” were among the operative terms. Only after prices had been crashing back to earth left and right, everyone agreed: it had been crazy, the whole system had gone berserk, it had in fact been a bubble, and it blew up with horrific consequences. “Housing bubble” became the official descriptor for that phenomenon.

But what are we calling the current phenomenon? “Housing recovery.”

And a phenomenon it is. The latest eye-opener, if one is still needed, was a Wall Street Journal analysis of home price data from online real-estate information site Zillow. It compared home values by ZIP Code against their respective peaks as they occurred during the 2005 – 2007 period. Turns out, home values in 10 of the largest 50 metro areas have already exceeded their bubble peaks.

Number one is Palo Alto, the epicenter of Silicon Valley craziness, where home prices jumped 19% this year and are now 40% higher than they were at their prior bubble peak. San Jose is almost back to its bubble peak. San Francisco is getting closer. In total, 38% of the Bay Area ZIP Codes are now above their prior bubble peaks.

More broadly, home values in 10% of the 4,400 municipalities in the largest metro areas in the country are above their bubble peaks. In Oklahoma City, they’re 13% higher; in Denver, 29.5%. Another 300 municipalities, such as Dallas and Nashville, are within 5% of their prior bubble peaks and might reach them soon.

OK, location, location, location. Many areas have not yet reached their old bubble highs, and some 1,500 locations are still 25% below their bubble peaks, according to Zillow. Overall, prices remain 16% below prior bubble peaks. So, the “housing recovery” must go on, apparently, until all prior bubble peaks have been vanquished.

It has been a stunning metamorphosis: The peak of the bubble, the apogee of all the craziness that was maligned and ridiculed, has become, abracadabra, a target for the housing “recovery.” The “healing process” won’t be complete until the prior bubble in home values has been outdone around the country. This is the level of insanity to which the Fed has driven this country.

But these bubble prices – at least that’s what they were called after the prior housing bubble – are slamming into higher mortgage rates. Affordability has collapsed. And even as the current housing bubble continues to inflate, just like the last one, cracks have been appearing for months.

One of them widened today. The National Association of Realtors’ Pending Homes Sales Index – a precursor for actual home sales – rose a scant 0.2% in November. But it “rose” only because October had been conveniently revised down today, giving the debacle a positive spin. Compared to the October index as originally reported, pending home sales in November actually dropped 0.4%.

This wasn’t a one-month fluke. And it confirmed a host of other measures. Pending home sales peaked in June, before the toxic mix of higher mortgage rates and higher prices started wreaking havoc on affordability. Then pending homes sales began to drop. By October, the fourth month in a row of declines, they’d dropped below the level of October last year, putting a damper on what had been a booming market. At the time, NAR chief economist Lawrence Yun blamed “the government shutdown in the first half of last month” that had “sidelined some potential buyers.” A sharp rebound was expected in November. But that didn’t happen. In November, pending homes sales were 1.6% below last year.

“The market is flattening,” the report conceded.

No downturn is allowed at the NAR, whose members make money only if homes change hands, and they make more money if they do so at a higher price. Ever higher volumes and prices are a built-in bias for any NAR forecast. A “flattening” is the worst-case scenario, same as during the last housing bust. So it predicts that existing home sales should remain flat in 2014 (5.1 million units) but then rise in 2015 to 5.3 million, despite higher mortgage rates and presumably higher prices.

But somebody has to pay for it, and that’s the hollowed-out American middle class. They face a stark scenario: last year, the payment for a 30-year mortgage with a fixed rate of 3.6% for a $270,000 home would have been $1,226 per month. If the home’s price rose 20%, as has been the case in many locations, and the rate rose to 4.62%, the payment these days would be $1,665 per month. A 36% jump in monthly expense (not counting taxes and insurance), for the same frigging home!

This is the insanity of the current housing bubble. It’s different from the insanity of the last housing bubble only in its details. And buyers, just like last time, are hitting a wall. Similar data has been pouring in for months. Repressed interest rates and the newly printed money chasing after assets, any assets, have distorted prices. And now that rates are rising, the prices have moved out of reach, and the hangover is starting to set in.

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