That the housing market is seriously twisted is apparent by the mortgage conundrum: despite historically low mortgage rates of around 4% for a 30-year fixed rate mortgage, mortgage originations averaged only $357 billion per quarter so far this year, according to the New York Fed. Unless a miracle intervenes in the fourth quarter, 2014 will be the worst year since 2000.

But home prices have soared 74% since 2000, according to the S&P Case-Shiller index. Unit sales are higher as well. Mortgage originations soared with them during the boom, crashed with them during the bust, and re-soared with them. Now home prices have “recovered” beyond the bubble highs in many markets, pumped up by big Wall Street players with access to the Fed’s free money. They gobbled up vacant homes for their buy-to-rent scheme. And they’re now stuffing rent-backed structured securities into retirement portfolios via conservative-sounding bond funds. But even these firms are getting cold feet [The Big Unwind: After Messing up the Housing Market, the “Smart Money” Bails Out].

Yet purchase mortgages started fizzling last year and today remain below the level of a year ago. At the segment where first-time buyers enter the market and where regular folks are trying to cobble together their American dream, buyers have to get a mortgage to buy a home. And there, things have gotten tough. Incomes have stagnated, and prices have been shoved out of reach.

And at the upper end, in the rarefied air where the beneficiaries of the Fed’s “wealth effect” are buying?

“It’s pretty mind-blowing, to be honest,” Los Angeles real estate agent Cindy Ambuehl told the LA Times. “The luxury market has been completely on fire.”

In the third quarter, 1,431 homes worth over $2 million were sold in the six-county Southland, up 14% from a year ago. In the second quarter, 1,436 of such homes were sold, the highest number ever. Sales of homes worth over $10 million are on track this year to double the prior record set during the peak of the last housing bubble.

“It’s just a completely different story between the two segments of the market,” said Selma Hepp, senior economist for the California Assn. of Realtors. “Those who are doing well are doing really well.”

The Fed’s ingenious “wealth effect” gets a big part of the credit. And incomes at the upper end of the spectrum have been growing strongly. So these folks want to translate these gains into something nice and real.

The wealth effect has been a success in other countries too, and some of the cash pouring into the top California housing markets comes from China and elsewhere. These folks are buying second homes and investment properties in an effort to move their wealth beyond the tentacles of political purges, anti-corruption strategies, and other governmental or business calamities that might entangle them at home.

“Everything’s just more global now,” Drew Fenton, an agent who specializes in high-end homes at Hilton & Hyland in Beverly Hills, told the LA Times. A decade ago “it was much harder to reach those people, and they didn’t travel as much.” Now a whole system has been set up to entice them.

A similar scenario is playing out in San Francisco. But already, cracks are appearing. Today’s S&P Case-Shiller September home price index for San Francisco edged down to 194.21 – the third month in a row of declines from the June peak of 195.88, and the first declines after a two-and-a-half-year period of uninterrupted gains totaling a phenomenal 57%.

But the index doesn’t fully portray the craziness in San Francisco. It covers five Bay Area counties that include cities like Oakland, which has been anointed the second most dangerous city in the US though it now has its own Bay Area housing boom and the mind-bending gentrification that comes with it.

In San Francisco itself, according to CoreLogic DataQuick, sales volume in October stagnated at last year’s level, but prices jumped 6.5% from September and 18.3% from a year ago to $999,250! A tad shy of the perfect $1 million mark of June, and nearly 23% above the prior record set in November 2007 that everyone afterwards acknowledged as totally crazy.

And that median home in San Francisco is a two-bedroom no-view apartment in a so-so neighborhood.

“After hitting what many view as a stratospheric level, Bay Area home prices have shown signs of leveling off,” said CoreLogic DataQuick analyst Andrew LePage. “To some extent it’s the result of sticker shock and a modest pickup in inventory.”

These are the cracks. But far above the median, it’s a different world. So a Victorian 3-bedroom, 3-bath, 4,000-square-foot single-family home in the Mission – an iffy area at the wrong time of the night – was bought by a flipper for about $1.6 million, rehabbed, and put back on the market less than three months later at $3.595 million. It quickly sold for $3.5 million. SF Curbed had this comment:

This home, an example of Stick/Eastlake architecture, was built in 1889 and is filled with both period details (hello, stained glass) and homey modern updates (solar panels!). There’s a lot to love here, from the trendy gray exterior to the hidden butler’s pantry in the dining room. Whoever bought this place paid in all cash.

At that segment, where money has a different meaning than for regular folks, the market is still hot. But there aren’t enough buyers with these means out there to prop up the entire housing market, and even if there were, they wouldn’t want to buy anything near a median home. That’s where the Fed’s ingenious wealth effect falls apart: it works with Wall Street firms and people who’re already well off. But by pushing up prices, it turns the American dream into a pipedream for an ever larger number of people.

Despite six years of unprecedented central-bank free-money policies that caused asset prices to jump, global economic growth is in trouble, according to the very businesses that are supposed to drive the economy forward. Their outlook for the next 12 months has plummeted to the worst level since crisis year 2009. Read…   Global Business Outlook: “Darkest Picture since Financial Crisis.” US Deterioration “of Greatest Concern”

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.