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Wolf Richter: Housing Bubble Means American

Dream Withers at Record Pace

TIP JAR

Posted on July 30, 2015 by Yves Smith

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By Wolf Richter, a San Francisco based executive, entrepreneur, start up

specialist, and author, with extensive international work experience. Originally
published at Wolf Street.
The current housing boom has Dallas solidly in its grip. As in many cities around the US,
prices are soaring, buyers are going nuts, sellers run the show, realtors are laughing all
the way to the bank, and the media are having a field day. Nationwide, the median price
of existing homes, at $236,400, as the National Association of Realtors sees it, is now
2.7% higher than it was even in July 2006, the insane peak of the crazy housing bubble
that blew up with such spectacular results.
Housing Bubble 2 has bloomed into full magnificence: In many cities, the median price
today is far higher, not just a little higher, than it was during the prior housing bubble,
and excitement is once again palpable. Buy now, or miss out forever! A buying panic has
set in.

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And so the July edition of D Magazine Making Dallas Even Better, is its motto had
this enticing cover, sent to me by David in Texas, titled, The Great Dallas Land Rush:

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Jeremy Grimm on Links 8/1/15
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Time for all but the fighters to

quietly...
Dallas Real Estate 2015: The Hottest Market Ever, the subtitle says.
Thats true for many cities, including San Francisco. The Boom Town, as its now
called, is where the housing market has gone completely out of whack, with a median
condo price at $1.13 million and the median house price at $1.35 million. This entails
some consequences [read The San Francisco Housing Crisis Gets Ugly].
The fact that Housing Bubble 2 is now even more magnificent than the prior housing
bubble, even while real incomes have stagnated or declined for all but the top earners, is
another sign that the Fed, in its infinite wisdom, has succeeded elegantly in pumping up
nearly all asset prices to achieve its wealth effect. And it continues to do so, come
heck or high water. It has in this ingenious manner healed the housing market.
But despite the current buying panic, the soaring prices, and all the hoopla round
them, there is a fly in the ointment: overall homeownership is plunging.
The homeownership rate dropped to 63.4% in the second quarter, not seasonally
adjusted, according to a new report by the Census Bureau, down 1.3 percentage points
from a year ago. The lowest since 1967!

Clive on More on the Systemic

Risk of Bank IT Systems
The main difference in what
happened with the...

abynormal on Links 8/1/15

thanks Jim... 'they' don't seem to
want us...

Clive on More on the Systemic

Risk of Bank IT Systems
What youre describing INDY when
you stipulate the...

MikeNY on Links 8/1/15

Biden to run? Wow, that would shake
things...

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Credit cards (133)

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The process has been accelerating, instead of slowing down. The 1.2 percentage point
plunge in 2014 was the largest annual drop in the history of the data series going back
to 1965. And this year is on track to match this record: the drop over the first two
quarters so far amounts to 0.6 percentage points. This accelerated drop in
homeownership rates coincides with a sharp increase in home prices. Go figure.
The plunge in homeownership rates has spread across all age groups, but to differing
degrees. Younger households have been hit the hardest. In the age group under 35, the
homeownership rate in Q2 saw a slight uptick to 34.8%, from the dismal record low of
34.6% in the prior quarter. Either a feeble ray of hope or just one of the brief upticks, as
in the past, to be succeeded by more down ticks on the way to lower lows.
This chart by the Economics and Strategy folks at National Bank Financial shows the
different rates of homeownership by age group. The 35-year and under group is where
the first-time buyers are concentrated; and theyre being sidelined, whether they have
no interest in buying, or simply dont make enough money to buy (represented by the
sharply descending solid black line, left scale). Note how the oldest age group (dotted
blue line, right scale) has recently started to cave as well:

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The bitter irony? In the same breath, the Census Bureau also reported that the rental
vacancy rate dropped to 6.8%, from 7.5% a year ago, the lowest since 1985. America
is turning into a country of renters.

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This chart shows the dynamics between homeownership rates (black line, left scale) and
rental vacancy rates (red line, right scale) over time: they essentially rise and dive
together. It makes sense on an intuitive basis: as people abandon the idea of owning a
home, they turn into renters, and the rental market tightens up, and vacancy rates
decline.

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This too has been by design, it seems. Since 2012, private equity firms bought several
hundred thousand vacant single-family homes in key markets, drove up prices in the
process, and started to rent them out. Thousands of smaller investors have jumped into
the fray, buying homes, driving up prices, and trying to rent them out. This explains the
record median home price across the country, and the totally crazy price increases in
some key markets, even as regular Americans are trying to figure out how to pay for a
basic roof over their heads.

TPP (38)

This has worked out well. By every measure, rents have jumped. According to the
Census Bureaus report, the median asking rent in the US rose 6.2% from a year ago,
and 17.6% since 2011. So inflation bites. But the Fed is still desperately looking for signs
of inflation and simply cannot find any.

Angry Bear

And how much have incomes risen over these years to allow renters to meet these
rising rents? OK, that was a rhetorical question. We already know what has been
happening to incomes.
Thats what it always boils down to in the Feds salvation of the economy: people who
cant afford to pay the rising rents with their stagnant or declining incomes should
borrow the money to make up the difference and then spend even more on consumer
goods. After us, the deluge.

But the party may not last much longer, as a decades-long tailwind will shift to a
housing headwind. Read Home-Buying Panic Sets in, Housing Bubble 2 Soars,
Industry Drools, But Its Doomed, Says Zillow
42

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This entry was posted in Credit markets, Dubious statistics, Economic fundamentals,
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Michael Hudson
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Guest Post, Real estate, The destruction of the middle class on July 30, 2015 by Yves
Smith.

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