Wolf Richter Housing Bubble Means American Dream Withers at Record Pace HTML

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Wolf Richter: Housing Bubble Means AmericanDream Withers at Record PacePosted on July 30, 2015 by Yves Smith

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2/8


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 priceof existing homes, at $236,400, as the National Association of Realtors sees it, is now2.7% 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 pricetoday 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 hasset in.

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

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“Dallas Real Estate 2015: The Hottest Market Ever,” the subtitle says.

That’s true for many cities, including San Francisco. The “Boom Town,” as it’s nowcalled, is where the housing market has gone completely out of whack, with a mediancondo price at $1.13 million and the median house price at $1.35 million. This entailssome consequences [read… The San Francisco “Housing Crisis” Gets Ugly].

The fact that Housing Bubble 2 is now even more magnificent than the prior housingbubble, even while real incomes have stagnated or declined for all but the top earners, isanother sign that the Fed, in its infinite wisdom, has succeeded elegantly in pumping upnearly all asset prices to achieve its “wealth effect.” And it continues to do so, comeheck 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 roundthem, there is a fly in the ointment: overall homeownership is plunging.

The homeownership rate dropped to 63.4% in the second quarter, not seasonallyadjusted, according to a new report by the Census Bureau, down 1.3 percentage pointsfrom a year ago. The lowest since 1967!

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4/8

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 backto 1965. And this year is on track to match this record: the drop over the first twoquarters 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 differingdegrees. Younger households have been hit the hardest. In the age group under 35, thehomeownership 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, asin 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 thedifferent rates of homeownership by age group. The 35-year and under group is where

the first-time buyers are concentrated; and they’re being sidelined, whether they haveno interest in buying, or simply don’t make enough money to buy (represented by thesharply descending solid black line, left scale). Note how the oldest age group (dottedblue line, right scale) has recently started to cave as well:

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5/8

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

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

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

This has worked out well. By every measure, rents have jumped. According to the

Census Bureau’s 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 signsof inflation and simply cannot find any.

And how much have incomes risen over these years to allow renters to meet theserising rents? OK, that was a rhetorical question. We already know what has beenhappening to incomes.

That’s what it always boils down to in the Fed’s salvation of the economy: people whocan’t afford to pay the rising rents with their stagnant or declining incomes shouldborrow 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 It’s Doomed, Says Zillow

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Guest Post, Real estate, The destruction of the middle class on July 30, 2015 by YvesSmith.

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