“In hot real estate markets in the US, what’s happening is rental housing is being built to profit from rising rents and luxury housing is being built to meet the demand from wealthy overseas buyers,’ warns Adam Taggart in Market Oracle October 10.
Elsewhere, in a chilling 88-page industry note, Barclays analyst Stephen Kim warns that the bullish housing tale spun by his peers is more of a fairy tale.
“And yet, over the past several months, we have become increasingly concerned about the way many analysts are portraying the industry’s current weakness as a strength,” Kim wrote via Business Insider. “To us, this seems a perilously risky oversimplification.”
Further, in trading on Wednesday, shares of the iShares US Home Construction ETF (ITB) crossed below their 200 day moving average of $27.20, changing hands as low as $26.97 per share. ITB’s low point in its 52 week range is $21.22 per share, with $29.86 as the 52 week high point.
US MacroEconomic and Real Estate Conditions
A Bifurcated US Housing Market, How Much Longer Can Unaffordable Housing Prices Last?
“In the normal cycle of supply and demand, new more affordable housing would be built, and prices would decline.
Eventually, prices rise to a level that is unaffordable to the majority of potential buyers, with demand coming only from the wealthy. That’s the story of housing in New York City, the San Francisco Bay Area and other desirable locales that are currently magnets for global capital.
With limited land in desirable urban zones and high development fees, it’s not possible to build affordable housing unless the government subsidizes the costs.
Meanwhile, the supply of existing homes for sale is limited by the owners’ recognition that they won’t be able to replace their own home as prices soar; it makes financial sense to stay put rather than sell and try to move up.
Some homeowners are cashing in their high-priced homes and retiring to cheaper regions. But this supply is being overwhelmed by a flood of offshore cash seeking real estate in the US.
Demographics & Housing Valuations
There are plenty of young people who’d like to buy a house and start a family new household formation), but few have the job or income to buy a house at today’s nosebleed levels — a level just slightly less insane than the prices at the top of Housing Bubble of 2005-06.
Mortgage Debt & Earnings
Now that mortgage rates have hit bottom, there’s not much room left to push housing valuations higher by lowering rates. No matter how solid the buyers’ credit rating, mortgag- es remain intrinsically risky, as un- expected medical emergencies, job losses, divorces, etc, trigger defaults in the best of times. In recessions, job losses typically cause defaults and lenders’ losses to rise.
All debt, including home mortgages, is based on household income and debt levels. The higher the debt load, the more money the household must devote to debt service. That leaves less to spend on additional debt or other spending. As the second chart shows, the ratio of debt-to-earned income (wages and salaries) has declined since the speculative frenzy of the Housing Bubble, but it remains almost twice the levels of the pre-bubble era.
A Bifurcated Housing Market: The New Normal?
These dynamics have created islands of strong job growth and global/domestic demand for housing in which only the wealthy can afford to buy and everyone else is a renter for life. These islands are surrounded by a sea of lower-cost housing in regions with weak job growth and stagnant wages.
Is this bifurcation the New Normal? Right now, the general consensus is that housing prices “will never decline” in New York City, the San Francisco Bay Area, etc.—the islands of job growth and high valuations. This sentiment is due to the strong US economy and capital flows into USD-denominated assets. But if the bulk of this capital flow has already occurred, and capital controls and clawbacks become the order of the day, this prop under current nosebleed housing valuations might be kicked away far sooner than anticipated.”