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Super Hot Real Estate Market Gets Ice Cold in June

Written by Gary North on July 19, 2013

The San Francisco area was hot. It was Evening News hot. In June, it turned cold. Sales dried up. Between May and June, sales in San Francisco fell 7.5% — in one month. What about year over year? Sales were down 9.4%.

Real estate markets never turn cold in June. In June, the markets heat up. Not in the Bay Area. Not in Northern California as a whole.

Mark Hanson is a specialist in California real estate. He has been predicting this for months. Now it’s here. Even more alarming is this: mortgage rates had not yet risen in April. Buyers had locked in low rates.

What’s most alarming about this is that “June” existing sales are actually from “contracts and price decisions” made in April and May when rates were at HISTORIC LOWS.

This market had suffered from an artificially reduced supply. Then, with no warning — other than from Hanson — the bottom dropped out.

Low rates had pulled purchasers forward. Buyers wanted to lock in those rates. Now they are gone. Buyers today face rates that are 50% higher than in early May.

If July reports similar declines, then San Francisco real estate has hit a brick wall.
The Federal Reserve has been pouring $40 billion a month into Fannie/Freddie bonds, yet mortgage rates leaped up, contrary to the FED’s assurances to the contrary when QE3 began last December. The stimulus has worn off. Hanson calls this the “stimulus hangover.”The stimulus was, in his words, “18 months of the most incredible, direct stimulus in history.” Now it’s over in San Francisco.
The hangover began before rates started moving up. That is ominous. The pent-up demand is no longer pent up. It is gone with the wind. Sales are falling prices will soon follow.
Prices rose because of falling interest rates. They also rose because bankers made deals around the nation with insolvent home owners who could not pay their mortgages or their HELOCs. What is a HELOC? It is a home owner’s loan against the equity in his home. Then this equity disappeared in 2009. The banks re-negotiated, offering lower rates. Why? To avoid foreclosure. These are called “mortgage modifications.” That created a distressed supply. Then legislatures moved in to prevent foreclosures. That increased the distressed supply. How large is this hidden inventory? Large.

Now that there is no distressed supply due to 6.5 million mortgage mods, a record long foreclosure timeline, banks protecting legacy HELOCs, and new laws outright outlawing foreclosures — and investors are out of the game so quickly — prices will have to come in to reflect real sales,,,more organic in nature by those using mortgage loans that need residential real estate appraisals.

Because the Case-Shiller index on urban housing prices is a 3-month average, what happens in June/July will not be fully factored in until October, which will be released in December. Merry Christmas!

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2 thoughts on “Super Hot Real Estate Market Gets Ice Cold in June

  1. It will be interesting to see how home sales correlate to mortgage rates. Historically there's been little factual evidence (contrary to theory). This time may be different, of course, and anyone predicting markets in this environment is brave indeed.

    A lot of distressed housing has gone into the hands of investment groups hoping for higher returns on rents than available by other means. The idea they bought these to 'flip' seems a bit far-fetched. If they bought them right, why should they liquidate cash-flow producers to buy … what? bonds? stocks? Likely future gains appear minimal on assets which all look pretty risky.

    Maybe the hedgies got it wrong in buying carloads of low-priced residential real estate, but the point that's often missed is that they've cleared those properties from the market with little or no leverage involved, whether they make any money on them or not. Those houses are no longer for sale and it seems unlikely they'll soon be dumped back into the market again at huge expense to recover cash that cannot be usefully and safely deployed any other way. Apart from gold, of course. 😉

  2. Big funds like Blackrock are buying up houses by the scores to rent out to people who can't afford to buy homes. The banks have a huge supply of foreclosed homes that they are keeping off the market or allowing the people to still live in the homes to keep the nasty reality of the housing market under cover. At one time, this "shadow inventory" was estimated at 5,000,000 homes, which if they all went on the market would really depress it and that is the last thing the Obama admininstration wants, is for another part of the economy to tank. It's more of the fakery in this economy…