Housing bubble, take 2

As homes in hard-hit cities languish in foreclosure, U.S. housing prices are reaching dangerous new heights


Joe Raedle / Getty Images

America’s housing collapse was supposed to be the kind of catastrophe that comes around once in a generation. Instead, some analysts are warning that a new bubble is forming just five years after the last one burst. This time, it’s not subprime lenders helping to push up prices, but easy-money government policies and billion-dollar hedge funds.

Home prices are up more than 12 per cent across the U.S. this year, according to the S&P/Case-Shiller Home Price Index. And they are soaring in some past bubble cities: up nearly 40 per cent in Las Vegas, 30 per cent in Phoenix and 20 per cent in San Francisco. Bidding wars are erupting in cities that were among the hardest-hit during the crash, where thousands of homes languish in foreclosure, even as buyers complain about a shortage of new listings.

“I’m beginning to see signs, not just in my district, but across the country, that we are entering, once again, a housing bubble,” Richard Fisher, chair of the Dallas Federal Reserve said after a speech to the Economic Club of New York last week. He pointed to the $40 billion worth of mortgage-backed securities that the U.S. Fed is buying each month, a policy designed to sop up many of the toxic subprime lending still weighing down the balance sheets of the nation’s banks, but that Fisher warned is helping to fuel low mortgage rates.

Meanwhile, 80 per cent of the nearly 525,000 homes in foreclosure in the U.S. still haven’t been listed for sale, sometimes years after they were repossessed by the bank, according to a new report from foreclosure-listing firm RealtyTrac. Laws in many states weren’t designed to handle the sheer volume of foreclosures, says RealtyTrac vice-president Daren Blomquist. At the same time, several major Wall Street banks were forced to suspend proceedings after employees were found to be foreclosing on millions of homeowners with improper—sometimes fraudulent—paperwork. That’s led to a massive backlog in foreclosures, which has helped push up house prices even further by restricting the supply of new listings. Nearly a third of bank-owned homes are sitting vacant, while nearly half are still occupied by previous owners, who are now living there mortgage-free. “These properties are going to be listed for sale at some point, but they’re being held off the market, in many cases, for a lengthy period of time,” says Blomquist. “That could, in the short term, be artificially inflating house prices.”

Even when homes do make it onto the market, they are being snapped up by hedge funds and private equity firms. Institutional investors have purchased as many as half the homes for sale in some cities in the past year, says Florida real estate analyst Jack McCabe, sometimes paying as much as 25 per cent over market value. Rather than try to flip them for profit, firms have been renting them out, often to previous owners who can no longer afford them. Blackstone Group has spent over $4.5 billion to amass more than 30,000 rental homes in the past year, and has plans to invest an additional $5 billion more in American real estate. Toronto-based Delavaco Properties Inc. has bought up more than 600 homes in South Florida and expects to buy close to 900 more, with most rented out to families who qualify for government-subsidized rent. “The funds are driving prices higher and artificially escalating values,” McCabe wrote in an analysis last month. He predicted the bubble would last another two years until mortgage rates start rising, prompting investors to dump properties. That could spark yet another crash, which would be a devastating blow to an economy that’s still reeling from the last one.


Housing bubble, take 2

  1. House prices are up 12%? I question that number as I know people in the USA and they haven’t seen the recovery. Sure, some areas are going up but it is all speculation driven. The reality is USD is losing value fast enough that people will pay a 25% premium to get out of cash as the USD future value is suspect in massive spiral debt. USD is now at record lows to the Yuan…..

    Real-estate may be a bad move as city/state/prov taxes are going up far faster than average inflation drawing out a long term cash flow issue and another bubble for sure. US economy is no longer strong enough to support any recovery as its destination for a much lower standard of living.

    Even looking at Canada, the bubble is bursting in areas I watch. Have cash, just waiting for the crash. People ignore, if you can’t afford to work towards ownership of it, you can’t really afford to rent it. As people “downsize” the properties in question will too go down. USA population is shrinking, and more Mexicans going home than coming to stay.

    Our monetary system is now hopelessly corrupt, bankrupt and just a mater of time before CAD/USD lose so much value we will be a 2nd world economy.

    • While I agree that the US is debasing its currency and therefore hollowing out the value of savings people have, suggesting it’s going to ‘lose so much value we will be a 2nd world economy’ isn’t following from the stats.

      This is because the Euro, the Pound Sterling, and the Yen are in a downward spiral as well. The Yuan, being linked to the USD, is also downward. What this has done is make accumulation of dollars popular! so the dollar price index (purchasing power of the USD) has remained fairly robust through all these successive rounds of quantitative easing. It’s almost mind boggling.

      The dollar ‘doesn’t suck’ relative to its ‘peers’.

      Real Estate may be more expensive due to the expectation of inflation from having tripled the supply of money since 2008 in the US. Similarly, you see an uptick in gold prices recently. People want to move their ‘savings’ into something that will hold value better. For that matter, the stock market is oversold in a huge way because stocks are seen as better than bonds in terms of real returns.

      • Those countries do not hold World reserve currency status like the U.S. Eventually, they have to stop devaluing to sell products to the U.S in exchange for U.S Bonds. If they don’t they face high inflation or possibly hyperinflation. U.S citizens are already losing their standard of living, roughly 100million or 1/3rd of Americans are now on some form of social assistance, whether it be federal EBT food stamps or State funded assistance. Look at each countries GDP, the U.S is a non productive country on the brink of collapse with cheap money, there is no way the U.S can pay back all Bonds issued. The U.S will have to do what the greeks did and negotiate with bond holders or better yet just default entirely to save the Economy. I expect once China stops buying U.S Bonds, japan and others will follow, because again, their currency do not hold Reserve Status and cannot be printed like the dollar, those currencies face real consequences if they continue devaluation. I do not expect the Fed to taper, their talk of taper is just to scare the markets but as seen recently the Fed is fully aware by tapering, the houing bubble, stock market bubble and bond bubble risk blowing up in their face. Janet Yellen will probably pay bond holders in whole by printing massive amounts of dollars once countries pull out do to high inflation hitting their shores. Eventually the Americans will face high inflation and stop the non-sense going on in Washington when they lose everything.

  2. Houses will come back and the market has always been about timing on both sides of the buying or selling coin!

  3. 12%? In parts of Orange County, California prices have shot up by 40+% in the last year alone!!

    The concern here is that WHEN not IF the current bubble in housing bursts there will be no solutions left to tackle the shock to the system since we have already thrown so much money at “fixing” the prior bubble! It’s going get very interesting in the next few years that’s for sure!