Higher rates, higher prices and weak fundamentals have sent home sales crashing in last year’s hottest markets casting doubt on the sustainability of housing recovery.

In the San Francisco Bay Area, home “sales plunged to a six-year low”…. while prices dropped 4.3 percent from a month earlier. (Los Angeles Times) Additionally, sales of new and existing homes and condos fell to their “lowest level for the month since 2008”, the peak of the financial crisis.

Similarly, Dataquick announced that “January was the worst month for home sales in nearly 3-years for Southern California.” Here’s more from Dataquick:

“Southern California logged its lowest January home sales in three years…The median price paid for a home dipped from December…The number of new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month (was) down 21.4 percent…in December, and down 9.9 percent…in January 2013.”… “The economy is growing, but Southland home sales have fallen on a year-over-year basis for four consecutive months now and remain well below average. Why? We’re still putting a lot of the blame on the low inventory. But mortgage availability, the rise in interest rates and higher home prices matter, too,” said John Walsh, DataQuick president.” (Southland Home Sales Drop in January; Price Picture Mixed), Dataquick

Low inventory is the favorite excuse of realtors who want to conceal what’s really going on in the market. The fact is, the higher rates (since the Fed announced its scaling back of QE) and higher prices have weakened demand and sent moneybags investors racing for the exits. Weak fundamentals (Stagnant wages and high unemployment) have added to housing’s troubles. Unemployment remains stubbornly high in the Golden State. It’s currently locked at 8.7 percent, a full percentage point above the national average.

Sales have also dropped sharply in Las Vegas and Phoenix, which were red-hot in 2013. In Vegas, “sales dropped in December to the lowest level for that month in six years … Total December home sales were the lowest for that month since December 2007.” (Dataquick)

In Phoenix, it’s the same deal. Check out this article in the Phoenix Business Journal which explains the situation without placing the blame on low inventory. Here’s an excerpt from the article titled “Has the Phoenix housing market finally balanced out? 2014 could provide the answer”:

“Despite the fact that there were 36 percent more homes on the market Valleywide in December than a year earlier…demand has continued to fizzle since July…In fact, single-family home sales were down 17 percent year-over-year, the report said. Even with a 12 percent increase in listings priced below $150,000…sales in that range plunged by a whopping 47 percent… Demand has been falling for several reasons. Rising interest rates and poor consumer confidence, largely ignited by the government shutdown, are among them. On top of that, many wannabe buyers don’t have the money for a down payment or have poor credit from a previous foreclosure or short sale… Additionally, Wall Street-backed investors have been losing their interest in the Valley as home prices rebound and foreclosures lessen. Institutional investors made up 19.3 percent of Valley home sales in December — less than half their peak market share in July 2012, Orr said… (Has the Phoenix housing market finally balanced out? 2014 could provide the answer, Phoenix Business Journal)

There it is, in just two paragraphs, everything you need to know. Sales are “fizzling” because rates are higher, prices are higher, and the economy stinks. The whole inventory-thing is a red herring, in fact, if you comb the data you’ll see that inventory had been increasing for a full year until August 2013, when the banks realized that they were in big trouble.

Why?

Because the Fed announced that it was going to reduce its asset purchases (QE) which pushed up mortgage rates by a full percentage point overnight. That’s what killed demand. (Mortgage rates had been in the 3-percent range, now they’re in the 4’s.) Two months later, the banks started reducing their inventory in order to keep prices artificially high and avoid more balance sheet hemorrhaging. It is a tale of blatant collusion that can be proved by simply browsing at a chart of housing inventory for the last couple years. (See chart here.)

Now take a look at this chart of mortgage rates and you can see how they spiked shortly after the Fed made its announcement in June. Rates have never really come down since. This is from the Mortgage Reports: