The Case Shiller data is showing a steady increase in home prices across the United States. The headline figures are clear but rarely make the connection that much of this gain is coming on the back of unprecedented Federal Reserve intervention. Data is clear that household income is not making any significant gains. These gains are coming largely from added leverage produced by lower mortgage rates. We’ll go into the details on this but you will see how a tiny drop in mortgage rates can supercharge home prices especially in a market where inventory is tightly managed as the year comes to a close. The Case Shiller is a better measure of home prices because it looks at repeat home sales. Yet even here we are seeing signs of bubble like activity in a handful of markets. An echo housing bubble is a possibility in many markets.

Echo housing bubbles

The Case Shiller figures reveal some strong gains in certain areas. Let us take a look:

Phoenix is an interesting case because since the bubble first burst, it has been a market dominated by investor money. The first boom was brought on by easy money in the initial round of the housing bubble. Prices collapsed but big investor money has flowed into the market pushing home prices up 21 percent in the last year as measured by the Case Shiller. This is interesting because Arizona household income is actually down 13 percent from the peak in 2007:

So doesn’t it seem odd that home prices suddenly shot up 21 percent in the last year when incomes have actually gone down? Of course much of the activity is coming from investment funds and investors. About 40 percent of all buyers in Phoenix last month were investors. Other places like Miami and Las Vegas are seeing similar trends. That is, local households have seen their income fall yet home prices are now rising sharply courtesy of external forces. The Fed with low interest rates has pushed big money to flow out of the banks to chase yield in real estate. It is ironic that Wall Street that typically looked down on being a landlord is now very much in the game.

You’ll also notice big jumps in California home prices. Again, the push is coming from all other sources except strong household income growth. There are those naïve and wedded to this new housing bubble that they are using the same denial tactics used during the first housing bubble. Some have even claimed incomes are going up! Let us look at the data:

That does not look like rising household incomes. Yet a good number of buyers are foreign buyers; in some markets like in California many are from China. So these figures do not hamper their buying ability. Wall Street money is still chasing yield and we have our hipster flippers back at it once again. Yet these rapid gains in price are unsustainable without real household income gains. Even the 4.3 percent gain across the US is merely a reflection of the tight inventory and Fed pressure on the 30 year fixed rate mortgage. But the Fed is now pushing at a $3 trillion balance sheet and we are already seeing leakage into other financed markets like higher education where easy access to debt is making costs soar. So what about the future home buyers that are now saddled with massive college debt? Interestingly enough college debt is much more expensive than mortgage debt which is an indication of our current priorities as a nation. After all, if we are targeting specific sectors for specialized low rate privileges why not target a sector that will education our future citizens? Then again, why not allow every American direct access to zero percent loans for anything they would like to purchase? This is the kind of logic some people will use to justify artificial low rates.

It might help to illustrate what has happened in the last year with an already low mortgage rate:

In the last year, the Fed has pushed rates from 4 percent to 3.3 percent. Big deal you might say but look at what it does in terms of price:

$500,000 mortgage @ 4%

PI = $2,387

$500,000 mortgage @ 3.3%

PI = $2,189

$545,000 mortgage @ 3.3%

PI = $2,387

In other words, the person qualifying for only $2,387 a month last year can now take on $45,000 more for the same monthly payment. People blindly think this is coming for free or have a religious like veneration of the Fed. Keep in mind the Fed is the reason we had the first housing bubble by not doing their job of monitoring member banks and stoking the flames of the mania by lowering rates. In the rubble of 5 million foreclosures, some seem to forget history. The Fed will now have to do everything it can to keep rates low but look at our current government and the current fiscal issues they are unable to resolve. Step back for a second and think reasonably here. We are spending more than we are taking in. That is simply a fact. If we enjoy the current level of services, guess what? You need to pay for it. If we don’t, then we need to cut. Seems reasonable enough but of course, the government is largely controlled by big interests and wants it both ways. That is why we are here only a few days away from the New Year with no plan on the table. It is likely a last second plan will emerge but will be a half-baked can kicking exercise that we have grown accustomed to.

Anyone bothering to read the details of what is being discussed realizes that once sacred items like the mortgage interest deduction or Prop 13 are now fully on the table. At the very least, major modifications will be coming down the road. I recently was seeing talk about doing away with 401k tax benefits. When you have many that are struggling the smoke and mirrors of increasing housing prices is simply a way of keeping banks from dealing with the ramifications from the housing bubble bursting in the first place. Who is really benefitting here? I’ve gotten countless e-mails from people being outbid for homes that they would like to purchase to live in and start a family because a flipper or a big Wall Street fund is seeking a better yield got their first. This is a modern problem in our housing market. Remember Paulson on his knees begging Congress for the banking bailouts to help the working and middle class? So much for that because many of these same banks are offloading properties to other financial institutions so they can jack prices up and rent them out or flip them to Americans that actually bailed out the financial sector in the first place. Higher home prices do very little good if incomes are not rising. That was lesson number one from the first housing bubble.

The Fed is picking winners and losers. One lesson you quickly learn in real estate is you do not have a win until you close escrow and a check is in your hands. Like all those that had paper gains in the first bubble, many tapped equity out and many did not sell at the peak. Why? It is hard to time manipulated markets but also, many wanted to sell and cash out and buy a larger (more expensive) place. In higher cost areas it is rare to see someone buy and then downsize. So this time around, unless you stay put for longer than the average five to seven years, you better hope the magic tricks of the Fed are still going on deep into the future. Seven years ago we were still in the mania of the first housing bubble and five years ago we were barely entering the recession. A lot will happen in that next timeframe but human behavior will not change in such a short duration. In the mean time, enjoy the echo housing bubble.

Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog to get updated housing commentary, analysis, and information.