Irrational exuberance is back in fashion in California real estate. The bullish case for real estate is so strong that the echoes of the last housing mania are slowly fading away into economic history. Flipping is now a big part of niche markets and we are starting to see the whacky stories that are common in manias. For example, In San Francisco’s trendy South Beach neighborhood a parking spot sold for $82,000. While that may sound extreme that is simply the behavior that occurs when virtually the entire state is cast under the spell of real estate fever. There can be no wrong and apparently incomes do not matter anymore. We’ve already discussed the reemergence of interest only loans so we are simply experiencing another mania with a different flavor.

The $82,000 parking spot

A parking spot in San Francisco recently sold of $82,000:

“(CNBC) While it may seem like a lot of money, real estate agents said parking could be a good investment in densely packed San Francisco, where vehicle spaces go for a premium. They can add as much as $100,000 to the purchase price of a property or be rented out at rates of $400 to $450 a month – the going rate in South Beach.”

As we have stated before in terms of rental income, getting $400 a month for plunking down $82,000 is not exactly a wise investment especially for a parking spot. What is interesting in the above article highlighting the parking spot is the agent had sold a spot at the height of the last boom in the same building for $95,000. So we’re not exactly to the levels of the last boom but we’re getting close.

What is interesting is we are now seeing that this housing mania is largely a game for the financially connected whereas the last bubble was an open market for everyone. Take a look at the emergence of interest only loans:

“(NY Times) In particular, people in the financial services industry who derive most of their compensation from yearly bonuses commonly rely on interest-only loans to keep their mortgage payments manageable the rest of the year. “Then they take some of that bonus and pay down their mortgage each year,” said David Adamo, the chief executive of Luxury Mortgage in Stamford, Conn. “And their monthly payment then also goes down.” Thus, interest-only loans have evolved into a financial tool, and no longer a means to affordability.”

And these loans are being marketed in particular in wealthier markets:

The low interest rate environment is allowing the financial industry to utilize low rates to speculate in the rental housing market but also, to use these low rates to essentially borrow for free when you factor in inflation. How this will help your regular buyer is limited especially when the market is being flooded by hot money.

US foreclosure activity is still relatively high:

What was interesting is that last month, REOs jumped up by 11 percent.

“(Yahoo!) Banks repossessed 38,946 homes, an increase of 11 percent from the previous month. The number of homes hit with default notices for the first time grew by 4 percent. Among the five lenders involved in last year’s national mortgage settlement, all but Citigroup (C.N) saw an increase in repossessions. “It could be a sign of a trend we’re expecting, which is that eventually, the banks are going to pull the trigger and complete these distressed loans that have been sitting in limbo for some time,” said Daren Blomquist, vice president at RealtyTrac.”

What this really means is that smart banks are seeing the mania in the market and are gearing up to unload some of the backlog in properties. And why not? The market is incredibly hot and you want to sell into momentum. I said this many years ago about the Fed and will remind you that the Fed is looking out for member banks first, and any secondary benefits are merely a consequence of this behavior.

California home values

The median California home price is up a whopping 25 percent over the last year. Once again California home values are diverging dramatically from nationwide prices in the speed they are going up:

While the above is happening, this is happening with household incomes:

I know, incomes don’t matter when one-third of purchases are coming from hot money investors and another good amount of buying is coming from families stretching their budgets to the limits with low mortgage rates.

Interest only loans. Flipping. Hot investor money. Parking spots going for $82,000. Prices soaring by 25 percent while incomes are slowly edging up. Sure sounds like a normal market!

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