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Summary

  • While the market has reveled in rising prices, first time home buyers have been pushed out of the market.
  • All cash investors and large firms have been behind most of the upswing in prices.
  • Shadow inventory being left off the market by banks has artificially propped up prices.

Since the 2008 crash and the precipitous fall in housing prices that accompanied it, many pundits have identified housing as a great buying opportunity given historically low interest rates and a large dip in overall prices. What many have failed to notice in the past few years is that while housing prices have risen at a dramatic rate, income is no longer following the prices.

(click to enlarge)http://research.stlouisfed.org/fredgraph.jpg?hires=1&type=image/jpeg&chart_type=line&recession_bars=on&log_scales=&bgcolor=%23e1e9f0&graph_bgcolor=%23ffffff&fo=verdana&ts=12&tts=12&txtcolor=%23444444&show_legend=yes&show_axis_titles=yes&drp=0&cosd=1963-01-01%2C1963-01-01&coed=2014-05-01%2C2014-05-01&width=670&height=445&stacking=&range=Custom&mode=fred&id=MSPNHSUS%2CA229RC0&transformation=nbd%2Cnbd&nd=%2C&ost=-99999%2C-99999&oet=99999%2C99999&scale=left%2Cleft&line_color=%234572a7%2C%23aa4643&line_style=solid%2Csolid&lw=2%2C2&mark_type=none%2C&mw=1%2C1&mma=0%2C0&fml=a%2Ca&fgst=lin%2Clin&fq=Monthly%2CMonthly&fam=avg%2Cavg&vintage_date=%2C&revision_date=%2C

Historically, the median sales price of new homes sold has followed closely disposable income per capita. This is a trend that goes back to the 1960s, and whenever home prices get out of line they quickly come back toward historical norms. We can clearly see from this chart the 2000s housing bubble, and we can also see that prices are again getting out of line with income.

But this is just one income measure. How accurate is disposable income per capita for most people? With all of the talk of the widening gap between rich and poor, perhaps using average income skews the data to not be indicative of most people. Is there a better way to capture what the housing market looks like for most people?

Perhaps the quick and dirty method for doing this would be to look at median household income.

(click to enlarge)

Here we see again a close relationship, which was obliterated in the housing bubble of the 2000s. During the correction, prices did not come all the way down, which probably has something to do with this.

(click to enlarge)

From a non-existent presence, the Federal Reserve has become a key player in the mortgage market. While this has been great for preserving inflated home values, this has been terrible news for buyers.

(click to enlarge)Homeownership Rates

Source: U.S. Census Bureau

Homeownership rates continue to plummet, and this in the midst of quickly rising prices? At least ownership rates were rising during the first housing bubble. That prices are rising now as rates are falling is absurd.

(click to enlarge)Fall in Ownership by Age

Source: U.S. Census Bureau

As expected, with these high prices, those with the least wealth are the most severely affected. Home ownership rates among the youngest here are down 12% from 2008. In fact, they are down at least 4% for everyone except those aged 65 and older. This is clearly indicative of housing prices being out of the realm of affordability for typical income earners.

According to census data, rental vacancies are down in the 8-9% range from an average of about 10% before the popping of the housing bubble. This has continued to be a great time to be a landlord. This rise in rental rates is indicative of a trend where people are being pushed out of traditional homeownership because of the high prices. Even with low mortgage rates, the prices are completely inhibitory to home purchases by individuals. So while vacancies are down and rents are up, home ownership tumbles. If there is a correction, it is likely that rents will come down also.

So why do prices remain high?

Beside Fed activity, most of this bubble is due to investment firms buying up properties as an investment. According to Goldman Sachs, today about 50% of all home purchases are all cash, compared to before the bubble where this stood around 20%. Not only this, but there is a large share of shadow inventory that is actually rising according to Mark Fleming. Banks are actively keeping distressed properties off of the market to preserve values. This is not indicative of a market with sane prices.

Summary

Home prices are far away from levels that most people can afford. While this has been a great time for investors who have made a lot of money with rapidly rising home prices, individuals have been priced out of the housing market and instead are forced to rent (or even move back home with parents). With prices continuing to rise and getting further away from median income levels, a collapse in the housing market is inevitable. With the actions that the Fed took after the first housing bubble, it will be interesting to see if they have any tools left to avoid the inevitable once this reflated bubble bursts.

Action to Take

As before, home builders are looking to lose a lot of money. If you own any of these equities, sell them immediately. If you want to make money on the fall, try buying put options against these stocks, but give yourself enough time for the bubble to burst. Some builders of note are D.R. Horton (NYSE:DHI), Lennar (NYSE:LEN), and KB Homes (NYSE:KBH). Also, an ETF such as iShares U.S. Real Estate (NYSE:IYR) is due for a major tumble, making a great opportunity for a short.

Disclosure: The author is short IYR, LEN, DHI. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.