Housing Bubble 2.0?

Yves Smith (www.nakedcapitalism.com) posted an article today by Wolf Richter about housing prices in California and their dramatic rise in San Francisco, Los Angeles and San Diego.  Along with the price rise has been an increase in Home Equity loans as well as first mortgages that are interest only and held on bank balance sheets:

Home-equity loans are back with a vengeance – up 30.8% in the first nine months of 2013 from prior year and are expected to reach $60 billion for the year, the highest level since 2009 when the market was in collapse mode. But it’s still a far cry from 2006, when such loans hit an all-time crazy record of $430 billion, in a $15 trillion economy!

And Interest-only home loans are back! They’re becoming popular on jumbo loans. In a number of high-cost counties, including San Francisco, these are loans over $625,500 that banks can’t sell to Fannie Mae and Freddie Mac but have to keep on their balance sheets. Bank of America said that 36% of its fourth-quarter mortgages were jumbo loans, up from 23% in the first quarter – a factor of jumping home prices. Wells Fargo, Mitsubishi UFJ’s subsidiary Union Bank, JPMorgan, City National, Bank of the West…. They’re all offering interest-only loans.

Adjustable rate mortgages are also on the rise, accounting for 22% of loans in December (double the previous December).  Prices are up over 22% in California.  Of course, not all appears rosy:

But sales volume has been plunging. In December it was down 17.7% in San Francisco and 12.7% in the Bay Area from a year earlier. In California, volume dropped 12.1% to 34,949 sales, the worst December since 2007 – and 19.7% below the average for all Decembers since 1988. DataQuick hopes that volume is down due to inventory constraints. But when the prior bubble blew up, it looked the same: volume dried up while prices were still rising. Those were among the visible cracks.

Number one is Palo Alto, epicenter of Silicon Valley craziness, where home prices are now 40% higher than they were at their prior bubble peak.

Does any of this mean that things are about to come crashing down?  I’ve given up answering such questions (especially with mark-to-market accounting a thing of the past), but we should certainly be paying attention.

This blog began writing about housing back in 2005, it seems the more things change…

Scott Dauenhauer CFP, AIF, MSAP

For another article on how the middle class is affected, see: Cracks Forming In Housing Bubble II (But This Time Is Different)


Leave a Reply