In a recent interview Daren Blomquist, vice president of California-based real estate website RealtyTrac stated, “The Sacramento region is one of a number of markets nationwide that are in danger of some minibubbles.”
How could our region be in danger of a yet another housing bubble? After all, we’re just recovering from the effects of the last housing bubble and its inevitable implosion. Surely, we learned from our past experience — what’s filled with hot air and goes up must eventually come down.
How preposterous to think, that after suffering through 200,000 regional foreclosures and short sales, homebuyers could be suckered into another over-inflated housing market. No way! According to Zillow, 157,000 homeowners in our four-county region are still underwater. Buyers would never forget the past mistake of thinking prices can only go up would they?
Price bubbles can affect most anything that is purchased or sold. In addition to real estate, bubbles happen in the stock market as they did with the dot.com boom and bust. The technology index, NASDAQ, climbed to a historic high of 5,132 in October 2000 and then plunged to 1,108 two years later. Bubbles often occur with commodities such as gold, silver and oil. In each instance people paid exorbitant amounts over what the price should have been and afterward folks stood around asking themselves, “What were we thinking?”
Housing bubbles are not created by traditional homebuyers who utilize long-established financing guidelines. Homeowners are long-term users. Housing bubbles are instigated by wide-spread speculators and investors betting that prices will continue to rise based upon an overly optimistic infallible forecast of the future. Housing bubbles usually start when demand exceeds supply. Then investors enter the market, believing great profits can be made through short-term buying and then flipping. Housing bubbles usually end ugly when demographics or economic conditions change and investors begin dumping their properties on the market and dumping everyone’s home value along the way.
If a housing bubble were to exist, this of course doesn’t because we are all too smart to participate in that again, several factors would need to exist. First, there would need to be a shortage of homes for sale. Well, OK, perhaps we do have a temporary shortage. Available inventory in our four-county region is down 40 percent from last year. In our county we have 540 active listings or about half of what we would normally have for sale at this time of the year.
While a shortage of homes is an element of a housing bubble, bubbles require hot air. Do we have anything going on that would tend to over-inflate this housing market? Well come to think of it, the Feds are stimulating the housing market by using billions of taxpayer dollars and debt to keep mortgage interest rates below 4 percent with a policy called quantitative easing. Over the course of three rounds of quantitative easing — which some call “printing money” — the Fed has shelled out $2 trillion buying U.S. debt and mortgage-backed securities. Sub-prime lending was the hot air in the 2005-06 housing bubble. Could subsidized interest be the hot air in today’s market?
When speculators start manipulating prices by controlling the availability of a product it is a sure sign of a price bubble. Have we seen any of that? Well, hello. Investors now account for about 39 percent of all home sales in our region. Their quick cash, non-contingent offers are easily chosen by sellers over owner occupants who must rely on financing. To make matters worse, the Obama administration recently authorized the sale of 1,200 homes in our region to the ultimate speculator, an international hedge fund, the Blackstone Group. Discounted bulk sales are unnecessary in a recovering market. They contribute to the shortage of inventory, depress rents and will have an impact on property values when they are flipped in a year or two.
A character flaw that always appears in a speculative market and price bubble is greed. People get caught up by all the money that can be made if they hedge their bets a little, usually at the expense of others. Kenneth Lay and Enron profited by manipulating the energy bubble, Wall Street giant Lehman Brothers nearly collapsed the financial markets with its credit default swaps and Countrywide mortgage, once the fourth largest mortgage lender, is now dissolved because of its focus on subprime lending. Is greed a factor in our local market?
Tom Pool, deputy commissioner for the California Department of Real Estate, thinks something is amiss. “The department is setting records handing out disciplinary actions.” Pool went on to say that an unprecedented number of real estate licenses have been revoked — a 100 percent increase from five years earlier when there were 137,000 more licensed agents than today. The department has also issued a record number of desist-and-refrain orders — a whopping 170 percent increase over 2007. So what’s up?
According to Pool, “Several hundred homes never see the light of day.” Agents are participating in a questionable practice called pocket listings, allowing them to double-end the deal and collect both sides of the commission by tipping off investors first before listing the property in the MLS. Other agents are taking secret profits at the expense of their principles. “I’ve been doing this for a long time and I’ve never seen a market like this,” said Pool.
“The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works.” Gordon Gekko in the 1987 movie “Wall Street.”
Bubble, what bubble?
Ken Calhoon is a real estate broker in El Dorado County. He can be reached ar www.kencalhoon.com