Monday, July 21, 2014

Sustained growth or another housing bubble?

From page C3 | March 22, 2013 |

“There appears to be no stopping this runaway real estate market. Home prices are increasing monthly and there are multiple offers on nearly every listed property. With low interest rates and many creative financing programs, nearly everyone is focused on buying real estate.”

That was taken from a column I wrote in June 2005 when the median selling price for a county home was $539,000. The rest, as they say, is history. Homes prices peaked a few months later followed by a long, six-year decline; finally reaching bottom in February of last year when the median selling price of a county home stood at $283,000.

Could history be repeating itself? There are some similarities.

Government manipulation of the housing market was partly to blame for the 2006 housing crash preceding the Great Recession. It became the stated policy by both political parties that everyone should be entitled to own a home. Increasing the percentage of homeowners was a worthy goal and Congress passed several affordable housing acts that mandated banks and federal housing agencies Fannie Mae and Freddie Mac reach out to the underserved. After all, everyone should share in a slice of the American Pie. Could current federal housing policies once again be blowing hot air into a housing bubble?

Today’s artificially low interest rates are a prime example. They are not a reflection of free market factors but reflect a Federal Reserve Policy called Quantitative Easing. This policy increases the money supply by buying government securities and by flooding financial institutions with capital in an effort to promote increased lending and liquidity. Simply, the Fed is borrowing huge sums of money and buying mortgages at ridiculously low rates. Does the Fed’s cheap and easy monetary policy remind us of anything that contributed to the last real estate bubble? Well, hello!

Here is an uncomfortable thought. What do you suppose will happen to the mortgage interest rates when the Feds decide to stop pumping money they don’t have into the housing market? How enthusiastic will homebuyers likely be if interest rates were at 6 percent?

In addition to subsidized interest rates, national housing policies are contributing to a housing price bubble by reducing the supply. Buyers can’t find anything for sale. Currently, the county has only 450 homes listed. Last year we had about twice that many. Entry level buyers have an even more difficult time locating affordable homes with only 125 county homes priced below $300,000. With a limited selection and faced with multiple offers, buyers are forced into over-bidding on marginal properties. So where are all the homes?

Nobody likes to see a foreclosure. It is devastating to the homeowner, costly to the lender and lowers values in our community. The reality, however, is that there are still many folks in their homes that shouldn’t be there and wouldn’t be without federal subsidies. In addition to federally insured loan modifications, banks are being forced to lower interest rates, reduce monthly payments and write down mortgage balances on delinquent borrowers. Often, the same borrowers who inflated their incomes in order to qualify for their loan or refinanced to pull “cash out” to finance their lifestyle are receiving taxpayer subsidies so they can remain in their homes which would otherwise be listed for sale.

Available housing has been further reduced by the Obama administration’s authorized bulk sales of thousand of foreclosed homes to large institutional “rent and flip” investors. In our region the international hedge fund Blackstone recently acquired 1,200 homes that should have been sold to individual owner occupants.

Traditionally, when resale inventory is low, builders will jump in and start building new homes. New construction creates jobs and the families that move into their new homes stimulate commerce. So where is the new construction in our county? Besides a few new homes in El Dorado Hills, there isn’t any. Builders are busy building new homes in Sacramento and Placer counties but not in our county? So what’s up with that?

We can partly blame ourselves. County voters reauthorized Measure Y in 2008 as a stated attempt to control traffic congestion by requiring builders to pay for road improvements. Those road assessments, called Traffic Impact Mitigation fees, can run up to $35,000 for one small, single-family home. Then add thousands of dollars for school and fire impact fees, water connection fees and building permits and, go figure, a builder has spent $75,000 before they turn their first shovel of dirt.

The question remains, is all this government intervention (or stimulation) creating another housing bubble? Yes, but not for long.

Many buyers are over bidding on homes simply because the interest rates are so low. This increases property values to unsubstantiated levels. Political pressure and our $16 trillion national debt will eventually cut off the Fed’s Quantative Easing Policy, gradually increasing mortgage rates. It will take time for buyers to mentally adjust to higher mortgage rates.

Increasing housing values will bail out many underwater homeowners, allowing them to bail out of their home. The number of available homes for sale should look much different this time next year.

The county’s no-growth advocates have succeeded in blocking new developments. With the exception of Blackstone in El Dorado Hills, new homebuyers have few options in our county and so will opt to settle in Folsom where home prices are not inflated by our county’s impact fees.

County sellers have a window of opportunity that may not be available next year. The higher this mini housing bubble floats the more likely it is to pop.

Ken Calhoon is a real estate broker in El Dorado County. He can be reached through his website at





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