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California Housing Market Cracks in Two, Top End Goes Crazy

That the housing market is seriously twisted is apparent by the mortgage conundrum: despite historically low mortgage rates of around 4% for a 30-year fixed rate mortgage, mortgage originations averaged only $357 billion per quarter so far this year, according to the New York Fed. Unless a miracle intervenes in the fourth quarter, 2014 will be the worst year since 2000.

But home prices have soared 74% since 2000, according to the S&P Case-Shiller index. Unit sales are higher as well. Mortgage originations soared with them during the boom, crashed with them during the bust, and re-soared with them. Now home prices have “recovered” beyond the bubble highs in many markets, pumped up by big Wall Street players with access to the Fed’s free money. They gobbled up vacant homes for their buy-to-rent scheme. And they’re now stuffing rent-backed structured securities into retirement portfolios via conservative-sounding bond funds. But even these firms are getting cold feet [The Big Unwind: After Messing up the Housing Market, the “Smart Money” Bails Out].

Yet purchase mortgages started fizzling last year and today remain below the level of a year ago. At the segment where first-time buyers enter the market and where regular folks are trying to cobble together their American dream, buyers have to get a mortgage to buy a home. And there, things have gotten tough. Incomes have stagnated, and prices have been shoved out of reach.

And at the upper end, in the rarefied air where the beneficiaries of the Fed’s “wealth effect” are buying?

“It’s pretty mind-blowing, to be honest,” Los Angeles real estate agent Cindy Ambuehl told the LA Times. “The luxury market has been completely on fire.”

In the third quarter, 1,431 homes worth over $2 million were sold in the six-county Southland, up 14% from a year ago. In the second quarter, 1,436 of such homes were sold, the highest number ever. Sales of homes worth over $10 million are on track this year to double the prior record set during the peak of the last housing bubble.

“It’s just a completely different story between the two segments of the market,” said Selma Hepp, senior economist for the California Assn. of Realtors. “Those who are doing well are doing really well.”

The Fed’s ingenious “wealth effect” gets a big part of the credit. And incomes at the upper end of the spectrum have been growing strongly. So these folks want to translate these gains into something nice and real.

The wealth effect has been a success in other countries too, and some of the cash pouring into the top California housing markets comes from China and elsewhere. These folks are buying second homes and investment properties in an effort to move their wealth beyond the tentacles of political purges, anti-corruption strategies, and other governmental or business calamities that might entangle them at home.

“Everything’s just more global now,” Drew Fenton, an agent who specializes in high-end homes at Hilton & Hyland in Beverly Hills, told the LA Times. A decade ago “it was much harder to reach those people, and they didn’t travel as much.” Now a whole system has been set up to entice them.

A similar scenario is playing out in San Francisco. But already, cracks are appearing. Today’s S&P Case-Shiller September home price index for San Francisco edged down to 194.21 – the third month in a row of declines from the June peak of 195.88, and the first declines after a two-and-a-half-year period of uninterrupted gains totaling a phenomenal 57%.

But the index doesn’t fully portray the craziness in San Francisco. It covers five Bay Area counties that include cities like Oakland, which has been anointed the second most dangerous city in the US though it now has its own Bay Area housing boom and the mind-bending gentrification that comes with it.

In San Francisco itself, according to CoreLogic DataQuick, sales volume in October stagnated at last year’s level, but prices jumped 6.5% from September and 18.3% from a year ago to $999,250! A tad shy of the perfect $1 million mark of June, and nearly23% above the prior record set in November 2007 that everyone afterwards acknowledged as totally crazy.

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