The new housing bubble the Fed helped create through its policies of cheap money and stimulus is a bit different than the one that burst in 2007, but the consequences will be very similar.
From 2004-07, low interest rates and sub-prime lending fueled a housing bubble that engulfed buyers from nearly every level of the economic ladder. From ninja loans (no income, no job) which helped families living below the poverty level to buy 'McMansions' costing over $600,000, to home builders racing to put up new communities by the thousands which didn't even have enough buyers to fill, the result was a complete collapse of the housing market, and spawned the Credit Crisis that nearly collapsed the global financial system.
However today's new housing bubble is quite different, but just as spectacular nonetheless. Because instead of low income Americans being the buyers in the market like in 2004, today the majority of buyers are foreigners with billions of dollars to spend, and the willingness to purchase property no matter how overpriced it is.
And like in 2007, this bubble has suddenly hit the skids and is now bursting as areas such as the Hamptons, Aspen, Miami, Vancouver where even the rich are finding it impossible to sell in an environment of shrinking buyers.
One month ago, we said that "it is not looking good for the US housing market", when in the latest red flag for the US luxury real estate market, we reported that sales in the Hamptons plunged by half and home prices fell sharply in the second quarter in the ultra-wealthy enclave, New York's favorite weekend haunt for the 1%-ers.
Reuters blamed this on "stock market jitters earlier in the year" which damped the appetite to buy, however one can also blame the halt of offshore money laundering, a slowing global economy, the collapse of the petrodollar, and the drastic drop in Wall Street bonuses. In short: a sudden loss of confidence that a greater fool may emerge just around the corner, which in turn has frozen buyer interest.
The statistics are stunning: single-family home sales in Aspen are down 62% in dollar volume through the first-half of the year. Sales of homes priced at $10 million or more — almost always paid for in cash — are down 60%. Last year, super-high-end transactions accounted for nearly a third of sales volume in Pitkin County.
“The high-end buyer has disappeared,” said Tim Estin, an Aspen broker whose Estin Report analyzes the Aspen-Snowmass real estate market.
"Aspen has never experienced such a sudden and precipitous drop in real estate sales," according to the post.
Luxury condo sales in Miami have crashed 44%.
According to the latest report by the Miami Association of Realtors, the local luxury housing market is just as bad, if not worse, than the Hamptons and Aspen.
The latest figures out of Miami this week showed residential sales are down almost 21% from the same time last year. But as bad as this double-digit decline may seem, it pales in comparison to what’s happening at the high end of the market.
A closer look at transactions for properties of $1 million or more in July shows just 73 single-family home sales, representing an annual decline of 31.8%, according to a new report by the Miami Association of Realtors. In the case of condos in the same price range, the number of closed sales fell by an even wider margin: 44.4%, to 45 transactions.
Needless to say, while most Vancouverites had long been priced out of the domestic real etate bubble - and some say were hoping for the recent substantial pullback in prices, if not outright crash - the biggest losers from this sudden, dramatic collapse, were foreign buyers, mostly the Chinese, whose aggressive, "buy at any price" money laundering "purchase tactics" have been duly documented on this website for the past year.
The result was swift: as Bloomberg reports, China’s top envoy in British Columbia slammed the Canadian province’s new 15% tax on foreign home buyers, questioning the justification behind the hastily imposed measure.
"Why a 15 percent tax? Why now? Why this rate? What’s the purpose? Will it work?"
Liu Fei, China’s infuriated consul general in Vancouver, said in an interview with Bloomberg. "The issue is how to help young people afford housing," she added. "I’m not sure even a 50 percent tax would solve the problem."
2016 saw the year begin with a huge move in gold, only to use the summer months to consolidate in the $1320 - $1350 range. And just as we saw the price begin its historic move upward in September and October of of 2007 when the housing bubble finally burst, so too will we see the metals follow the same course as confidence in the financial system will bring in even more buyers than a decade ago.