Housing Bubble 2.0 Veers Elegantly Toward Housing Bust 2.0

They’re not even trying to blame the weather this time. “Housing affordability is really taking a bite out of the market,” is how Leslie Appleton-Young, chief economist for the California Association of Realtors explained the March home sales fiasco. “We haven’t seen this issue since 2007.”

In Southern California, the median price soared to a six-year high of $400,000, up 15.8% from a year ago, as San Diego-based DataQuick reported. It was the 24th month in a row of price increases, 20 of them in the double digits, maxing out at 28.3%. Ironically, prices per square foot are increasing fasted at the bottom third of the market (up 21%), versus the middle third (up 15.9%) and the top third (up 14.3%).

Ironically, because at the bottom 65%, sales have collapsed.

People, wheezing under the weight of their student loans and struggling in a tough economy where real wages have declined for years, hit a wall. Private equity firms and REITs, prime beneficiaries of the Fed’s nearly free money, gobbled up vacant homes sight unseen in order to convert them into rental housing, and in the process pushed up prices – exactly what the Fed wanted. But now high prices torpedoed their business model, and they’re backing off. So sales of homes priced below $500,000 plunged 26.4%, and sales of homes below $200,000 collapsed by 45.7%.

These aren’t poor people who stopped buying them but two-income middle-class families who’ve been priced out of the market. Thanks to the Fed’s glorious wealth effect, however, sales of homes ranging from $500,000 to $800,000, increased by 2.9% from a year ago, and sales of homes above $800,000 increased by 5.4%. In total, 35% of the homes sold for $500,000 or more. But combined sales, due to the collapse at the low end, dropped 14.3% from a year ago to 17,638, the worst March in six years, and the second-worst in nearly two decades.

“Southland home buying got off to a very slow start this year,” said DataQuick analyst Andrew LePage. Among the culprits: the suddenly absent large-scale investors, the jump in home prices, and the increase in mortgage rates.