The residential real estate situation is still looking quite bleak.
The downturn (actually, the continuation of the earlier downturn – they
were not two separate events) that I forecast last year has come, and
come with a vengeance. If we may reminisce, the mainstream media was
overrun with optimistic housing forecasts, primarily as a result of some
minor metric upticks born from incessant .gov bubble blowing. From my
post of June 22nd last year - As I Made Very Clear In March, US Housing Has a Way to Fall
From Bloomberg, early in the morning you get the usual, inaccurate analyst chatter: Sales of Existing Homes in U.S. Probably Climbed on Tax Credit
Sales of U.S. previously owned homes
rose in May to the highest level in six months as buyers rushed to beat a
June tax-credit deadline, economists said before a report today.
Purchases
of existing houses, which are tabulated when a contract closes,
increased 6 percent to a 6.12 million annual rate, according to the
median of 73 forecasts in a Bloomberg News survey. To receive a
government incentive worth as much as $8,000, buyers must have signed
contracts by the end of April and need to complete deals by the end of
this month.
Credit-induced gyrations will make
the underlying health of the market difficult to determine over the next
couple of months. A slump in builder shares since early May signals
investors are concerned the damage caused by the end of government
stimulus, mounting foreclosures and unemployment will exceed the benefits of lower mortgage rates.
Then the actual report comes out: Existing Home Sales in U.S. Unexpectedly Fell to 5.66 Million Rate in May
June 22 (Bloomberg) — Sales of U.S.
previously owned homes unexpectedly fell in May, a sign demand was
probably pulled into prior months before a June tax-credit deadline.
Purchases
of existing houses, which are tabulated when a contract closes,
decreased 2.2 percent to a 5.66 million annual rate, figures from the
National Association of Realtors showed today in Washington. To receive a
government incentive worth as much as $8,000, buyers must have signed
contracts by the end of April and need to complete deals by the end of
this month.
The decline raises the risk the
retrenchment following the expiration of the tax credit will be deeper
than anticipated. A slump in builder shares since late April has
exceeded the retreat in the broader market on concern the damage from
the end of government stimulus, mounting foreclosures and unemployment may cause renewed weakness.
Now, this is the BoomBustBlog version
from March of this year where I made it crystal clear that housing will
fall further and significantly. The government incentives are just
market interference and pricing distortions, prolonging the pain: It’s Official: The US Housing Downturn Has Resumed in Earnest
Let’s take a look at some charts sourced from the upcoming BoomBustBlog subscriber “A Fundamental Investor’s Peek into the Alt-A and Subprime Market”…
Click to enlarge - NOTE: videos and interactive graphics are available in the original version of this article at The Latest Case Shiller Index – Housing Continues Freefall In Aggressive Search For Equilibrium
Come 2011, the effects of the government’s attempt to usurp market
forces have nearly completely worn off and housing stock is in free fall
– exactly as I proclaimed in 2009 and 2010 – free fall in an incessant
search for equilibrium. Said equilibrium is nowhere near where we are
now.
My very first post, the one that
created BoomBustBlog, back in 2007 warned that the residential and
commercial real estate bust was not only just getting started, but would
continue for quite some time. I was dramatically more bearish than the
Street and the mainstream in general. Reference The Real Trend in US Housing Prices… Sunday,
September 2nd, 2007. In that post I made clear that although the Case
Shiller index looked bearish, it failed to capture the worst parts of
the residential bust. Well, fast forward 3.5 years later and the story
still stands, even more exaggerated.
Looking at the basic precepts of residential real estate
valuation, there is no real reason why prices should not continue
falling. As indicated in the Bloomberg video below, nearly every factor
that you can plug into the valuation equation is negative. In addition,
the recent fraudclosure issues significantly exacerbate the problem. Here, you have the most recent snapshot of the Case Shiller index. As
you can see, it is the quintessential picture of a bubble gone bust.
Notice the upticks throughout 2009 and 2010, the results of incessant
.gov bubble blowing. Many truly believed that was the marked turnaround
in the real estate market. Those who believed so did not study their
history nor their spreadsheets. Plug in the numbers, and you will see
that there is no empirical reason for housing prices to go up when they
are still too richly priced to begin with.
Please take into consideration that I believe things are actually
going to get worse, for the shadow inventory buildup has been
exacerbated by the foreclosure issues. All paying subscribers should
review Foreclosures & Shadow Inventory.
Shadow inventory not only hides the true condition of the housing
market, it allows banks to hide the true nature of profits from said
housing stock. More on that in our next post which will contain a
current update of the shadow inventory and foreclosure backlog numbers.
Teaser to our upcoming foreclosure research
Related links:
- I Warned That Banks Will Soon Be Forced To Walk Away From Homes… Guess What! Monday, January 17th, 2011
- Less
Than 24 Hours After My Warning Of Extensive Legal Risk In The Banking
Industry, The Massachusetts Supreme Court Drops THE BOMB! Monday, January 10th, 2011 - As
Clearly Forecasted On BoomBustBlog, Housing Prices Commence Their
Downward Price Movement In Search Of Equilibrium Scraping Depression
Levels Tuesday, December 28th, 2010 - The
3rd Quarter in Review, and More Importantly How the Shadow Inventory
System in the US is Disguising the Equivalent of a Dozen Ambac
Bankruptcies! Wednesday, November 10th, 2010 - The Truth Goes Viral, Pt 1: Housing Prices, Economic Sales and the State of Depression
- Why the Case Shiller Index, Although Showing Another Downturn Coming, is Overly Optimistic and Quite Misleading!
- Those
Who Blindly Follow Housing Prices Without Taking Other Metrics Into
Consideration Are Missing the Housing Depression of the New Millennium - Pay Attention to the National Association of Realtors and Their Chief Marketing Agent At Your Own Risk!
- The
Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks
Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008! - Yes, Housing Prices Have Much Farther to Fall. We’re Talking Years…
- I
Told You Housing Was Going to Take a Downturn for the Worse. I’ll Tell
You Something Else, We Are in a Housing Depression! It’ll Get Worse
Until Market Forces Rule Over Government Bubble Blowing!
Interested readers can follow me on twitter, peruse my Residential Real Estate postings and/or my Commercial Real Estate opinion and research. I
will be lecturing on this “realistic” viewpoint of real asset valuation
and the outlook for 2011 as the keynote speaker in both New Amsterdam
(Harlem, NY) and Amsterdam (the Netherlands).
When home prices become a function of income in a market then we'll see the bottom. With a few geographical exceptions, we are a long way off. My personal opinion is take home prices from 2000/2001 and subtract 25% then we'll be approaching the bottom. Then be prepared for an easy 10 years of no capital appreciation.
Anyone considering buying in this market with any view other than a very long one is nuts.
Then be prepared for an easy 10 years of no capital appreciation...
Residential "capital" appreciation occurs due to market forces. They are manipulated constantly so saying it will require 10 years for it to occur is wild speculation imho.
With the fed in control of currency production, anything can happen. Another factor that is often overlooked is the creation of more wealth on a Monday night in local board of Supervisor's meetings where the mundane activity of rezoning property uses occurs virtually undetected by J6P.
This is about as close to conjuring up wealth out of thin air as Bernanke's wand, and too often it lies in the control of wacko's intent on trading islands for beads.
Boxed, I think you may be proceeding frm a false assumption.
Take a look at a chart of equity prices during QE 1, and bon yields during QE2. I think the notion that the Fed is in "control" of currency production, when the vast majority of the money supply is debt that cannot be paid back, and thus cannot maintain its value, is misleading. Markets can devalue all that as fast or faster than they can "print".
So what would you call what happened between 1999 and 2007. Or what didn't happen between 1989 and 1998. That sure looked like capital appreciation. And of course outside forces influence both on a micro (your zoning meeting) and macro (money printing or easy credit) level. I'm just saying that isn't happening again for an easy 10 years IMHO.
excellent again. So much of the money is debt. There is no way in hell they can keep up
You are right. That is close to the 100 year trend line. Close enough cuz it is inflate or die as richard russell puts it. Dont.forget that happy .meals will be 8 to ten bucks too. I see and acknowledge a fellow believer in the optimistic scenario.
I do about 300 broker price opinions for banks per month in Las Vegas, and an interesting item I've noted in the past month, Wells Fargo properties that were foreclosed on in 2008 and turned into rental properties are now being put on the market as REO's. WFC lost big time on these as they have fallen about 40% since 2008. They should have sold them in 2008!
Love your work Reggie!
Costa Mesa, Ca , a desirable locale in Orange County, has 9 on the MLS and nearly 400 in some stage of foreclosure www.doctorhousingbubble.com The shadow inventory is huge and prices still too high.
Somehow a national collection of stats on the MLS to default shadow must be done. Or maybe I look in the wrong places. Post it if you got it, Reggie. Nice work.
You make it sound bad that the only thing of actual value left in the hands of the American people is in fact a liability. NIHILIST! You will pay for your lack of enthusiasm!
Nay, sir, we still have our minds, and our hands! Reggie has shown us how to use the former; it is high time we employed the latter.
excellent
Yes, thank you Reggie.
Watch the rates too, see the 30-year treasury going up?
Ben is bringing on inflation, and when that kicks rates up into prime buying season this year = more trouble.
We might get another spike of panic buying by those who can afford it, but the drop on the tail of that spike will be viscious.
I'm still seeing and hearing Real Estate ads that "Now really is the best time to buy a home" which means that it REALLY ISN'T.
Reggie = the Chuck Norris of real property valuation. I've been impressed by the website for a couple of years now, but never saw the dude speak. Now I have to say he has an amount of credibility few achieve.
I will say it seems this analysis has a blind spot: the artificials. Sure, fundamentals support his view, but the artificials can have a significant and lasting (but surely not permanent) impact. The same argument that Reggie makes could have applied to C in 1Q09, but artificials distorted the true outcome as to make a prediction based on fundamentals deadly. Also consider that the line between what I just called 'artificials' and fundamentals can be difficult to discern, since manipulated price levels and fundamental valuations are dependent variables of each other.
This is only to say that the arguments captured in this small snapshot to not allow Reggie to present a rebuttal to the thesis that 'artificials' could negate his prediction, which is something he has almost certainly examined.
+1 for the CHuck Norris reference, best one I've seen to date.
Honestly, the apparent stabalization of Case Shiller is all "artificial". We let the banks live, let them avoid marking, let them leverage the hell out of their balance sheets in the 'rebound' to book profits, we swapped their crap assets for Treasuries, we allowed them to hold massive inventory and manage/supply demand at various price points accross the country; we juiced the economy with the biggest shot since FDR, we threw in tons new new home buyer credits and modification tools, we suppressed interest rates, we torched Fanny/Freddy/FHA.
At the end of the day - prices are not in line with incomes. That is the reality here. There is no escaping the gravity of market forces. For a long time people have been sitting in a situation where tons of people, successful and well employed people, know they can't afford to rebuy their own house. The incremental buyer comes into a neighborhood, pays too much, and everyone hits the ATM machine to take money out on the 'new neighborhood valuation' where they can't even handle property taxes at those levels. Houses have to be in line with incomes, this is the reality of supply/demand and it doesn't do any good pretending otherwise.
It's unfortunate the government encourgaged a massive speculation bubble in the people's largest and most leveraged asset class immediately after the speculative tech bubble. Seemed pretty obvious it would end badly.
well said. Have we ever screwed with it this much? Leveraged it this much? It's a really bad combo isn't it, with the economy falling apart for all sorts of additional and historically intense factors. It seems insane what they did. The only thing that possibly makes sense to me is that they are criminals, covering a con game with a bigger one. No one can be this stupid
The conspiracy theorist in me does indeed wonder if there wasn't some kind of motive behind this. Maybe trying to force major political change using housing to wipe out the majority of the broadly distributed wealth in the country. Maybe better equalize the world. Not sure if there really is a master plan, but this would be an excellent mechanism to expediently accomplish those goals. Makes me very grateful our founding fathers provided a bill of rights. It gives the people some level of protection against tyranical rule - even sneaky tyranical if people pay attention and use their brains as opposed to regurgitating from television.
Slim,
I couldn't agree with you more. But I'm trying to explore reasons why an artificial or manipulated factor could further distort reality--denying gravity for a bit longer, where "a bit" could end up lasting long enough to have a material impact on near-term returns.
For example, what would the effect of a Maiden Lane type QE3 vehicle that allows banks to park non-performing residential and apartment assets in exchange for a mark-to-mythology price? The asset would transact at above an affordable market value, and keep Case-Schiller up. They could also continue to offer a variety of tax incentives to promote buyer affordability, at the same time allowing asset prices to remain artificially high. I see no reason why the Fed would not continue the 'pull out all the stops' inventiveness in manipulating asset prices.
As you say, much of this type of artificial accounting and market intervention is what is keeping the prices as they are--why would it not continue or increase? What is the limit on the great US Treasury credit card?
I'm not really sure. Never have been. Even if the economy was healthy, once you pull the crazy financing/home can't go down belief system - we'd never get close to 2006 prices. People just can't save that kind of money consuming as they do and without constantly increasing prices under leverage, well - there will never be a big downpayment based on a paid down 30 year mtg.
I think about it all the time. What else can they do? What will they do? At this point I think they might be taking a genuine run at letting the market clear. We'll know this year. They've allowed the banks to build up a massive warchest to realize the losses. We need a functioning residential real estate market otherwise people will simply walk away forever and that essentially accomplishes the same thing as rent is predicated on income and there would be no ownership-premium to speak of.
New Jersey ca. 1989 and Slim nails it.
housing crash deniers LOL
Intentional option arm mortgage reset defaulting house flipper deniers!!!
No ripcord bitches!
I am someone who would certainly consider buying in this market if the right opportunity presented itself...a building with rental income probably. But frankly what scares me is how high property taxes (and other city/town controlled expenses) might get ratcheted up by increasingly desperate municipalities.
I wonder how many other potential buyers are also scared away by this.
The points on sales volume are well taken, but as a (prospective) homeowner obviously price matters more to me than the amount of turnover in the market.
What I see from the CSHPI is, seasonal wiggles aside, a number of markets in which prices are steadily rising. Even truly atrocious markets such as Detroit have mostly stabilized.
This is awfully disappointing to me, frankly, since it looks like it means that housing prices where I live are going to remain prohibitive. I had hoped to try and catch a double-bottom on rates and prices, but it looks like that ship has sailed.
I don't know where you live but stick around a while, I think Reggie's right. There's downward pressure on home prices from just about every angle imaginable.
Reggie, you are the rarest commodity in the world............an HONEST ANALYST, Many Thanks and Keep up the Good work
Houses here in Florida can be had for between 10 and 35 thousand dollars. These are homes in good condition and in decent neighborhoods. There are entire sections of my neighborhood that are simply abandoned. The banks do nothing about squatters and even less about maintenance. Yeah Reggie, the bottom is nowhere in sight for this real estate market.
gotta to be trash
Decent neighborhood? If it doesn't have sailboat access, it is worthless.
then, as reggie said, there's a lot farther to fall. think of all the states with no sailboat access at all. scary.
Are you exagerating? What part of Florida are you talking about?
San carlos park, way east ft myers. A decent neighborhood means most areas are safe from gunfire.
C-grade Apt rents have been declinihg in my region. I just looked at a deal and the rents were $1,065 a few years ago and the most recent move-in is at $960
BTW, renting is now 40% cheaper then owning..and anyone who reads KNOWS houses will plunge another 20-30% at least.......
What logical person would buy now?
"unexpectedly fell....."
"Better then Expected"
"Seasonally adjusted..."
Smells fishy to me.
Wouldn't it be interesting to know how many people are now living in their RV's? We have an 'RV park' a mile or so from us (we live in the country) that is 100% filled with permanent campers in spite of county regs that limit RV park stays to 30 days. These are RVs that are skirted, many with porches, most up on jacks or on cinder blocks. How does this calculate into the 'housing' numbers?
Most "campgrounds" allow you to stay 30 days. An RV park is different. Also known as a "trailer park". Although some privately owned "campgrounds" also allow permanent residence.
I have noticed RVs near parks and people sitting in them during the day. No fees if you park in public R-O-Ws.
My girlfriend just got me to start looking at houses with her this past weekend. I'm now having doubts about the relationship.
Keep up the good work Reggie!
See the Dr. Housing Bubble site for some discussions of the wisdom of buying versus renting right now:
http://www.doctorhousingbubble.com/
He focuses on conditions in southern California but a lot of what he says is applicable elsewhere to varying degrees.
spot on Reggie!
spot on Reggie!
spot on Reggie!
And this is...deflationary. Asset values plummet- value storage plummets.
Thanks Reggie- i had an argument with a friend about how housing is doubledipping or never stopped.
Without an easy stream of credit to buyers, no one is going to buy. And if rates rise, thats all she wrote.
Very important point... we already saw the lowest rates in 2010 and they are jumping up quickly now (especially in the last week or so.)
I agree, great assessment.
My take is that not only are we not near the bottom... but "the bottom" is not going to be an instantaneous better-buy-now-or-else-miss-your-chance-forever moment. It is going to be a multi-year process, where even when it starts to recover that will begin with a year or two when prices don't fall further. Then prices can go up 1% a year after that.
I dunno about NYC, but in many other places, housing was overbuilt. Forget even baby boomers wanting to scale back. They have simply built too many houses.
Reggie keep the fire to their lieing feet .
a real breath of fresh air in a room filled with paid and compromised shills for the government propaganda
and again thanks reggie
Reggie- you are a breath of fresh air, in a world filled with BS.
+1
Another good catch. Thanks mate.