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).
yup
Amen!! +100
Another 15% drop in value is needed to see any significant increase in demand. The problem that I see is that current home owners are programmed to believe that you can't lose money on a home. Many sellers are at their break-even price and aren't going to budge. The stalemate in the housing market has been pretty impressive.
I own a two-family that I rent out and I was looking to purchase a home to live in. After making about a dozen offers over 2 years, and coming within 10k of closing on a home, I decided to give up on buying another home. I bought a tenant out of their lease and am moving into that apartment.
Buying a home doesn't make sense at this time. If the market recovers, it will be a long and slow recovery. If the market tanks even more, it will be a fast and vicious drop. The best thing to do is wait and see what happens.
Amen. Sold my condo and I'm not even thinking of buying again for another year or two unless an incredible bargain dropped into my lap. The other thing to keep in mind is that when the free fall comes it's likely to go a little too far. If real market value is another 20% drop, prices are likely to go down more than that as the sentiment feeds on itself.
One of the problems of owning in a downturn is that it makes it much harder to relocate to another job, harder to sell and if the mortgage is underwater...
That's very true. Here's a living example of it; a neighborhood of (formerly) million dollar houses which must all be completely underwater by now. Built near the peak of the bubble in 2006, most in the range of $900k to $1M, now going for about $500-600K. I'm sure most there didn't put 20+% down. Which would mean that most families in this upper scale neighborhood are now underwater.
Here's an example from Zillow:
http://www.zillow.com/homedetails/7122-Cerro-Crest-Dr-San-Jose-CA-95138/...
And here's a street view:
http://maps.google.com/maps?q=7146+Cerro+Crest+Drive,+San+Jose+CA&layer=...
Not quite MacMansions. And right next to the freeway, with all the rubber and asbestos dust which comes off of it due to the traffic. Not only are these people stuck, but they are stuck in a crappy location. I wouldn't be surprised to see this whole neighborhood default during the next leg down.
And this is in one of the places (SF Bay area) which has done the best pricewise according to Case-Shiller.
Nice case study, but blimy! Have they expanded the SF Bay area 60miles from where it is? (I stayed in Marina Bay for awhile).
Thanks, I'm glad you enjoyed it.
The SF Bay area covers a large region. It generally includes all of the Counties which border SF Bay, and that goes down to San Jose. The County that SJ is in goes way, way South too.
Some include Santa Cruz County as well, though most residents of Santa Cruz don't like that. :)
Case-Shiller includes SF County, plus two others. One across the Bay and one further South, IIRC. Not the whole region; but it's a decent ballpark reflection. It ought to include San Jose, but they started their data before most people had heard of Silicon Valley, let alone SJ.
But Cramer called for the housing bottom so long ago.
If you accept the concept of stable valuation in residential RE being at 3x average household income (currently hovering around 50K), that would put stable values at 150K national average. We're currently at about 170K, which implies another 12% drop before we hit a stable value.
Again though, important to distinguish price from sales. ~150K average prices are what I would consider the starting point for sales to start picking up again.
Also, in deciding where to put your money in this space, remember that even if you don't experience a price decrease in the valuation of your property, you are still constantly losing the purchasing power of the dollar denomination of that property asset. The very lack of an increase and/or countervailing increase in the face of a rapid devaluation of the dollar is, imo, NAV negative.
Ie., I think when a lot of folks talk in the RE space, they conveniently forget the difference between nominal and real yield.
I think the average household income wil drop, thus bringing your 3x number down.
More importantly, 3x is vastly too decadent. If you're at 1x income (on a $50k avg), you're looking at a monthly note payment of ~10% takehome... add to that real estate taxes, PoA fees, termite/pest policy, insurance, maintenance and upkeep, and you're probably at ~15-17%... maybe 20%+ if you have a needy home.
Spending 20% of your takehome leaves you with less and less wiggle room for financial planning or catastrophe. By the time you factor in fixed costs, e.g. utilities, gas, groceries, clothes, automobile, KIDS?, etc., you're probably going to burn another 50%+ of your takehome.
If you try and factor in devaluations of the dollar and responsibly put money away for retirement, your childrens' educational needs, needs of elderly relatives, etc., then saving 20% of your takehome a month is not out of the question... obviously you may stuff it into various investment vehicles, but it is not available to pay the bills... Even though people may be 30 years til retirement, they're already bankrupt and don't know it (either they didnt put enough away or their investments will be devalued to the point of futility)...
Needless to say, there is getting to be a fairly thin margin for error even at 1x earnings ($50k/year). AND THIS IS WITHOUT ANY DEBTS WHATSOEVER. Factor in student loans @ $500/month or more... and/or medical or credit card bills @ $500/month... and there is literally nothing left over...
3x earnings is patently ridiculous (this was the marquee for the bubble for christ's sake). Somewhere well south of 3x is going to be the final resting place for the foreseeable future regarding home valuations... In the present environment, I would think risk averse americans (such as myself) would feel 1.5x to be a pretty hard ceiling... simply put, there are too many increases in daily living costs for which we must account and plan.
took the words out of my mouth, msC. but bear markets overshoot on the downside was still in there so....
He should have checked for millions of option arms and subprimes resetting from now till mid year. 11 percent empty houses is just 1/2 the problem to come.
I think that 11% figure has been debunked. It never really passed the smell test, did it? The real number is something like 3%.
Link please? I question the "debunking".
Bunker soldiers are debunking without leaving the bunkers. Fantasy island won't deplane either.
Trained bodies in coordination
Is that a better way for bunker soldiers?
But it's a nicer way to spend a war
On lava beaches and sandy seaside
The rusting bodies are surplus now,
Then we never taught them how to fight like that
The object's exercise is so compulsive
It's not a better way, but it still suits us
I'd give up rice fields just to fight like you
It's not a better way
Though we are here to stay
Well, that might seem okay
Waves of people in strange directions
It's no use talking, there's no decisions
They gave up houses to be refugees
The mud in ditches is over their knees
The sand-bagged trenches are over our heads
This kind of warfare's become hide and seek
The khaki uniforms are universal
Your propaganda is losing appeal
I'd give up rice fields just to fight like you
I'd give up rice fields just to fight like you
I'd give up rice fields just to fight like you
I'd give up rice fields just to fight like you
It's not a better way
Though we are here to stay
Well, that might seem okay
http://www.youtube.com/watch?v=6ioa8mBCuIk
Visited my old neighborhood in Vegas...has 260 homes in it, only about one of every three has someone currently living in it. Much more than half of all houses there are EMPTY.
Yea its ground zer for housing but to see that many empty houses is eerie. Wonder how many of those show up in real housing numbers vs shadow inventory.