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If Anybody Bothered to Take a Close Look at the Latest Housing Numbers...
I read through the usual suspects in the mainstream media yesterday
after the Case Shiller numbers were released and see headlines such as "Home Prices Flatten in October After 5 Months of Gains" and "Mortgage insurers rally after housing data"
and wonder just how many of these reporters and analysts actually
bothered to look at the data versus repeating sound bites. This has
been a bad three quarters for the fundamental bears, but there is
absolutely no macro or fundamental reason to turn bullish. As a matter
of fact, the only reason I can see to buy stocks is that the stock
prices are going up. That, in and of itself, should give one pause.
Let's take a close look at the "raw" Case Shiller numbers, not the
seasonally adjusted ones for which I cannot source the method of
adjustment for seasonality. Don't worry, if one looks at the data over
a long enough time frame, you can easily recognize the patterns of
seasonality, and more importantly notice how dramatic they have become,
leaving open to question how effective the seasonal adjustments are,
whatever they are.
Starting with a bird's eye view of key markets over two decades you
can see that the housing boom was enormous and the crash was severe,
but nearly all major markets ticked up significantly over the last few
months, although we are still at roughly 2003 pricing levels, having
lost about 7 years appreciation. The question is why. Well, the US
government has put more money and resources into re-blowing the
residential housing bubble than any other time in its existence.
Click any graph to expand.
Despite this, significant headwinds persist in inventory, foreclosure
and distress pipelines, unemployment, etc. Yeah, I know, you have heard
this all before, but let's put it in context this time around.
This chart shows us the month to month changes over the same time
period. As you can see, last year was bad, but we again ticked up
significantly for several months in a row for an improvement. That
improvement has quickly disappeared with several markets dipping back
into the negative. and all markets trending sharply downward.
This is a negative, not a positive turn of events. Put this in
perspective, with hundreds of billions of dollars of government aid,
MBS purchases, tax credits and bank support - we are still seeing this
sharp month to month downtrend. It is no wonder why the housing tax
credit was extended, but to what good?
As we drill down on the trend view, we can see that the upward trend in
most markets has stopped, with a few markets actually turning back down
again, and right after the spring/summer selling season and the
perception of the proximal expiration of the tax credit. This is a
negative, not a positive turn of events.
The chart below illustrates the seasonal ebbs of month to month price
changes. On a month to month basis, we see hills in the spring and
summer and valleys in the fall and winter. During the onset of the
bursting of the (first) bubble, this cycle was compressed, but was
still there. and lasted throughout the bubble. With the onset of the
government stimulus (ex. housing credits and MBS market manipulation),
the peaks were significantly exacerbated. Now we are entering into the
winter months again, and guess what's happening, as has happened nearly
every winter cycle before. The only difference is that this dip is
extraordinarily steep! I would also like to add that the month to month
price changes coincide exactly with the S&P 500 move downward and
upward for 2008 and 2009, to the MONTH! What a coincidence, huh? If
this relationship holds,,,, well you see what direction the month to
month lines are going and how steep they are, don't you?
As you can see when we drill down into the month to month numbers, the
improvements either weaken significantly or disappear into numbers that
show further declines - and this is in the face of government bubble
blowing!
Let's chop the data up using bar graphs that give the reader a greater
feel for the seasonality of the moves, and you will still find the
latest numbers showing what looks like a downtrend, again...
Remember, the CS index measures matched sales pairs. That means that
it attempts to follow the same properties being sold, so the
seasonality will mean much less than if one were simply measuring
transactions, irrespective of the property. The seasonally adjusted
numbers look more positive, but still show a downtrend. Since I could
not find the specific methodology on the "de-seasoning", and I am
easily able to discern the seasonal trends over time, I am much more
comfortable with the raw index data.
So, what does it mean if we get another significant downturn? Well, not
only are the 2003 to 2007 vintage mortgages in trouble, but those 2008
and 2009 mortgages are at risk as well. What are the chances of this
happening? Fairly significant. For all of those guys who swear we are
on the brink of a booming economic recovery, recall that it was housing
depreciation that set all of this off to begin with. It was not a dip
in GDP, not unemployment, not a dip in corporate profits, definitely
not a change in analyst's earnings forecasts and not a crash in the
stock market. It was a crash in housing. What happens if we get another
housing crash (or more accurately put, the continuing of the current
one) after a few hundred billion of stimulus and a 62% run in the
S&P to guarantee that the stocks are nice and ripe in their
overvaluations? Inquiring minds want to know...
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when and if the 8k bubble enhancing tax credit expires, currently set for April,look out. One of our neighbors is a successful realtor, and she is expecting a substantial move downward later next year.
Extend and Pretend Now Official US Treasury Policy:
A senior person at Treasury said to a small group of us that it is now official Treasury policy to extend and pretend on real estate loans. In other words, the policy statement from last week says, if you can make an analysis that says even if the current value is less than the loan, if you can do a spreadsheet that shows if you extend for 3-5 years, and if the economy gets better, and if the loan can be amortized down to where the loan is no longer more than the value, then the lender does not have to take an impairment -write down. Loans are to be modified by rate reductions, deferral of reserves, deferral of amortization or what ever.
Just NOT principal reduction. This is just like they are doing in housing.
Giant make believe. The free market seeking an equilibrium price is no longer economic policy. In short, the working of the free market is suspended. She went on to say it was administration policy that they will create new employment and by doing so they will boost the economy, and so then real estate values will return to old levels. There were 50 of the most senior and smartest real estate people in the room. They ripped her to pieces. It looked like one of the town hall meetings of August, except everyone there was a very senior, polished professional. At one point everyone was calling out or moaning at her. It was clear to all she had been given a few talking points and she was told to stick to them no matter how foolish she looked. The group told her in no uncertain terms this is terrible public policy. They said for jobs to be created you need to lower rents so the cost of occupancy was at a level to encourage more hiring. If the loan is kept at old levels and building values not reduced, then landlords can't reduce rents to where they need to be to make taking space by tenants economically viable. Retailers costs remain higher than they should be making it harder to lower prices to induce sales. So there is a massive make believe going on. When I pressed the issue of political interference she said -what do you want us to do, bankrupt all the banks.
That is the choice.
http://www.financialarmageddon.com/2009/12/whats-really-happening-in-real-estate.html
how much will 2010 IRA to Roth IRA conversions add to the Federal tax buckets ? And how much will be lost from future tax buckets ?
Good work, RM. I'm planning for the worst: that this game will go on and on and...
RE values must eventually correct to pre-1980 levels.
Only then can there be a "return to normal." Problem is the Government will not allow the correction to happen - because it will wipe out the banks and betray to foreign asset buyers that the US financial industry is a giant scam.
So, instead, they're going to turn Japanese, and turn a brutal correction into a 2 decade deflationary collapse accompanied by currency debasement to ease the pain.
Somehow, i just can't see hundreds of millions of ruined Americans - who have just got off the express train from "upper middle class" straight to "homeless" go quietly into the night like the dutiful and supplicant Japanese.
I live in Texas - where there have always been "nutbars" who claim the US Government has devolved into a crime syndicate and agitate for succession. As the US Treasury over-plays its hand here, that logic will become more compelling to more people - and not just in places like Texas and New Hampshire.
"...because it will wipe out the banks and betray to foreign asset buyers that the US financial industry is a giant scam."
Everybody already knows it's a scam. People who play the markets just want their cut, sludge that they are.
With over a trillion in "stimulus" left to spend next election year - I think the house of cards could still be standing through next year.
Very interesting.
I have some thoughts about the seasonality, would appreciate your feedback.
In the end of the day, price moves including seasonality are caused by demand and supply. To interpret the seasonality, I think the right way to go about it is to think about what has happened to supply and demand.
In a normal state, say mid '90s, there's natural demand which is seasonal. It's seasonal because it's so much nicer to walk thru open houses every night / weekend when weather is warm. Natural supply is also seasonal, because the seasonality in demand-driven transactions causes a seasonality in supply. This is because in a normal state sellers usually buying another house. In the end, the warm summer months lead to a coordination of most buying and selling activity to those months. To summarize, the demand is naturally seasonal and supply automatically follows demand seasonality because most buyers are also sellers. Importantly, neither buyers nor sellers have any sort of urgency.
In an inflating bubble state, people get manic and there's so much flipping going on that liquidity is there all year aroud. Also, people are playing the greater fool game and many buyers and sellers therefore perceive timing being important. This crazy state makes the warm weather effect relatively unimportant, and in the end there is urgent supply and demand throughout the year. Seasonality gone.
In the deflating bubble state, things get interesting. Buyers are no longer manic and again like to shop during the summer months. If you are buying a second home, for example, you are probably not going to go house hunting when its' +12F out there. Buyers also don't have huge urgency now.
This lack of urgency is in contrast with sellers. Many sellers are forced to sell, either explicitly in foreclosure or implicitly by wanting to avoid foreclosure. This supply is urgent and, importantly, this supply doesn't create its own demand because people who are forced to sell are not going to buy a new house, they will probably rent. (CS indexes exclude foreclosures, but the foreclosure impacts all neighboring sales.) So now we have seasonal demand but largely inelastic supply without the same seasonality. This will greatly magnify the seasonal price moves.
I think that's what you are seing in the data. The rebound last summer is greatly overstated (as a measure of annual trend) and the decline this fall is also greatly overstated. In my opinion, those are just temporary price moves caused by unusually inelastic and urgent supply and completely normal seasonal demand.
On top of that, for cheaper homes, there's also the tax credit and the reclessly low rates for "qualifying" small mortgages. The tax credit ending for sure is going to make the winter prices lower for small homes.
What do you think?
Sounds pretty good to me.
As a housing junkie in SW Florida,this is a great post. Everybody wonders why I just don't jump in and buy. Next year is going to be interesting...
eggie,
Your comments are always great and on target!!
The announcement on Fannie & Freddie on Christmas Eve! It appears that the authorities have come to the conclusion that HAMP without principle modification makes no sense to anyone except the banksters. So who will fund the hit .. TAX-PAYERS (as is the norm). A relevant link here ... http://market-ticker.denninger.net/archives/1800-Are-Banks-Scamming-Fann...
What happens when you have a MASS JINGLE MAIL .. I wish for one ... as I find it is most easy and non-violent way to screw the banksters! Here is another good link espousing the very same stuff ... http://market-ticker.denninger.net/archives/1791-Finally-Mainstream-Pres...
Reggie,
Your comments are always great and on target!!
The announcement on Fannie & Freddie on Christmas Eve! It appears that the authorities have come to the conclusion that HAMP without principle modification makes no sense to anyone except the banksters. So who will fund the hit .. TAX-PAYERS (as is the norm). A relevant link here ... http://market-ticker.denninger.net/archives/1800-Are-Banks-Scamming-Fann...
What happens when you have a MASS JINGLE MAIL .. I wish for one ... as I find it is most easy and non-violent way to screw the banksters! Here is another good link espousing the very same stuff ... http://market-ticker.denninger.net/archives/1791-Finally-Mainstream-Pres...
Reggie,
Your comments are always great and on target!!
The announcement on Fannie & Freddie on Christmas Eve! It appears that the authorities have come to the conclusion that HAMP without principle modification makes no sense to anyone except the banksters. So who will fund the hit .. TAX-PAYERS (as is the norm). A relevant link here ... http://market-ticker.denninger.net/archives/1800-Are-Banks-Scamming-Fann...
What happens when you have a MASS JINGLE MAIL .. I wish for one ... as I find it is most easy and non-violent way to screw the banksters! Here is another good link espousing the very same stuff ... http://market-ticker.denninger.net/archives/1791-Finally-Mainstream-Pres...
Nice, always get a lot from your original work and enjoy the 'tude. BTW I follow and attend my weekly local sheriff's sales of foreclosed homes, and the banks have been either postponing sales or buying 95% of the properties. www.crudewire.com
Hey Reggie - GREAT column.
Would you comment on the lack of prudent loan underwriting in 2008-2009? I read where FHA does not require EITHER significant down-payments or debt-to-income less than 30%. Is 2008-2009 vintage going to be another wave of strategic defaulters?
Well, there is no need to make a profit since it is taxpayer funded so underwriting in not necessary. FNMA is a policy tool, not a for profit entity.
Will those loans go bad? I think many were bad when they were written.
ditto...Thanks Reggie. Really great work as always...I just wish I knew how long I have to prepare for this house of cards to fold. In all honesty, I didn' t think the gov could make it as long as it has...another crash in housing seems inevitable, thus continuing the crash of the entire US economy. It seems that a more drastic solution to solve the housing crisis was/is in order, but it seems that that opportunity has already passed.
I have to agree with Chopshop - Fantastic work you do, Reggie.
You are a terrific source on ZH.
May 2010 be a boom year for the Middleton family.
yes, always love your charts. Very clear to grasp.
http://www.finance.pamplin.vt.edu/news/articles/bofa.pdf
Moynihan will fix BOA troubles with his "market timing" ability. Can someone get Spitzer on the phone. With all of the rule changes being implemented by CONgress, can we now ignore a penchant for prostitutes and move on with going after big fish criminals?
http://www.finance.pamplin.vt.edu/news/articles/bofa.pdf
Good analysis - We are going into a double dip recession at the end of 2010 looking at all of these things coming and it will become a depression and years down the road they will use the the end of 07 as the start of the depression instead of a double dip recession. I have laways heard trust what you see on the ground and I am in Florida and all I see everyday is a few more houses are vacated (left as shadow inventory mostly with no sale sign put up)and commercial space is going vacant more by the day. I know a lot of regional/local banks will be going under soon due to the commercial collapse and wonder if that isnt what the big bankers what in their greed.
excellent work, Reggie.
great analysis and charts; thank you very much for them.
Ditto -- always like reading Reggie. ;-))
The housing crash is just getting warmed up. We have another 30%-40% to drop from the current point. It takes time for people to decide to walk away, and after cooking for a year or so, people were just holding out for the holidays to be over.
The MBS market is a nightmare, unemployment will continue to rise for an extended period, and no, we will not see interest in "move up buyers". In fact, a number of people have watched their parents suffer, and in this mobile society, plan on never buying a house in their lives.
Gonna get scary ...
Couldn't agree more. I'm just turning 30, and to be honest, if I never own a home, I feel like it will be one less headache over the long term. Renting may not be the best use of my limited income, but at least when something breaks the landlord can take care of it and I can always just move on to another rental if I dislike my current residence. It would be great to be able to make a place my own, but the risk/reward ratio seems completely out of whack. Certainly not a larger trend, as this is a personal opinion, but I comeplete agree with you & Reggie that things are going to get much much worse.
I'm not sure why you would think that you are not making the best use of your income by renting. You stated precisely WHY renting is saving you money...you don't have to fix anything, no taxes, no termite bonds no homeowners insurance. That is costly stuff. Plus you are not stuck in one place. I pay less in rent in South Carolina than my parents pay in taxes in NJ. I also make more income. We all have to get over this "it is better to own" nonsense. It is part of the problem that has caused all of this. It is NOT better to own for me...I have tons of money and I still rent. In fact I have tons of money because I have rented.
You're quite welcome, dear sir :-)
Thanks Reggie,
Great work....
OT.. Hey, how about ( Simon ) SPG. Insiders selling of options issued in the $24ish range? Those guys are good! Maybe some rocks to turn over there?
http://biz.yahoo.com/t/81/597.html
I'm a little heavy on REITs right now. Need to focus on a less crowded trade.
Agreed, right on the money.
Yes things will get much scarier.
RM....
I always enjoy your posts....because I like the way you think.....and back up your views....
I trade all day.....have been in securities for over 30 years....
See if this is correct to you....
I like to rationalize in a simplified way....
The way i see it is that one has to view the past economy with the current economy in terms of all credit amounts and non-credit amounts....
Let's say this number in 2007 was $70 Trillion....
Post 2007....the overall number was reducedd by 40%....
ie no more securitization, ccs....etc...
What this means is that even if the govt. were to put $10 Trillion back into the total....there is still a shortage of $18 Trillion....and will appear not ot work....add to this view that the reality is that the govt. impositions are far less than $10 Trillion....and mostly not sustaining....
The next govt. step will be to take more fruit from the orchard while cutting some of the orchard down as well....
The key point being that in order to replace what was lost and then some will require structural changes....that will
most quickly replace lost valuations in the mix....
My view is that this missing group are stocks....in that they lever capital....just as banks supposedly lever capital....
But banks are positioned such that a 3% decline in their asset valuations wipe them out....
This is another reason that stocks are more interesting....
I propose revamping the securities exchanges by making all securities tax free in every way....and by making them defragmented and more transaction efficient worldwide....and most certainly direct access...with information provided in a fact based wiki format....
RETAIL needs to be revamped by making the exchanges more trustworthy .....ie eliminating dark pools.......bringing back Glass Steagall....ie the exchnage should be more likes the BATS model....
Then it would be stock valuations when added back into the equation ...that would replace what was lost and then some....and would be far more sustainable than govt. programs.....and would be key in wealth distribution to RETAIL...those who are the estuary of better economics....