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It's Official: The US Housing Downturn Has Resumed in Earnest
The year 2009 was the year of reflation theories and bubble blowing.
Theses of "Green Shoots", catching the bottom, and QE reigning supreme
were the order of the day. Sure enough, asset prices (nearly all of
them) went one direction, straight up. We all saw it coming, but guys
like me who actually count the money and rely on the fundamentals didn't
believe it was a sustainable gain. It wasn't a bull market, but a bear
market rally. After nearly one year, the reflationists have had their
hay day, or have they?
One thing that I have been proven
correct on thus far is the housing market. Despite what was probably at
least a trillion dollars of effort directed at suspending real estate
and real estate related assets, prices are resuming their downward
slide after falling 28% nation wide, peak to trough, and over 50% in
some areas.
It was the sharp downturn in housing prices that
started the entire domino effect and much of this country's financial
infrastructure is still heavily levered into residential (and to a
lesser extent, commercial) real estate. Any further downturn will,
without a doubt, wreak additional havoc on the economy. Is such an
additional downturn in the tea leaves? Let's take a look at some charts
sourced from the upcoming BoomBustBlog subscriber "A Fundamantal Investor's Peek into the
Alt-A and Subprime Market" update, which should be released
withing 24 hours or so. This release will include all of the raw data
necessary for users to run their own calculation and draw their own
conclusions.
Click to enlarge
The
governent did succeed in temporarily raising home prices in some of
worse afflicted states temporarily, but as was easily determinable from
the beginning, market forces grabbed control again and prices have
continued to sink. There goes a few hundred billion dollars of taxpayer
monies in the process. I believe that the taxpayer capital would have
been better spend on small and medium business credit line guarantees
that would have had an IMMEDIATE and lasting effect on employment and
incomes. Instead of trying to manipulate the real estate markets and
the associated mortgaeg market, we should have been focusing on true job
creation and the availability of credit to that sector of industry
that employees the most people. As income to debt service rations
increase, home prices would be sure to follow. Of course, prices would
have fallen significantly in the interim, but that was going to happen
anyway, regardless of how much money you spend and what you spent it
on. That's why they call it a bubble "burst"! The government could have
used that capital to purchase the properties directly and the prices
still would have fell once the government attempts to resell them. The
market is the market and it is waste of capital to try and manipulate it
in lieu of driving the fundamentals behind what dictates it.
I
fear we will be learning a very similar lesson in the equity markets,
as soon as the end of the second quarter - and after trillions of
dollars of QE on top it.
In the chart above, you can see where
CA has made some progress interms of appreciation. CA, FL, and NV
account for nearly 50% of nationwide price damage. Let's take a closer
look...
As you
can see, even the effects of HAMP and QE in California are starting to
wear off. Florida never broke positive ground, it just got worse at a
slower pace. California's housing market may get hit even harder as
that state government is literally insolvent - and the effects of that
insolvency will probably be taking root in the upcoming quarters in
terms of diminished services and government employment.
These
illustrated negative facing trends were easily discernable 3 months ago
when I dissected the Case Shiller resutls graphically, see If Anybody Bothered to Take a Close
Look at the Latest Housing Numbers...
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...
All of this information was sourced from
government sources and to a much lesser extent, Bloomberg. Keep the
findings above in mind when considering the big and small banks that
hold billions upon billions of loans based upon these assets on a
leveraged basis on their balance sheet while their share prices
skyrocketed 100%+ and sell side analysts forcast rosy earnings and
continued rocketing share prices. Do you remember in 2007 and 2008 when
the housing market really started to nosedive?
Better yet,
what has happened to the equity markets over the last 80 or so years
whenever stock prices wandered so far away from the fundamentals? I am
not going to be the one to utter the word CRASH, but go back and chart
it yoursefl, The last event was only two years or so ago.
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Well done again Reggie and some very insightful comments from the group.
Reggie - regarding your comment that increased interest rates equals lower prices, perhaps you should qualify that.
Reason being, in nominal terms, prices often rise in connecton with interest rates. One only has to look at the high interest rate 1980s for an example:
http://seattlebubble.com/blog/wp-content/uploads/2010/02/KC-Home-Price_1...
Now in real terms, homes do become cheaper, presumably because high inflation leads to wage growth (lesser than the rate of inflation, but a necessary component of inflation nonetheless). Still, when looking at nominal prices, history shows us that rising interest rates equals rising prices.
Well, over the last decade, nominal and real rates resulted in a boom in prices. Granted, dropping those rates to zero did not prevent a crash in prices thus your comment does bear some merit but I think it is far from absolute. I haven't run the numbers, though.
Reggie - id recommend looking into it further. For a long time I was like you thinking that higher interest rates = lower (nominal) prices. Yet the stats show that is often not the case. Its pretty much the opposite of first glance common sense.
Still, when you think about it a bit deeper it makes sense. Higer interest rates often come hand in hand with higher inflation. In order to have inflation, you have to have wage inflation (a lagging, yet necessary component).
Either way, look deeper into CPI vs median home prices since the 1950s - its pretty compelling...good luck.
I think in most places rent is still quite a bit cheaper than buying - at least here in Florida once you add in the taxes and insurance. It wasnt that way up till about 1999 but now rent may be slightly under 99's rates in my area but total house buying costs now still are higher even with the big drop so far. They will come down more.
Unemployment Increasing
Rates Increasing
Alt A/Option Arms adjusting
FTHB tax credit expiring
Foreclosures Increasing
Fed not buying MBS (maybe ending)
How can all of this not continue to put downard pressure on prices??????
This is simple....
Employment down....ie neg 20% and smaller $...
Available money down....down over 60%....and what remains is built on quicksand....
The only reason RE does not fall 50% from here...is rampant printing of money.....
And Euro...even China will do so as well....their problems are covered up by their govt.....
There are no pristine maidens in a whorehouse....
So what are the govts. going to do ?....Stuff it all in a box and make up the values to any fairy tale story they choose....
Ok - some basics here. Any first time buyers should buy now - not because RE will go up, probably won't and I'm in agreement w/ Reggie's research. No, 1st time buyers should buy because they can buy for 3.5% down and get tax credit to more than offset down payment. This means they get the house for nothing out of pocket (net) and so long as they have any income get to write off all interest against their taxes (if you have no income/taxes, less attractive proposal). Plus, if prices do go down they can simply walk or get a gubmint modification program w/ no loss of cash. Payments are generally same as rent. We are all just playing the stupid game as it's set up...clearly the game is f****** stupid and not going to fix anything...just saying 1st time buyers probably should buy (moral hazard be damned). Only other instance someone might want to buy is if you are an investor buying for cash flow and putting 25%-50% down (you are afraid of cash and the inflation that will likely come after the deflation ends). So long as you bake in lower rents and higher vacancy into your #'s, you really don't care if prices go up or down if you are cash flow positive (I'm starting to see this in some locations now).
Thoughts?
I think your advice to buy now should only be considered in certain markets. I did an evaluation on 100 properties sold in the greater Sacramento Area over the last nine months. I took the sale price total of a 100 misc. properties, all under <250 k and the total price paid came to 16,325,236. Now nine months later I looked at the Zillow evaluation on those same hundred properties and came up with 13,386,693. That is a decrease of almost 18% in just nine months! So if people took your advice and bought one of these homes with just the 8000 tax credit down, they would already be underwater. The average price paid was 160k and now the average value is 131k. If the next nine months go as well as this last nine did in the greater Sacramento region you would already be considering a strategic default considering you just lost 35% in roughly 18 months. When people in these FHA loans can't make the carrot enticed payment they will default just like the rest of them and the next bubble will pop. You don't need to be a science rocket to figure the math, only a mere skeptic with the ability to sniff out a stinky rat.
well done sir! nice to back up an opinion with some hard digits!
Suppose unemployment increases significantly and prices go down as a function of decreasing rents. Where is the upside in putting your cash into an investment that, although may cash flow, will also lose money as the yield on investment would be higher this time next year? Just playing devil's advocate.
As for 1st time homebuyers gaming the system, if you don't care about your credit, your plan seems to be the way to go.
Definitely not for me - I've got 3 rentals (a couple of duplexes and a single family all purchased on cash flow from '01 to '03)...that's enough risk. Since those I couldn't make any new rentals pencil w/out putting 40 or 50% down. Now I can make many pencil...but I'm conflicted by market fundamentals saying RE market should go down, income down, taxes up, interest rates up, gas and other inputs up, etc. vs. the gubmint doing their best to deny / delay reality. I have cash and do fear the inflation (I do believe gov will print endlessly...there is no other way) and believe the inflation will last longer than the deflation.
Yeah, but when you drill down a little deeper, you find:
Yep, yep, yep. It's all G-double O-D, good, good, good.
Yep, yep, yep. It's all G-double O-D, good with me, with me, with me.
Reggie! Thanks.
there is no way the residential real estate problem is even close to over.
I live in Florida, moved out of my home on May 27 last year and had not made a mortgage payment since May, 2008--the year before I moved out.
Citi began foreclosure proceedings in January, 2009--14 months ago.
When I moved out last May, I did so because I was filing bankruptcy and surrendering the home.
I notified Citi and its attornies I was surrendering the home, had moved out and turned off all the utilities (200 yards from the ocean.) I even called the attorney handling the foreclosure and told her all this.
The loan amount was in the $450k range. The bank could maybe get 200k-230k for the place right now.
After filing the foreclosure suit last January, Citi has done nothing to move its case forward.
I am probably one of several thousand in my county alone. Most people still live free in their homes.
Unemployment in this country is increasing and there really isn't the proverbial light at the end of the tunnel even dimly visible yet.
The very best case scenario for housing is many, many more years of stagnation.
worst case won't even happen--that being the banks actually move forward with all the pending foreclosures and force all those people out of their homes.
It's fecked and nobody really knows how to fix it because there really isn't a solution except hoping that time will cure it somehow.
Here is a thought.
The fed is trying to help with liquidity. They have been keeping rates at nothing and spending money like crazy. Yet the problem they can’t see is that that liquidity they crave is pumped into the wrong pipe and nothing but some weak steam comes out of the other side. (I won’t say where the pumped dollars are leaking to not my expertise).
I am not a Keynesian person but if we are spending trillions wasn’t the idea that it goes to a middle class who pumps it right back. So if we got the trillions and the trillions that are not lent to the middle class or given (Why not) to them then what’s the point?
My proposal: Freeze mortgage rates on all life mortgages at 2% (sans qualifying). Regardless of the price offer 3% financing on new homes as long as there is 20% down payment. Call it Forced Lending (on the lenders). Now that housing is fixed. Offer tax breaks on everything and anything that makes people employ people. So adding an addition to the house, lets go even further, any absolutely any renovation to the house or upgrade to the car or boat to be tax deductable(not all that novel idea yet I think quite forgotten). For anyone who commutes to work allow that mileage/gas to be deducted (people may travel farther for work; which they won’t do now since they have to pay hundreds of dollars for transportation). Services, such a huge part of our employment, punish heavily anyone who outsources servicing to foreign countries make it absolutely too expensive to do. Well that is probably a tough sell as those companies will claim that they will go belly up (bs, I am sure they can CUT somewhere internally to keep profits were they need to be). Lastly, now… that is going to make me regret it but its such an easy yet unpopular fix. Legalize all the emigrants. Make them pay 10K penalty plus all back taxes. They won’t leave anyways. If they are legal we will have few millions of new home buyers who, on top of it, are now buying those cars they dreamed off and are building up their retirement plans. LETS BE HONEST THEY WILL NOT LEAVE. Plus we will safe millions on deportations and legal process that is sponsored by our generous annual donations. FYI one deportation, I have heard, costs in a line of 10 to 20K depending how long the person is detained. If I remember correctly Adam Smith claimed that without free flow of capital and labor. No we will accomplish liquidity and steam. Next stop the new bubble. Who is for who is against
Are we going to have another Great Depression? Has the real crisis even hit us yet? If so, I need to take measures to protect my family.
thanks
Never been a better time to buy...right guys?
Sarcasm off
So yes there are still many people my age getting taken advantage by the tax credit. I still keep hearing about how shrewd it would be to buy a home. I'd rather rent, thanks. When I hear how terrible of an investment RE is, I'll know its time to buy. Simple as that.
But Cramer said housing bottomed on June 30th of last year. He even had a big countdown and everything.
But Cramer said housing bottomed last June 30th. He had a big countdown and everything!
In SoCa the bifurcated housing market rules. Cash is king. Cash buyers are crowding out buyers who need a bank loan. I just read Prechters Nov. Theorist, (free at his website) and he notes that in the post financial crisis model, banks are getting into the appraisal business, [out of self interest I would say] which results in higher appraisal values than the cash market would suggest. However the lending system has ground to a halt, the loans exist in name only, and cash buyers are stepping in front of the lenders. It's a bit like paying full price for a new car, and getting 0% APR. Car dealers would not give cash discounts, because it required them to make an asset writedown, so they shifted the discount mechanism to easy credit terms, and of course the Fed is helping.
Existing housing is not a monolithic industry however, so the analogy fails. A cash driven market in anything suggests higher prices. Of course no one has any cash. Ooops, the Fed policy of the last twenty years fixed that. Now the stock market heads for the bottomless bottom (no buyers left to buy at any price)
Cali bubble not dead yet...
http://www.redfin.com/CA/Atherton/372-El-Camino-Real-94027/home/1803066
Atherton is one of the most expensive suburbs in the Bay Area. According to Forbes, it was the second most expensive zip code in the USA in 2009 (median home price = $3,849,133) and the most expensive in 2004 (median home price = $2,496,553).
That house is cheap for Atherton, probably because of the location (El Camino is the main business road that runs down the entire peninsula and is a very undesirable location for a home), landscaping, etc. Still, it would have gone for more at the height of the bubble. A complete tear down in Atherton would have gone for more.
http://www.forbes.com/2009/08/26/most-expensive-zip-codes-lifestyle-real...
http://www.forbes.com/2005/04/22/cx_sc_0426homep.html
I'm sure Atherton was near the top for home prices in other years but I didn't bother looking.
Location, location, location
if you thought RE bubble in Cali is over, you tell me..
http://www.redfin.com/CA/Atherton/372-El-Camino-Real-94027/home/1803066
must be the pristine landscaping
Average FAMILY income in the U.S. is $45,000 per year. Based on traditional convential mortgage lending standards, that family could afford a house costing between 2 and 2 1/2 times their annual income ($90,000 to $125,000). I don't see the average house price anywhere near that range, therefore there is only one way to go on house prices - DOWN!!!
Until the prices achieve a level affordable by the average household income, prices can't go up.
Only a real FOOL would buy a house today, when 3 months from now it will loose 20% of its value. The FOOL will find he owes more than the asset is worth and will eventually default.
HOUSES ARE NOT REAL FINANCIAL INVESTMENTS, THEY ARE FOR LIVING IN AND PROTECTING YOU FROM NATURE'S ELEMENTS!!!!
"Until the prices achieve a level affordable by the average household income, prices can't go up."
Why do you think that? That has not been my experience over the last 4 decades, at least in my part of the country. The average family could not afford the average house (even in the 1970s, maybe earlier), and yet home prices roughly doubled each decade (but incomes did not).
FWIW, I don't see a strong recovery in housing for quite a while and would not be surprised if housing prices declined for the next decade. However, I strongly disagree with your reasoning that they HAVE TO decline just because they cost more than 2 1/2 times annual income. Experience has shown that they do not.
Bernanke's MBS buying will prove to be his death knell.
We aint seen nothing yet.
RE has another leg down of over 50%.
I love all the posers on here that talk up RE like it is some no brainer while they get drunk on manipulated market kook aid.
The only no brainer is prices still have a looong way to tank.
You have been warned.
I expect median home price to overshoot on the downside as well. 2x household income wouldn't be unreasonable.
You're right about that Reggie. I've been telling these stupid fuckers for some time now that the reflation trade is dead. It's time to get short.
Just from a common sense point of view I agree RE prices still need to fall. I (along with the rest of America) am not all that concerned for NY, CA, FL, and NV prices. Even if I was attracted to those areas I never could afford to live there, and I probably never will. Everyone knows those areas were screwed. How about the other 95% of RE in this country, where most of us normal non-elite folks live?
Northeast Ohio has a hard contrast between acceptable and shit RE. You can either live in the ghetto of Cleveland/Akron areas for 50k, or you can live in a more pleasant proximal suburb for 150k. There is no middle ground. It's either shit, or somewhere decent but overpriced.
I think it's simple math in that fresh grads (be it from college or high school) can't afford to drop 50k as a down payment on that non-slumville home. I'd rather move in with other family before living in the city slums, and I think I'm not alone in this thought. The majority of homes in this country should be much closer to the 100k-125k range in my opinion where everyone can actually begin to afford them, but whatever that's just my $0.02.
My two cents is that the fresh grads are risk adverse and will buy the urban properties and turn these neighborhoods around, saving expenses related to commuting. As the foreclosures/vacancies increase in the suburbs, those neighborhoods will erode.
reggie .. thanks for up date on housing .. another 20 odd years to go..
Banks holding homes from foreclosure isnt going to help prices either, they eventually will be forced to let them go.
Good article Reggie as usual. You are correct on Florida, prices have been going downhill since 2006, it has slowed a little but definietly no upturn yet - hopefully soon.
"As income to debt service rations increase" - Freudian slip?
Equity markets have correlation to residential real estate prices??? If the "squid" could figure out how to create a futures market for housing, they would have goosed it higher and higher like they are doing to the S&P. As we all know, equity markets are not ever allowed to go down....
"Keep the findings above in mind when considering the big and small banks that hold billions upon billions of loans based upon these assets on a leveraged basis on their balance sheet..."
Really? Where? Fed repo's? GSE's? Where are they?
PS. Even if "some" do lie on bank balance sheets, they are still priced pre-crash. Looks like thier Models suffer from Y2.006K
I believe real estate prices can only go up in America. Care to join me anyone?
Well hey, if they print enough money then sure... prices can go up forever in nominal terms.
Till the day comes when the debt ceiling is reached (not the one the congress critters keep bumping), and inflation no longer translates into increasing wages at or near the pace prices increase...hmmm that sounds an awful lot like...today.
Thanks for the info. The shadow inventory is a key driver. The buyer subsidies and program dynamics (extensions, etc.) continue to bias the stats.
RE back to pre-1980. Believe it.
At least in real terms. "QE" will attempt to keep nominal declines under 25%.
Subprime is over, get ready for alt-a, option arms and all the other obama/frank/pelosi sponsored s***. Short builders, get rich like you did by shorting bush sponsored s***. GOLD BITCHES
The carnage in residential real estate has already happened. Case Shiller is the history. The bottom is set and it is a far cry from 28%. I've been buying bank owned units for 20% of what they traded for in 2006. Anything worth buying is now gone. It will be six months before they show up in these "studies." Go to zillow and look at homes that sold for 250k and under in 2006. Get your kleenex ready. The banks have already dumped the lower end and are speculating and keeping residents in the jumbos. They have already written them down and refuse to dump them as it will increase their severity rating. Cash investors have already pounced on the market and will get paid in the long term. The govt incentive programs have done nothing to mitigate the deflation. Do you really think that a 8k incentive does something for someone that cant buy anyway? The home buyers incentive has not held up prices in the least. The market found it's bottom on it's own. Every good socialist needs a roof over their head and last time i checked we weren't making more dirt or roofs.
Reggie vs Obamaphobe...hmmm...think I will have to go with Reggie here. Don't worry too much Obamaphobe, you have a nice discount in place from going directly to the bank for the note...but your argument is not sound, so I would be careful not to get too attached to it. And by the way...they are making more roofs and there is a lot of unused dirt available.
We've only been surfing on the little waves my friend, get your longest board out because the tsunami is coming. If you honestly believe the worst is behind us then you obviously don't keep track of the shadow inventory or NODS very closley. All the < 250k homes bought during the cash for flea bag program are already -15% in value and some 28% of them which are FHA paper are already in default. So keep buying the rat holes and hoping they will turn into a bidding war someday...? NH= not hapnin! What you saw last year was another bubble blown up by low interest rates and no money down FHA Loans and a butt load of investors buying up every little dump for what they thought was a good deal. So keep packin the bong and keep your lighter close by so when reality kicks in you can take a hit and blow the pain away.
Homes are still unaffordable. Wait till they over correct to <3x incomes, after the downward wage/price spiral, then we can talk bottom fishing.