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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.
- advertisements -
very good point...there are many
ways to evaluate residential real
estate but one of the standard
indispensible tools is income to
payments or income to sales price....
it is not infallible or the last word
but it certainly is the starting
point....
look up median income in the
neighborhood or zip code (some
are very uneven) to get a feel if
pricing is right or not...
Not sure what your actually saying here obamaphobe. The programs are phasing out and generally prices drifted down the entire time. But you are saying the bottom is in and prices are going to remain somewhat stable even after all these attempts to manage the fall end?
20 years ago we had the S&L mess. That was magnitudes smaller than the current bubble pop and took almost a decade to work through. Your argument seems to be we found bottom in about 3 years this time when we haven’t even gotten through all the resets and recasts? And the banks play games with shadow inventory? And the government has pulled every trick they could think of to try to re-inflate?
Hope your purchases work out for ya, but not a game I’d want to be playing. If we’ve really found anything close to a “bottom” at this point it would be the fastest such has happened in a real estate bust I am aware of.
I am a cash buyer in destressed real estate as well but I am really worried about a continued downturn in housing. In my estimate the combination of the tax credit and the tremendous money the government has used to force down the mortgage rates represent at least a 6% prop in the market based on the median home price. Combine that with a strange experience I just had at a bank the other day where I was turned down for a 250,000 heloc (first lien holder position) when I had proven that I have many times that in cash alone and no debt at all. My income was extremely high in 07 and 08 but I own a construciton company and chose not to lose money on bids last year so I didnt have income. My wife works as a cpa and should have qulaified on her own. I also have a 800 plus rating. They told me that if I couldnt show that I peronally made 10k a month(in addition to my wifes income) last year then I didnt qualifiy because my income dropped. I made more than enough in simple interest to make the payment. If I dont qualify for a fucking 250k loan then I am not sure how the "average american" is going to either. The more people that do not qualify for loans the lower the prices go.
Great stuff Reggie.
I can corroborate although not currently sharing your case position. Point. Case. Deflationary washout looms and there is nothing anyone can do about it.
Or they already would have but I don't think "they" want to stop it.
Housing has not found a bottom yet. They are still dropping in NYC. There are some that may tell you that it is not, but factor in all of the variables. When rates go up (and they definitely will) do you think that housing prices will go up with them as RE becomes less affordable. Foreclosures and charge-offs are INCREASING, not decreasing. The more positive news is that delinquincies in residential RE are decreasing across the board.
But unemployment is still strong and that is a stiff headwind. Then we still have all of the supply from new construction, foreclosures and organic sales. NY real estate travels in roughly10 year cycles, the market started crashing 3 and a half years ago. I wouldn't hold my breath if I were you.
Washington D.C. real estate has barely budged down over the last several years. Suburbs, yes, DC, hardly. No bargains for the bargain hunters.
Thats because income grew in DC more than any other place in the USA (except Arlington). DC will see some pain, but with incomes moving up at close to 2X the national average, it will never be as cheap as it was back in the days of running gun battles on U street.
I agree completely. And an excellent analysis all around, Reggie.
I'd only add that Fannie appears to be tightening Credit already, as per that recent analysis of their latest statement done here on ZH.
Who cares? Dow is heading to 36000!
... on hyperinflation!
Don't forget, gold SURGED 0.06% today!
I'm surprised that there isn't a post specifically dedicated to that.
MB turned a thread gold! hahaha!
MB after testing this new range of $1135+ it will come back down to $1125, the price the buyer China (or other????? 1) House of Saud 2) Brazil 3) Canada 4)Germany 5)Japan) will buy it at. Then the gold market will move slowly to the $1199-$1250 range by May. Then, next fall, when gold is in high demand due to continued devaluation of all fiat, and peak gold, gold will move past $1250 and to $1500+ by december. If you time it right, you could probably get 33% YoY. haha
http://www.youtube.com/watch?v=e69laCvKxEw
Actually, gold is up $7.70 right now according to Bullion Desk. But why are you trying to use 1 day of price action to validate / invalidate the discussions going on about whether people will continue using fiat currency for wealth storage? There is obviously a trend among people who feel disenfranchised by their governments, and the trend appears to be gaining momentum. Does this upset you in some way?
How many AR15's do you have scrog breath?