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Pumping Up The Fear From Falling Home Sales Volume
Browse the web for today's financial news of "Existing home sales plunge 27%" and you'd think the world is ending.
It's not. This is simply a drop-off in transaction volume, and the news has already been telegraphed by falling agency debt rates. Average home prices are still 10% above 2010 lows, and just as in stocks, a fall-off in trading volumes do not mean the same thing as a price crash.
Common knowledge says tax credits catalyzed buyers to come out of the woodwork and move up the time-frame of purchase, borrowing future trading volumes into present periods. And as home transactions take longer and are done in much rarer frequency, it is likely volumes will remain anemic until enough time passes for the number of buyers to naturally replenish.
Granted, quantity traded is generally smaller on a higher price, so the volume numbers could be interpreted to convey lower prices lie ahead as the market re-equilibriates down in a post-tax-credit environment.
But expected returns on assets are in a nosedive, lending some countervailing support to asset prices. While 30 year treasury debt yields 3.57%, in local formerly overheated housing markets such as San Diego, even without being lucky enough to steal a discounted REO, one can easily buy entry level (under $200K) rental properties that yield 6-8% after expenses. In the mid range ($400-600K), yields hover closer to 4.5%-5%. It would make sense that these price ranges experience converging rental yields. On an indexed basis, a fall of the mid-ranged sectors may bring median prices down substantially, even if the low end strengthens (or holds up) considerably from here. In the face of a long run excess return of 350-400 basis points over treasuries with the added benefit of the asset being tangible and physically impervious to central bank monetary policy whims, the considerable value already in today's housing market can not be forgotten.
Given where risk-free yields are, there is no shortage of capital out there, and longer term arbitrage will continue to evolve all of these markets in better balance. Artificially higher pre-credit-expiration trading volumes in housing (almost an extra million units/year on an annualized basis) followed by a drop-off of similar magnitude (about minus a million units/year annualized) make sense. Given volumes were substantially elevated above norm for 3 months (September to November) out of 2009 and another 3 out of 2010 (March to May), it would make sense that we have up to 6 months (starting in July) of anemic volumes until normal trading demand returns. January 2011 should likely bring a return to the annual 5 million unit resale run rate.
Until then, lower than average agency debt supply (given that borrowers will have below-normal demand for new mortgages) combined with deflationary excitement means lower mortgage yields. Perhaps a 3.5% or 4% mortgage, provided by natural market forces, will be the perfect catalyst for the early round of 2011 home buyers.
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Don't know about the article, but the comments are definitely priceless........
This post is a joke, right?
Trading demand? What a bunch of horseshit. The housing market is not the stock market. Furthermore there is no housing market, just thousands of submarkets.
A good laugh to end the day. When you're done touring Disney World, how about a trip to Fundamental World. Get real, THEN get back with us.
I would agree with you if the markets had rallied into close and the markets were green.
However, after last year's rally monkey's put the market into a frenzy based on "better than expected (after lowered expectations that were easy to beat)" numbers galore, I would have thought the -27% number would have been spun better.
That is not the case. The sucker is going down amigo. Why does the market not simply digest the numbers and moves higher? It always did, remember.
Even with a 4.5% GDP growth reading for Q2/2010 the market tanked.
solution to the housing problem: sell them to the Chinese or did we already?
Unfortunately, no. If we had, prices would be up 50% this year.
scriabinop23
Having been a participant/observer of real estate cycles (boom 1980, bust 1990, boom 2003, bust 2007) in real time take it from me; this debacle has nothing in common with those cycles. Numbers are nice but understanding the busting of a forty year love affair with an asset category is a bit more valuable.
Handfuls of very smart people will make money in real estate over the next decade. The rest, who do not do a tremendous amount of homework on a property, get a rock bottom price and really know a local market inside and out will need fantastic luck or a resurgence of inflation to bail them out. The later might happen but who in their right mind would bother making an effort with all the baggage of owning property when there are far easier ways to fully hedge yourself from a resurgence of inflation.
You forget, real estate is only one asset category. Its, normally, a very challenging category to make better than average returns....if you aren't either savvy or lucky. Anyone who doesn't shoot for an initial 12% return before they take all the risks attendent to real estate better pray for inflation.
"The rest, who do not do a tremendous amount of homework on a property, get a rock bottom price and really know a local market inside and out will need fantastic luck or a resurgence of inflation to bail them out."
are you the same person who wrote the snippet below?
"one can easily buy entry level (under $200K) rental properties that yield 6-8% after expenses. In the mid range ($400-600K), yields hover closer to 4.5%-5%"
check your meds, dude!
LOL. Tough group, needs some prozac.
Maybe I should rewrite the article to 'The end of the world is near' and my rating will hopefully rise from the abyssmal 1.1.
:)
Never capitulate. That's worse than writing a less-than-doomy article.... ;-)
The bright side: You now get to post images in your comments!!
....whining is also discouraged. Man up, dude. :>)
I like your thinking! Maybe we could fabricate the equivalent of a Minsky Melt-up in the housing market. At the end of the day, as Nassim Taleb says, it's all about the debt burden...time for the banksters to eat their fair share!
Man, can't a pump monkey just write a nice fluff piece around here?
Here's some reality I see in my CT hood:
Property listed as owned by Deutshe Bank on the market for $167k (1 acre, tear down house) since May, dropped to $104k last week and had accepted offer in 3 days. Nice, finally an attempt to start way low to see where the interested buyers are (I was one, all cash offer).
However, in a nicer hood just around the corner 1 week earlier, word goes out that a house listed near $800k sold in 2 days. Within a week, 5 houses hit the market (I need a paint job, otherwise it might have been 6) some of them I would never have suspected as wanting to sell.
Moral of my little story: the market may be moving around at the lower end (like 3 card montey?), but mid to upper levels have a loooong way to go and they may never get there.
I fail to see how volumes will just magically replenish themselves without a fall in price. If the houses are going to sell in the future at the current price, why wouldn't they move now? You could make the argument that people are replenishing their stock of savings in order to purchase a home. But even if rates fall to nothing and down payments drop to zero, I doubt many people could even afford to pay principal-only on most homes at these prices.
"a fall-off in trading volumes do not mean the same thing as a price crash." Exactly right, it's just that nobody's going to buy at these prices. Maybe they should raise prices, that might prime the pump.
Ok you see the number - then what?
Well it has implications - huge implications to an ecnonomy on its knees. A buyer brings Cash to the sale, without the cash no sale occurs.
Now time to think of what -27% does to the economy.
I'm not going to put figures up as it will just muddy the point.
The point is Cashflow.
Kill cashflow and you starve the many symbiotic industries that attach to the release of Cash from a hard asset.
Agent fees
sales tax
moving fees
bank fees and charges
service fees (power,gas, electicity, phone etc
motor vehicle sales
New furniture purchases
paint sales
Carpet/Drapes/Manchester etc ect
Now go and do your sums. You will see that this -27% sales shortfall carries with it some fat tails that will destroy what is left. This Huge Stoppage of Cashflow will see the GDP plunge in 3 months.
You are respectfully warned - do the sums and be very afraid.
"feeding pearls to pigs is expensive and does not fatten pigs"
You left out the demand push of the tax credit with subsequent demand drop due to the expiration of said credit; and the lingering effects of the 'shadow' inventory that will tend to impede any sort of housing price inflation, but other than that, nice to read a different perspective.
BTW
Don't take the comments personally, this is a fight club after all.
"Perhaps a 3.5% or 4% mortgage, provided by natural market forces, will be the perfect catalyst for the early round of 2011 home buyers."
The mortgage market is utterly lacking in natural market forces, and neither are there any the horizon, you imbecile.
No kidding - WF's 30yr fixed has been glued to 4.5% for weeks even though the 10yr bond has been dropping like a stone.
Where's my 3.5%?
You're close...we need a couple of things...1. Cheap money, 2. a realistic reason to believe we have hit the bottom such as a reduction ininventory from either successful workouts, increase in purchases or both (it will have to start as successful workouts) and a bit of loosening in underwiting (or a closer look at creditworthiness). At this point if banks continue to file NOD's and NTS' they will kill themselves along with everyone else as new invetory will drive prices to new lows resulting in bigger losses than if they just took the hits now. By completing successful workouts, new distressed inventory never hits the market and buyers realize the days of the sweet deal are coming to a close. Supply dwindles as pent up demand becomes real. Homes start to sell and people rush back into the market to get a deal...the cycle reverses and things get better (we can only hope!).
Evidently my point was unclear. No natural market forces = government has totally taken over this sector, subsidizing it to clinically insane levels.
Cheap money is just more of the same unethical behaviour.
I completely disagree. The big drop in sales volumes means that the hopes of all those people who have been resisting lowering their sales prices or resisting putting foreclosed homes on the market just became a whole lot more forelorn. Rents are already capitulating, the capitulation of home prices is a foregone conclusion.
I like that 'perhaps'. 'Risk-free yields'? If you say so...
lol. Posts like these remind me that the bottom is nowhere near in. A lot of sunshine pumpers still around it seems, and not just on CNBC.
Once the last of these dreamers capitulates and declares that homes will NEVER appreciate, then you know the bottom is likely coming very soon! This will happen concurrently with CNBC and GS/JPM closing up shop.
"even without being lucky enough to steal a discounted REO, one can easily buy entry level (under $200K) rental properties that yield 6-8% after expenses. In the mid range ($400-600K), yields hover closer to 4.5%-5% "
I live in San Diego and I'm bored today so let's spitball some numbers
$200K invested for straight 6% return = $12K/year
mortgage 0
insurance $1500
property taxes (1.1%) $2200
maintenance $1200
12,000 + 1500 + 2200 + 1200 = $16,900 yearly costs so I need rent of $1408/month with zero lost rent due to turnover in order to get my 6% yield
that's a fairly realistic rent for a $200K unit in San Diego although it might be a little high
~
$600K invested for straight 5% return = $30K/year
mortgage 0
insurance $2000
property taxes (1.1%) $6600
maintenance $1500
30000 + 2000 + 6600 + 1500 = 40,100 yearly costs so I need rent of $3341/month with no lost rent due to turnover in order to get my 5% yield
I think you'll find that a $600K unit in San Diego rents for $2300-2800 and not $3341 - as an aside, this is why it makes more sense to rent than to buy
~
for those of us who have been landlords, the whole idea of comparing yields on bonds to yields on rental real estate is laughable - I can buy a bond and get 3.5% on a piece of paper that requires zero management or I can buy rental real estate, advertise for tenants, screen tenants, answer phone calls from tenants when there are problems, clean up after tenants when they move out and then start the process all over again - and for my efforts I get an extra 1.5% or 2.5% yield on my money - if I'm not willing to manage the property myself I can turn it over to a management company and they will charge 8-10% of rents - let's look at those numbers
$200K invested for straight 6% return = $12K/year
mortgage 0
insurance $1500
property taxes (1.1%) $2200
maintenance $1200
property management $1344 ($1400/mo rent @ 8% mgmt fee)
12,000 + 1500 + 2200 + 1200 + 1344 = $18,244 yearly costs so I need rent of $1520/month with zero lost rent due to turnover
good luck getting $1520/month for a $200K unit
You need to double that tax in my town. That would add 200 to the monthly rent. The first scenario isn't as viable as it would appear.
Not to mention, you would have to take into acount it is impossibly (or nearly) to collect 100%.. Over a 4 year period, it could sit empty for a year.
Oh... and the maintenance figures are way off. One water heater will kill most of the year's budget, not to mention all the stupid shit the tenants will do. I also have years of Section 8 experience and the horror stories go on for hours.
Signed: Property Management company owner with over 1,200 units from 1981 thru 1989.
or the tenant who is pissed off at move-out time and pours cat litter down the toilet - three units get flooded - $21,000 to repair and make the units habitable again
or the tenant who gets a cat even though they signed a lease with a 'no pets' policy and even initialled next to the clause stating the 'no pets' policy - tenant moves out and leaves a flea-infested apartment - lots of fun doing turnover in a unit when there are fleas biting you
or the tenant who ...
Try the one who poured the aquarium water down the side of the sink with the disposal in it: Turned on disposal and found out that they DO NOT grind up aquarium gravel.
We normally carried a spray can of OFF to apply to the bottom of the pants and shoes when going into an empty unit. Those starved fleas were ravenous!
When one tenant gets a St Bernard and the rest bitch because THEY can't have a pet. We didn't OK the pet but it was OUR fault any way. So they all go out and get dogs.
Thank you. Could you maybe send this over to Barracky in the WH and see if he understands simple math? You did not use the SAVE OR CREATED math so he may not understand at all.
I was keeping it simple for the big man
I didn't point out that the $200K unit is most likely a condo so there is an HOA fee of $75 to $300/month
Nor did I point out that the $600K unit is likely to be in a planned community that has both an HOA fee AND Mello-Roos taxes (this is how the developers avoid paying for the cost of infrastructure in the communities they develop - a sweet deal if you are a developer but F'd for the homebuyer)
As I said in another post today, San Diego is home of the real estate Polyanna crowd
You didn't figure in all the bad ass power tools you get to buy and write off under property management fees.. A real nice nail gun sure can go a long way twoards stress relief..
rb
Um, A few more insurance and tax payments much less P and I, and no showings will do wonders to the ask with no bid.
I rented out a house once.. Their second check bounced.. Within a year I had to evict them and I was out 5100... 1700/mo for 3 months. Won the case in court, still haven't collected.. He lost his job.
Looks good on paper.. In practice, it's much harder.. Where I am, prices need to come down another 20% before the risk would be worth it to buy and rent out. I'm not buying this guys logic for a second.. Maybe in select areas of the country, but everywhere, not so much.
You got that right. I am a licensed real estate broker and ran my own property management company throughout the 1980s. A lot of my new clients came in with a property that had not generated income for months. I got to be paid to be the black hat. Throwing folks out of their homes (rental) with a sheriff's warrant got to be a mechanical thing in my office. The leasing game is not easy, especially when you throw in the maintenance factors. This was also the era of "no money down" rental property seminars. A notable number of new clients had property they bought with no cash, but there was also no cash flow. There is no way one can buy with no money down, you just pay it out on the monthly negative cash flow easy payment plan.
I was going to lift the same quote. I've never seen house prices directly compared with trading stocks before. Probably for good reason.
This is the second really stupid article I saw on ZH today written by a newbie at ZH. Please, the hopium is seeping in.
I will take a guess that the writer is some young B school grad with a quant background who has yet to buy his/her own home and still has mom or dad wipe his/her ass after taking a shit.
If dad wipes his ass... he went to law school...
If mom wipes his ass... MBA...
If mom and dad never wipe his ass... econ phd like Bernanke and Krugman...
i do want the prices in teh 100k-150k condos to fall further..but judging by the rental rates here in seattle, it looks like a 130k investment would yield 12k a year in rent.... from me looking at redfin listing and rental ads in craigslist.
$1000 a month rent implies a $36-$40K income, so you'll need to rent to two job holders, available as soon as the flying pigs land and find employment.
I'm in SoFla; few real buyers, only speculators/investors at the low end, seeking to rent out. The bottom is nowhere in sight, the cast of delusionals keeps increasing.
Maybe if you pulled your head out of your ass and took a walk down main street you'd get a real idea of what's going on. You remind me of Geithner standing under an awning with rain falling all around him...he says,"It can't be raining, I'm not wet." Prices are going to continue to fall as NOD and NTS inventory rises. Equity will continue to erode and people will continue to default and the cycle will lead to further deterioration. A huge bill is coming due, so far somehwere between $7T to $8T in equity erosion has been paid for by homeowners. Another $2T has been paid for by taxpayers. Where are the payments from the assholes who knowing pushed subprime, the assholes who packaged C rated shit and pssed it off as AAA bonds and CDO's, and the ratings companies who said turds looked like gold? We are underwater in debt, both the private sector and the public sector...the only question is who is gonna pay for it?! My guess is we're not going to crash, but we will burn slowly. If the shit really hits the fan I imagine the banksters will be greeted by loving adoring fans the way the Ceaucesceu's did when Romania collapsed. Dream on dumbshit.
Those pesky recasts in alt-and option ARMs will buzz kill any 2011 dreams. They run through 2012. So much for "countervailing support for asset prices" the next two years.
My ex is working for Chase going through Wa Mu's Fannie crap. As of last week all Fannie loans not current will go to foreclosure. She has been working this for Chase since day one, and they had been trying everything to keep people in and using any and all gimmicks or gimmies, this is now over.
I knew I could count on you Rain to remember this.....everybody seems to have conveniently forgotten these critters, which will put a serious nail in the coffin of housing.
Cue a second revision to FASB 157 so the banks can mark to menagerie squared!!
I see you guys in Cali are back on that IOU thing again, lol!!!
DH.....Hahaha....while we virtually bet each other which state would take Gold/Silver in the Insolvency Olympics......NY or CA......the Land of Lincoln snuck around us to be a worthy competitor. I was thinkin' of you, dude...!! We need to step it up !!
This article misses the point of what is happening in the housing market. When the cost of housing as a percentage of income reverts to its 1987 levels (before all of the "helpful" FED monetization) or even its 2000 level, then you might see the housing market start to have a pulse. That is, if U-6 unemployment is less that the 17% we have now.
To blame today's number on the timimg difference caused by the idiotic first time homebuyer's credit is like blaming the Johnstown flood on a leaky faucet in Altoona!
That leaky faucet was the John Murtha Memorial Leaking Faucet National Recreation Area, and the flooding is a 'broken window' economic development FEATURE!