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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.
Check out, join, and contribute to bondtraderforum.com, a home for meaningful discussion on rates, bonds, what the Fed will do next. (Or scriabinop23.blogspot.com for more analysis.)
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LMAO!
Wait, this wasn't posted by Leo????????
Good luck with that logic, Scria. Pump Monkeys do very well here on ZH.
And monkeys do not deserve a pump now and then?
Interesting. You see this as a "normal" wave that corrects early in 2011. Maybe. I grant you that mortgage rates will be low. You might even see something like 3.5%.
My guess is that around the turn of the year unemployment will be pushing 11%. GDP foQ4 will be negative. We will be losing 100k jobs a month. (we need +200 to stay even). Fannie Freddie and FHA will have to change their standards (they already are doing so). There will be no private money to make up the difference. The REO problem will be worse. That will result in lower prices. The buyers then, as now, will pay cash at distressed prices. Outside of that liquidity for housing will become problematic.
The later point troubles me the most. Illiquid markets are no place to invest. I don't see the buyers.
bk
Right Bruce. He approaches this problem as if we have 5% unemployment and growing wages. Absurd. Not only did it (tax credit) pull purchasing forward, it pulled the bulk of foreseeable interest in home buying. Anyone that thinks they are going to buy a house to rent it out might want to wait and see what shakes out first.
Amen, Bruce.
and FHA, as previously noted by yours truly amongst others, will implode shortly after the November elections (they're already broke as far as I'm concerned).
Bruce, the truth hurts dreamers.
The later point troubles me the most. Illiquid markets are no place to invest. I don't see the buyers.
I think with residential RE markets do typically bottom on very low volume as opposed to say, the stock market which usually makes a big bottom on very high volume. So that's not the disconcerting part so much as the growing conviction that everything else will be getting a whole lot worse sooner rather than later.
They're coming:
http://www.youtube.com/watch?v=KsV1ShKtAcE&feature=related