A theory on the bounce and slog housing market.

drhousingbubble's picture

Another thesis regarding the housing market’s future path is that of a bounce and slog market. The theory focuses on the negative equity home owners and also the low inventory on the current market. This view point actually holds some solid ground. As of last count, there are over 11 million negative equity home owners in the US. This data is usually put out quarterly but with the stronger home price movement this summer, many will move out of the negative equity position. The theory proposes that many are not selling today simply because they cannot without bringing cash to the table. Out of the 11 million underwater home owners, how many would like to sell but simply do not because they would actually lose money on their sale? This is an interesting perspective on the underwater segment of the market. Yet the outcome is probably not as clean cut as one would expect.


Case Shiller will turn positive shortly

2012 has been a solid year for housing thanks to low inventory and very low interest rates:

case shiller

Coupled with the above items, you also have very low down payment mortgages like FHA insured loans that have boosted the entry level market buyer by allowing maximum leverage with little money in the game. This has assisted on one front but there are still many in a negative equity positions that are paying their mortgage dutifully. To the initial theory of the bounce and slog, the idea goes that many will want to sell and are seeing that prices are going up. So they hold off inventory until they reach a tipping point where it finally does make sense to sell. In normal markets, people move for more common reasons like starting a family, up-sizing, divorce, or down-sizing. The distressed portion of the market was typically a small segment. For the last few years it has dominated.

As more of these home owners enter positive equity territory many are likely to sell based on more historical reasons versus the current leakage of shadow inventory. But think of what happens then. A larger portion of inventory will enter the market and likely put pressure on prices. After all, we know that 11 million of these homes are sitting in this exact position. It is an interesting theory and seems to be a very likely outcome on a nationwide scale especially if household incomes do not go up (and there is little evidence to show this is happening).

You also have seasonal impacts of home prices. Spring and summer are usually the best times for sellers and fall and winter usually see prices stall based on volume of sales:

case shiller seasonal

Since the Case Shiller data lags the current market by a few months, you are likely to have positive news coming out for the spring and summer while the fall and winter data will not show up for a few months. It is really an interesting phenomenon because the market forces have been blunted to a large degree but you now have this pent up inventory of distressed home owners but also many more who are simply underwater. Someone that is say 5 to 10 percent underwater and has no issue paying their mortgage really isn’t a distressed home owner.

Visible inventory seemed to peak in 2008 but has moved steadily lower since that point:



With demand being increased via:

-Lower interest rates

-Banks controlling distressed inventory

-Low down payment mortgage products

Home prices have stabilized and are actually increasing nationwide. The one aspect I am cautious here about is that household income remains weak and prices have increased simply by various mechanisms of leverage. The housing bubble was created by leverage products that decoupled from household incomes. We are nowhere close to liar or NINJA loans but is a 3.5 percent down payment product something that should remain if default rates are soaring? Anyone that buys a home with an FHA insured loan (the vast majority go with the lowest down payment possible) will be in a negative equity position for a couple of years given selling costs associated with a home sale.

The premise is interesting and I think this is likely a path for housing for the next few years. A sort of bouncing along on the bottom as distressed inventory is funneled out but also, many underwater home owners come online to sell and thus pushes inventory up putting a cap on how high home prices can go up. Supply and demand on the MLS but behind the scenes, we have a potential pool of inventory that has never existed in the US housing market.

The religion of the Fed

On a side note, some seem to think that the Fed is nearly omnipotent in what they can do. Do not forget that it was the Fed with little oversight of the banking system and Alan Greenspan slamming rates lower that provided a very fertile ground for the housing market to expand. Also, let us use Ben Bernake’s words from 2007:

“(Fed Reserve, 2007) All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well. Past gains in house prices have left most homeowners with significant amounts of home equity, and growth in jobs and incomes should help keep the financial obligations of most households manageable.”

Does that sound like a central bank that can predict deep into the future? Only a few months later the economy started to implode. The danger with the very generous monetary policy of the moment is that people are now conditioned to insanely low rates and low down payment loans. Black Swans are common because people act irrationally and we do not have full transparency in current markets. The vast majority even openly admit that banks are sitting on millions of properties yet the only way to get a true measure of their price is to have them on the market! In the short-term a bounce and slog market seems to be the name of the game.

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Snakeeyes's picture

Case-Shiller is likely to show a YoY increase of between 0.2% and 0.4%. House prices have stabilized, at least for the summer months.


Since Fannie and Freddie have raised credit standards (again), FHA is the only game in town with low DP mortgages. Oy vey!

goodrich4bk's picture

Good Doctor:

Is there any data that alligns the percentiles of "underwaterness" with the borrowers' age?  Anecdotely, I see a lot of Boomers who refinanced in their 50s thinking they would sell and dowsize when they retired.  Not only is that now impossible without a short sale, but also their income is about to drop as they move into retirement.  SS checks are not going to pay their mortgage once rates start to rise again.  Do you know of any data that quantifies this problem?

DeadFred's picture

My recollection is that the market reacted quite favorably back in 2007 when Bernanke made his most infamous statement. In other words he did his job well. Sarcasm aside twenty years ago the general perception was that the Fed was doing a good job. More recently they are seen as bumblers but still pretty much omnipotent. Soon the omnipotent part will be torn away. I'm seeing the current housing market as pretty favorable for buyers but that shadow inventory is scary. What happens if a significant downturn happens in the next few months?

Lucius Cornelius Sulla's picture

If the 30 year rises by 200 basis points you can pretty much kiss the housing market goodbye.  Cheap debt, backed by the public, continues to be the only thing holding it up.  IMO, it is a shaky foundation to base your investment decisions on.

banksterhater's picture

Romney claimed to "CLEAR THE MARKET" if elected. They are withholding foreclosures to prop prices while Squatters are going on 5 yrs+ rent-free. WILL ROMNEY BACK UP HIS WORDS?

There is a "Holidays PC" foreclosure moritorium Oct-Feb EVERY YEAR!

You Didn't Build That's picture

3.5% down puts you automatically in negative equity. It's like when you drive a car off the lot, it depreciates in value. Same witha house. House prices don't go up after you buy them these days. That was only in the previous 10 years of EZ Credit.

Most people will need to move within 5 years due to issues DHB described as well as job reasons. Also, Seniors are getting crunched by the ZIRP thus getting almost Zero income from their savings and/or pension plans they were depending on to live for their retirement years. They will need to sell their huge empy houses (as when the kids have all moved out) and increase supply even more.

Ben refuses to let market forces correct this Bubble market, but history shows that market forces ultimately win and correct the out-of-whack balances.

deez nutz's picture

FHA now covering 30% of the mortgages today, historically 8%.   You can buy a home with 3.5% down BUT.... if you don't have it you can borrow from.... the FHA!!!! and roll it in your mortgage!!!!   VOILA!!  - GUB-GOODNESS!!!

I see the Gubmint is at work in: Mortgages,  ZERO interest loans to auto companies(and god knows who els), student loans, etc......  

Even with credit card interest above 12%, and a helluva lot higher, people are spiking plastic everywhere I go.  New Silverados, F150s, Rams are all over the streets.  Kids back in Lexus's.      

And I wonder how long can this fairy tale called "fiat currency" last? 

Ned Zeppelin's picture

I'm involved in the housing business and rest assured that if there were no government mortgages, no FHA, no VA, no Fannie, no Freddie, there would be virtually no mortgages, and prices would then collapse and then the whole shaky financial edifice would be a goner.

Lucius Cornelius Sulla's picture

IMO, its only a matter of time before the USG is forced to abandon mortgage subsidies.  The USG balance sheet reeks of desperation.  The clock is ticking...

deez nutz's picture

the we both have to agree that with this much Government involved we are becoming a socialist nation, we have no choice.  And this is the last run for the elites to get filty rich as our days our numbered.

deez nutz's picture

prices would then collapse and then the whole shaky financial edifice would be a goner.

.... and then the phoenix could arise from the ashes?

Until then, thank god for FIAT!!!, a keynesian's best friend!!  (and real estate monkey's too!!)

Yes yes NED, let's keep this game going, more of the same until at least you can retire - profitably from the "real estate" game.


3.7.77's picture

Agreed, blood sucking realtors trying to get the last bit under the guise of "Saving the Economy".

yellowsub's picture

If you put more down, you borrow less.  Thought it was a simple concept. 

If you can't even save enough for 20% then you really don't have any business owning a home. 

Winston Churchill's picture

Another 30% to 50% drop in values is coming.

Caveat emptor.

Lucius Cornelius Sulla's picture

I agree. It may take a few more years.  The catayst will be a debt and currency crisis which forces the government to abandon its support of the mortgage markets.  Debt servicing costs will go beyond military expenditures as rates rise.  Hard choices will be forced on politicians.  Housing will be a victim as will many other ridiculous boondoggles such as corn ethanol subsidies.  If you are a buyer you better have enough cash for a huge down payment.  Private banks will require it.

CheapBastard's picture

The 'blip' in price rise is just that, a 'blip.'

With joblessness increasing and wages stagnant and/or falling, I don't see how a house prices can rise for more then this temporary 'blip."


Ned Zeppelin's picture

I think that is possible, but only if negative equity homeowners for any number of reasons give up and walk away from their homes in droves.  Most will cling to what they have, even payments on an underwater home, since the decision to leave a home is not informed strictly by economic considerations. As long as they do, and there is not otherwise some economic catastrophe whereby homeowners lose their jobs and the issue is forced (even there, how long does it take to get a foreclosure done?), I like the bounce and slog theorem. 

(did not vote you down BTW)

Lucius Cornelius Sulla's picture

I think there is way more shadow inventory and pent up inventory from under-water mortgage holders than Case-Shiller accounts for.  Banks are desperately trying to manage the inventory flow.  They have no incentive to sell as it will mean a write-down for them.  Mark to make believe has saved them at the expense of the public as they bleed us dry through negative real rates and USG bailouts.  The US housing market, like Japan's, will die a slow death of a thousand cuts.

lolmao500's picture

It should be 20% downpayment.

pashley1411's picture

All you need to know is that if the Fed sits on the housing market, through the banks, money can't be made.    When the government sits on an asset class, only insiders can make money.    Maybe a nickle here, a few thousand there, but nothing to make a living on.