Guest Post: Has Housing Bottomed?

Tyler Durden's picture

From Simon Black of Sovereign Man

Has Housing Bottomed?

After an almost uninterrupted period of decline over the last few years, US home prices now have some positive momentum.

For one, the S&P/Case-Shiller index of property values in 20 cities has seen its highest increase in more than two years. In addition, JP Morgan CEO Jamie Dimon recently stated that his bank was seeing a surge in mortgage applications.

And perhaps most importantly, the National Association of Realtors has reported that the nation’s inventory of homes on the market has dropped to its lowest level since March 2006, while the median home price is 11.3% higher than a year ago.

These are definitely good signs for housing. But remember, nothing goes up or down in a straight line. Just like a stock market that suffers a serious crash, housing has been due for an upward correction.

But it is a false premise to conflate ‘rebound’ with full blown ‘recovery’. The market could just as easily improve, then decline once again in a few months’ time. Positive data is great, but doesn’t necessarily portend long-term growth.

Here in LA, the median asking price of a home is now $361,390. This is 12.2% higher than in January 2012. Good news. But over the last few years, the LA market has gone through similar periods of growth, followed by more declines.

Between February 2009 and January 2010, for example, the median asking price in LA increased 14.0% from $369,125 to $420,975. Home prices then reversed this trend and declined 20%.

People readily accept that stock markets can turn on a dime and move in the other direction. Fact is, housing can do the same. Over the long-term, it’s fundamentals that count. That means demand, supply, and policy:

1) Demand is ultimately about population and income levels. If the number of households is increasing, demand will increase. If income levels are high, demand will increase. Yet the long-term trend for both of these in the US is negative.

- Unemployment is still high (and surging in the northeast). This typically portends fewer households as people ‘bunch up’ during times of financial difficulty. In fact, the number of adults aged 25-34 living with their parents has exploded to over 40% according to the US Census Bureau.

- Census data further show that population growth in the US is tepid; the nation’s fertility rate hit an all-time low in 2011, continuing a four-year trend. Not to mention, America’s strict immigration policy tends to keep wealthy foreigners away.

- US median household income continues its 4-year slide and is back to 1996 levels.

2) Supply of homes in the United States continues to increase. Since 2002, housing inventory in the US grew 10.7%, far outpacing population growth. As further evidence, the Census Bureau reported that 18.15 million homes in the US are vacant– 13.6%.

By way of comparison, this vacancy rate was about 8.5% during the peak recession years of the 1970s. Bottom line, there’s still a lot of inventory out there.

3) Interest rates are at all time lows, currently around 3.5%; this helps people afford higher priced home for the same monthly payment. At 3.5%, for example, $2,000 per month buys you a $441,000 home. At 7%, it only buys you a $298,000 home.

Consequently, when mortgage rates rise to their historic norms, housing prices could fall drastically.

In the meantime, while low rates make principal and interest payments more affordable, the Fed’s loose monetary policy is pushing up the ‘other’ costs of home ownership– HOA dues, insurance premiums, property taxes, etc.

So in a way, Bernanke is lowering one cost of home ownership, but simultaneously inflating others.

This means that it may be too early to uncork the champagne bottle and declare an end to the housing crisis in the US.

It only takes a few years so build millions of new homes, but it can take decades for demographic shifts to mop up all that supply. It’s foolish to believe that the crisis has abated simply because the Fed has printed a ton of new paper.

No doubt, it makes sense to refinance a home at 3.5% (possibly the best way to bet against the dollar). As does buying high quality, well-located properties at today’s prices. The general rule is if you can buy it for less than construction cost, it’s very hard to get hurt.

But these deals are few and far between. So before writing big checks for mid-grade investment properties, it’s definitely worth taking a long-term view of the fundamentals. On an inflation-adjusted basis, the market still has major headwinds.

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jomama's picture

no, bitchez.


francis_sawyer's picture

Only "monkeys" pick bottoms... Oh wait ~ It's a Simon Black article... Nevermind...

maxmad's picture

Inflation and Hyper-Inflation will ensure this is the bottom... Wait, what's that... My rent just went up another $150/month this year.... Why not buy a house when my rent is $1500 for sh** townhouse!

redpill's picture

Yes it has bottomed, the Fed has seen to that.  And actually it was last year when it happened.  But really that's not the point, the point is that it simply cannot grow rapidly from here, so if one is anticipating an explosion in prices or transaction volumes you'll be sorely disappointed.  Public home builder stocks are a foolish buy, and if you're buying an investment property to rent, you better be cashflow positive on day 1 by a very healthy amount.


maxmad's picture

Always bet on the side of the banks and the Fed.... Until its over...

AldousHuxley's picture

you don't need wage increase to have housing values go up.

Lower interests effectively increase asset values.


High asset values is what banksters want. make shitty homes worth more so they can buy real assets

Citxmech's picture

The other critical issue is access to financing at those lower rates.  While I doubt the Fed will allow rates to climb very much, the bank can restrict to whom the give the sweetheart deals too.  In other words, effective average loan rate can (and I think will) go up in the future - effectively capping RE appreciation.  Having said that, a good property that allows you to do what you need that can be had for less than rent is hard to argue against.

MachoMan's picture

How has the FED seen to a bottom in housing?  Unless wages increase, I fail to see the mechanism to prop up houses...  there isn't much room to decrease interest rates for mortgages... 

Inflation can run rampant while housing prices continue to decline... 

redpill's picture

1) They've made mortgage money near-free

2) They are buying all of the toxic mortgage backed securities so the banks don't have to worry about foreclosing

3) They've enriched the banks themselves so there is no pressure to dump seized properties at below-market prices.


I'm not saying I agree with their actions, rather just that they've pulled out all the stops to try to re-inflate the housing bubble.  They've failed to do that, but they have put in a bottom.


Really adds some perspective when people say Sandy is the worst disaster since Katrina and will cost $40 billion....hell the Fed prints that EVERY TWO WEEKS!

MachoMan's picture

This is not the bottom based on any fundamental analysis (the only analysis).  All you're saying is that the FED has induced a temporary plateau on a declining chart.  THAT IS NOT A BOTTOM.  More like eye of the hurricane.

DeadFred's picture

There is NO inventory on the market now. The inventory in my town is ten percent of peak levels. Is that because no one wants to sell? Not likely, how about there are very few buyers. Next spring when the foreclosures come on the market again we will see further drops. Anyone who thinks this blip means the bottom is in should contact me because I have an even better deal on this certain bridge.

redpill's picture

Inventory is tight because:

1) Home builders are building only what they can sell immediately

2) Resale prices haven't risen enough for most homeowners to be above water and even be able to consider selling


There are buyers out there at the moment, still heavily investor driven, but slightly less so this year than in 2011.

MachoMan's picture

Are these investors actually solvent or solvent but for temporary monetary and/or fiscal policies?

redpill's picture

Given current interest rates, it's nothing short of astounding the number of cash buyers in the marketplace.  There is a lot of foreign investment, people from growing economies that are looking for a store of value, and many of them believe that is the US real estate market.

Hayabusa's picture

MachoMan is right.  I work for a school system and this year my take-home pay changed by less than 1/2 of 1% due to increased medical insurance, etc.  When you factor in inflation for food, gas, etc., my take-home pay and in particular disposable income is DECREASING.  Some of you just can't think with any depth.  Wages are falling and inflation increasing... comon folks, you can do the math and extrapolate to the housing market!

flacon's picture

Housing will bottom when people can afford to PURCHASE their home without debt. 

maxmad's picture

Just keep paying your rent Flacon, cause its never gonna happen!  That would bankrupt the greedy banks and the Baby Boomers..

CH1's picture

Things denominated in "never" have a funny way of coming to pass.

mmanvil74's picture

Pretty much everyone is afraid to call a bottom for any market on this web site, since it is full of bears for just about everything.  I am just as bearish as the next ZHer, but when I analyze US Housing for investment, it still looks pretty damn good from most angles.  I've voiced my views by commenting on US Housing related posts on this site for months so I don't want to repeat myself.  

Let's put it this way.... housing has bottomed relative to most asset classes (including US dollars, but that's not necessarily the one that matters the most).  If you measure US housing vs. US home rental rates, US Housing vs. Oil prices, US housing vs. Gold, US housing vs. the S & P 500, US housing vs. real US average wages, and probably several other asset classes, you will find an intriguing fact - US housing is at or near all time lows in every case, that's ALL time for as far back as I can find records, not just since the '90s.  These are the types of metrics I like to use when evaluating investments... is an asset currently high or low in historical terms relative to other asset classes?  Does the P/E (or in housing's case the Price/Rent) ratio look attractive?  Is an asset priced at or near its book value (in the case of housing, its cost of construction)?  

When you factor in all time historical low interest rates, all of these metrics make housing looking even more attractively priced.  Compare US Housing to Canadian Housing, or Mexican Housing or Housing anywhere, once again, all time lows.  So, I don't really give a shit if housing has bottomed, it will revert to the mean compared to every other asset class and earn positive cash flow in the mean time, what more do you expect from your investments?

In most every way, US housing is one of the least worst investments out there.  Certainly you have to buy right, in the right places and take into account housing trends such as retirees downsizing, moving to southern climates, etc.  But a smart investor who has the time to wait (as all smart investors ought to), could scoop up 10 homes with $200,000 down and own them outright in 20 years, all the while earning positive cash flow, including the cost of professional property management.  What's not to like?  

Or, tell us Mr. Simon, why we should pay more for a house in rural Chile, than one in central Phoenix, or Atlanta?  How do real Chilean wages stack up against Chilean house prices compared to that same ratio in US?

The only possible reason to avoid US housing is if you believe we are headed for a full blown deflationary depression, or world war, where unemployment doubles from here, and the Fed can't ignite inflation no matter how hard they try.  But, in that case, what should you own besides gold and guns that pays rent?  Bonds?  Not for me, thanks.  I'll take housing over bonds any day.  Sure, get your guns and gold and food, but housing is a solid fourth choice once you have your bomb shelter assets covered.

Panafrican Funktron Robot's picture

New home sales are currently projected to hit 389K by the end of the year.

In 1982, in the middle of another significant recession, with interest rates at 18%+, there were 412K new home sales.  That was with 82 million less people living in the U.S.


Just Ice's picture

And more sales occurred at that time with less people and despite recession and killer interest rates because homes were affordable to average people with average incomes.  That is not the case now.  Houses remain substantially overpriced for average families with average incomes.  Comparing one overinflated market to another overinflated market, so that traditional metrics may look appealing, does not change that.


Omen IV's picture

that period was front end of baby boom acquisition of Stuff - they believed in the future - very few believe today anything - the kids have been raped by Student Loans and offshore jobs - cant be dupilicated unless you change the WTO terms

MachoMan's picture

The only thing you've made a case for is that housing is the best horse at the glue factory.  The thing about our present situation is that ALL the chips are on the table...  as a result, all asset classes are subject to complete and total revaluation, but for their respective utilities.  One might say that housing has a lot of utility...  and, it can, however one might have thought that about Detroit too...

In the end, I think investors in housing will take giant haircuts, but probably not as much as some other asset classes.  Presently, if you're patient and have plenty of discipline (and cash), you can find solid buys and net 8%+ on rental property...  However, rents will follow wages down (just like housing values will continue to decrease despite low and decreasing rates...  although, when rates do finally increase, housing will simply decline faster in price).  At the end of the day, some assets have a salvage value, while others do not...

Snoopy the Economist's picture

Eventually, all market revert to the long term mean line/trend. Housing has not dropped to that point yet.

Wages are decreasing (with increasing inflation = stagflation) and most fear for their jobs - how does that induce buyers?

Foreclosures will flood the market and drive prices lower along with these other fundamentals.

As phil grande says - "no one is bigger than the market" and market forces will come back to their senses at some point - the fed does not want to kill the dollar - it's their only game in town

JamesBond's picture

cash buyers are snapping up prime properties, but they too will get their fingers burned.



Offthebeach's picture

Housing market?

The Fed is the market.
Where would it be with out the The Fed/Washington buying 90%+ of the mortgages?

Devaluation of the dollar is making people poorer faster then economic growth. In the north, Kalifornia, towns, cities,counties and states have long since been broke and need to massively cut labor costs, reduce pensions, and expenditures to local contractors and suppliers. But local gov expenditures ARE the local economy. Further, taxes, fees, fines, permits must be raised on fewer business until those massive windmill, battery, solar plants start flooding the economy.
Young people are not having families or kids. Houses are too big. Storm insurance is going up. Local taxes are not going to. Be paid by detox centers, environment set asides, closed commercial business. The taxes will be paid by tax hostage homes.
There are tens of thousands of nice towns, cities with massive amounts of houses in the north. And year by year, people can't afford them. Detroit is the future. Declining income/profitable business, high taxes, broke give, houses once grand.
I see houses either being squared in, or abandoned, everywhere. In New England I see blue tarp camps . Ask any cop. People live in cars, RV. Go down the east intercostal, people living in 25' boats.
The debt/tax/ finance papershuffling economy is omnipotent. So long as the paper clears. The uber baes economy is steady. Local gov is hanging in and will for a long time. Detroit cities show that local blood sucking gov hangs on until the last drop of taxes can be farmed, and more. They manage vote buying g/poverty pimp farms and are incentivised to grow,nurture local poverty. Crime and poverty are the last gov racket left. Although I see Mayor Bing is doing local bulldozer cleanup of the economic crime scene. Even on Cape Cod there is more and more town bulldozing.

The US will only learn through experience. Repeated experience. Socialist/ Keynesian pap is rewarding for many still, and appealing for the gooberment edgamakted Ritilen Pot NFL masses.
We are just at the beginning.

cranky-old-geezer's picture



The only possible reason to avoid US housing is if you believe we are headed for a full blown deflationary depression,

We are, and it's full blown INflationary depression. 

Fed keeps printing to keep govt and Wall Street going.  It debases the dollar.  That's the inflation part. 

But people's wages aren't rising.  Wages are actually falling (in constant dollars).  So housing won't go up with other prices.  That's the depression part.

Demand for big ticket things like home ownership is way more elastic than food and gas. People must have food and gas.  They don't have to buy a home. They can rent, room with someone, live with parents, etc.

If wages don't rise in real terms, home prices won't either.  Just the way it is.

or world war, where unemployment doubles from here,

Unemployment WILL double from here and it won't take a war to do it.  Govt policies already in place will do it.  Simply maintaining the status quo will do it.

and the Fed can't ignite inflation no matter how hard they try. 

We already have inflation, about 15% / yr.

You're talking about Fed pushing home prices up.  Fed doesn't care about home prices, just prices of MBS and such.  Fed has done pretty good keeping MBS prices up by creating artificial demand for them, while home prices keep falling from lack of demand.

We might reach a point where home prices stabilize if the opposing forces of demand collapse (pulling prices down) and currency debasement (pulling prices up) reach equilibrium.

I tend to believe currency debasement will win out and home prices might float up some.  But not near as much as food and gas. 

Larry Dallas's picture

Its the wages, stupid! The wages! No increase in wages, you could have 0.5% mortgage rates and perhaps it would be the same!

exi1ed0ne's picture

Since wages have been loosing ground for years, inflation gaining momentum, and taxes eating the guts otta your paycheck that is not likely to happen in my lifetime.  Average house price would have to be in line with average wages at least.  There is just too much disconnect there to have much more than 10% ownership without some form of debt, if that.

MachoMan's picture

Around here, median housing is approximately 3x median household income.  I'd say the issue with housing prices coming into conformity with wages is probably going to be an issue for non-flyover states...

exi1ed0ne's picture

Even in the flyover states where I am it will be challenging.  Lower average cost of housing, but also lower prevailing wages too.

MachoMan's picture

Yes, housing prices are ultimately tied to wage levels (although not necessarily domestic wage levels).  However, the areas that have the most room to decline are not the areas with 3x home to gross household income.....  don't see the boom, but don't see the bust as much either.

MeBizarro's picture

How did this stupid comment get this many thumbs up?

walküre's picture

Depends. Housing in the Northeast will need replacement at 2012 prices of materials. Cost of building materials hasn't gone down, cost of labor has.

LongSoupLine's picture



Housing will find a bottom when TBTF's, and Fannie Fredie book cooking hits a top.


masterinchancery's picture

lies, damn lies, and government statistics--you don't actually believe this crap do you Simon?

sangell's picture

Just wait till the insurers send the new premiums to homeowners along the Mid Atlantic from Cape Cod to Virginia Beach!

CH1's picture

You mean there is a cost associated with broken windows???

Can't be true.

yogibear's picture

Ouch! The insurance rates skyrocket and property taxes increase. The home leaser (Not an owner, just leases it from the government) will be srcaping to make ends meet.



Frank N. Beans's picture

is it a round bottom or a flat bottom?


NotApplicable's picture

Just another manipulated, dead-cat bounce. "The housing market" numbers are every bit as relevant as ADP/BLS employment numbers.

maxmad's picture

You may be right, BUT, nothing is more manipulated than the management company for my townhouse... They raised my rent again!!

yogibear's picture

And they will keep raising the rent. Bloated public labor costs and pensions will keep sticking it to the landlord. The landlord then sticks it to the renter. The renter will just eat it.

Now many townships license landlords and inspect yearly along with fees.

It's cheaper to live in a camper or trailer and flip off the townships. Pay almost nothing in taxes and move if they start getting carried away with taxing.


exi1ed0ne's picture

Mobility is the new black.  RV is a good choice as an alternative to home ownership.  Some of them are unbelievably gorgeous, even opulent, inside.

northerngirl's picture

I've been telling my children that is what I'm going to do, buy an RV to live in.  They think I"m crazy.

Snoopy the Economist's picture

At least no property taxes to contend with.