Guest Post: The Real Housing Recovery Story
Via Lance Roberts of Street Talk Live,
Imagine that your financial advisor called you up one day and said:
"Great news...your investment portfolio gained 1% in January which is an annualized return of 12%. However, we have to subtract .05% from that return because historically January's return has only been 0.95% since 1950. This brings our seasonally adjusted return to 11.4%."
Of course, after the SEC pays a visit to the advisor to correct his performance reporting measures, the simple reality is that "what you see is what you get."
While this example may seem a little farfetched - this is exactly what happens with a variety of economic reports that are released by various government agencies and member organization/lobby groups. The reasoning for such data manipulations is not a nefarious scheme; but rather an attempt to smooth what is normally very volatile data. This is particularly the case with housing related data. As an example the chart below shows the data released by the Census Bureau for housing starts on both a non-seasonally and seasonally adjusted basis.
As you can see there is an extreme amount of volatility in the non-seasonally adjusted data. The Census Bureau takes the reported monthly housing starts data and annualizes it. Therefore, if 10,000 homes were started in January it is reported as 120,000 on an annualized basis. Then a seasonal adjustment factor is added to account for seasonal weather and demand patterns. For example let's take a look at the housing start data that was just released for December of 2012.
The headlines read that "Housing starts surged by 12.1% in December proving that the housing recovery is back." In reality the numbers were as follows:
- December starts: 61,500 (down 2.8% from November)
- Annualized December starts: 738,000
- Reported seasonally adjusted December starts: 954,000 (Up 12.1% from November)
- Seasonal adjustment to December starts: +216,000
Historically, the data smoothing methodology was "close enough" and the variations were, more or less, worked out over time. However, in the current economic environment, the seasonal adjustment process may be overstating that actual activity that is occurring within the underlying economy. With housing currently making a very small contribution to overall economic activity, just slightly more than 2.5% as shown in the chart below, the difference between the "real" economic impact of 61,500 homes being started nationwide versus 954,000, of which 216,000 were a mathematical seasonal adjustment, can be quite dramatic.
However, as in our financial advisor analogy, when it comes to the impact of the "housing recovery" on the economy "what we see is what we get" and nothing else. Therefore, in the quest to determine what the actual contribution to the overall economy that housing will provide, we need to look at the full process of housing on an actual basis.
The Housing Process Activity Index (HAPI)
The housing process begins with the permit to build a home which leads to the start of the construction process, the completion and the sell to an end buyer. The reason for looking at all four components is that many permits that are filed do not result in a start, many starts do not lead to completions and there are many completions that remain unsold for quite some time.
The Housing Process Activity Index (HAPI) takes into account all four variables. However, instead of utilizing seasonal adjustment factors and annualizing the monthly activity, as with the Census Bureau, I use a 12-month average of the actual monthly activity to smooth the data. The chart below shows the HAPI as compared to its individual HAPI subcomponents.
This tells us quite a different story than what the media is currently reporting. On average over the last twelve months there were:
- 67,000 permits for new privately owned housing
- 65,000 housing starts each month
- 54,300 completions
- 30,900 sales
What this tells is that out of the 67,000 permits, on average, that were pulled each month to build a home only 30,900 actually wound up being completed and sold. This is a very different picture than the recent months seasonally adjusted data that showed:
- 903,000 permits
- 954,000 starts
- 686,000 completions
- 377,000 sales (as of November)
It is important to note that I am NOT contesting the manner in which the Census Bureau reports its housing data. I am, however, suggesting that the method used in the current economic environment may be overstating the actual activity that is occurring. By smoothing the non-seasonally adjusted data using a monthly average we see a very different perspective to the data. The HAPI begins to potentially answer the questions of why housing remains a low economic contributor and why construction employment is still mired at very low levels.
While housing has improved somewhat from the post-crisis lows it is far weaker than the majority of headlines actually suggest. Housing inventory has declined sharply from its peaks that have primarily been driven by speculative all-cash investors turning lower priced homes, and buying homes in bulk from banks, to be turned into rentals.
Furthermore, a large portion of the "housing start" story has been in the multi-family apartment space. As shown in the chart below the percentage of apartment starts, 5-units or more, is currently at some of the highest levels on record and has surpassed the peak seen in the last recession.
Currently, there are still more than 25% of homeowners underwater which limits their ability to move, refinance or sell their homes. However, as prices rise, there are two issues that begin to attack the housing story: 1) As prices reach levels where underwater homeowners can sell they will likely do so out of a psychology need to escape the "trap," which will bring a large supply of homes back onto the market, and; 2) rising prices will eventually erode the profitability of buying homes for rentals which will bring the speculative frenzy that has been the driver of the recent recovery to a halt.
The housing recovery is ultimately a story of the "real" unemployment situation which still shows that roughly a quarter of the home buying cohort are unemployed and living at home with their parents. The remaining members of the home buying, household formation, contingent are employed but at lower ends of the pay scale and are choosing to rent due to budgetary considerations. Also, we should not discount the psychology of home ownership has dramatically changed since the crash as many of the "millennials" saw the financial damage their parents suffered and are opting out of taking such a perceived risk.
As I stated recently the optimism over the housing recovery has gotten well ahead of the underlying fundamentals. The overarching problem is that the housing market that is almost exclusively dependent on the continued push to artificially suppress interest rates combined with massive amounts of direct stimulus, and incentives, to bailout current homeowners and banks. This intervention is causing an artificial supply suppression which is likely to create a backlash in the future as the current supply/demand conditions are unsustainable.
While the belief was that the Government, and Fed's, interventions would ignite the housing market creating an self-perpetuating recovery in the economy - it did not turn out that way. Today, these repeated intrusions are having a diminished rate of return and the risk now is that interest rates rise shutting potential homebuyers out of the market. It is likely that in 2013 housing will begin to stabilize at historically low levels and the economic contribution will remain fairly weak. The downside risk to that view is the impact of higher taxes, stagnant wage growth, re-defaults of the 6-million modifications and workouts, elevated defaults of underwater homeowners and a slowdown of speculative investment due to reduced profit margins. While many hopes have been pinned on the 2012 stimulus fueled, China investing, and supply-deprived housing recovery as "the" driver of economic growth in 2013 - the data suggest that may be quite a bit of wishful thinking.
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I made SOOOOO much in the market, I'm gonna buy every house in sight!
Imagine that your financial advisor called you up one day and said:
Well, for starters, I'd say "Go look up 'compounding.' Also, you're fired."
The 'boomers' want to downsize.
Accept most are underwater.
Trapped in houses they can ill afford and forced to work until they croak!
Only to pass on nothing but the rags on their backs.
Housing supply is going to remain elevated, with little increased demand. Except as rentals.
costs of house owneship are rising fast...maintenance, insurance ...an dnow property taxes. i just heard on the radio there most likely will be a property tax increase to pay for, "school security training and additional school police" in light of the recent Newtown thing.
As far as supply, NYT had an article last year showing a 9 year supply of houses...that's impressive and does not include the massive increase in tract houses recently.
The next housing crash is going to be messier.
Evil bastards stole our printing press, now their buying our houses with our money. That will drive prices way up beyond previous levels eventually.
Seems fair enough.
It drives me nuts that the media consistently reports rising home prices as a "good thing". Are rising food prices a good thing? How about rising gas prices? In what other sector are rising prices in the cost of living considered a "good thing"? The assumption with this type of reporting is that we're all homeowners. But we're not. We're increasingly a nation of renters. So celebrating rising real estate prices are another way of saying, "Hooray! It's going to get shittier for you".
Houses used to be a place where you raised a family, had friends over, enjoyed company, provided a sanctuary for your children, and where you could relax.
Wall St. turned it into a side show. House flippinig, mortgage fraud, and unserviceable debt load created one of the biggest asset transfers of our time.
Amazing how so many people got sucked in. There will never be a housing recovery because in a debt based economy, the house is the only hard asset security against the loan. Confidence is gone, but the loans aren't and will linger for decades.
Live in your home and enjoy life. If you plan of flipping, you're much too late to the party and now look like an idiot.
Yeah, unfortunately it's a tough situation for the 61 year old guy who refinanced into a 30 year 5 years ago so he could take the old lady to europe and lease a new Lexis. What the hell, at least his social security will go up as he works till age 70.
Thank you Tylers, I knew my assessment was not far off on the housing numbers, however I was not sure how our government adjusted the numbers. I think the world would just love to have the numbers and facts straight out, no bending.
Although they still like to manipulate the markets with the false media figures.
Great work, Carry on
Some people buy houses & others dig... You dig...
whatthefuckever.
Bernak said QE4eva was for one reason. To lower interest rates. They have risen. The fact that the market just keeps movin up is just an unintended consequence I guess.
Surely, at this late date you can not believe that the consequences of QE (version whatever) are unintended.
<I can, and stop calling me Shirley.>
We are in a place where both the intended and "unintended" consequences of QE are seen as desirable. They drove rates pretty low and they pumped the stock market. Additionally, they largely monetized the federal deficit with apparently no adverse inflationary impact. If you're a monterarist, this is what you call "winning".
However, I see nothing different than the last bubble (certainly no lack of hubris anywhere). The only difference is if we get hit with another significantly destabilizing economic event there's nothing left to lean against it from a policy perspective. All institutions are financially locked at the hip (dominoes are lined up perfectly). All policy levers are already pushed up into the "run until failure" position, just to get us back to this middling state of affairs. Downside risks of toppling that first domino are everwhere, upside risks..... not so many.
The current regime never sees the next wave coming. Patience. It's just halftime.
Yes, the FED can't understand why mtg. interest rates haven't fallen even lower, to under 3%. Maybe because banks don't see much return on a 30 yr. loan at such low interest when they can find other, more profitable investments?
http://libertystreeteconomics.newyorkfed.org/2012/12/why-isnt-the-thirty-year-fixed-rate-mortgage-at-26-percent-.html#.UOGJBGF7DcY.twitter
I have read some anecdotal stories about people with great credit having a hard time getting a mortgage which makes sense from the banks point of view, as you said why give a 30 year fixed rate low interest loan to someone who will pay you back with inflation dollars. If i was young though i would sure try to buy a house now with prices down and low interest. As for the taxes going up, you still pay them when you rent through your landlord but can not deduct them on your 1040.
LOL, look at the huge divergence between Residential Building Employment and Housing Starts. So, the houses are magically erecting themselves now???
Yeah ~ the money is PRINTING itself too... Didn't you get the memo?...
Mexicans "don't earn no income" and don't pay no stinkin income tax.
uhhhh...double negatives result in a positive. I guess that was your unintended consequence.
Trying to figure out what's in the numbers is likely a fool's errand...but perhaps the Residential Building Employment number is flat is because the jobs moved to the pre-fab factories:
Factory-Assembled Homes
Factory-assembled homes are sometimes called
manufactured homes, modular homes, factory
homes, or kit homes. All factory-assembled
homes share a common strategy which moves
as much of the construction process as possible
from the building site into a factory environment.
http://gccds.org/research/altconstruction/factory/factory.pdf
I know that this is happening with the 4 houses under construction down the road from me...and sadly no scraps in the scrap box either. When they were building from scratch, we salvaged all sorts of stuff and built a shed.
I've watched them build some of these track houses and many look like crap....knotted, low grade wood, 2x4s too widely spaced, etc...I'm not sure they will last for the length of that 30-year morgtage or will fall apart before then.
Hmmmm
"Great news...your investment portfolio gained 1% in January which is an annualized return of 12%."
Has this guy ever heard of compounding interest?
Question is always this: When?
Home ownership is becomming less a priority among the young, especially in urban areas. They are realizing that you buy a depreciating asset, pay a mortgage, maintain it to protect your investment and keep it comfortable, pay rent to the government to keep it, and stuck there if they want or need to move. Renting is the way to go. Even if they try to get rents to go higher than owning, It'll nevr be like it was when you could buy a house at 20K and sell it at 300K again.
I'd say the same thing about auto ownership not being a youth priority-of course the most they'll ever be able to afford is some iShit
OMG, I can find you houses (move in condition in decent areas) on Zillow that cost less than some of the higher priced cars on the market today. That's why the auto industry will have to deflate sooner or later. It's only a matter of time.
son just bought a foreclosed home in terrific condition. had a 320k loan for owner in 2007. 117k, nice subdivision in charlotte, most of the homes in there are custom built back in the middle to late 80's. i told him to take it as a possible he may lose 20% or more if this bubble burst, he knows and said he could stand it for he intends to live in it for more than 5 years. one heck of a lot of house for the money, but i think it will go lower, or even to 0 for a couple of years when this currency/country bubble burst.
He made his decision, support him and be there. Hope he is happy and lucks out.
Just a contra-thought -- real estate "Could" win in a currency bubble bursting by
1- (hyper) inflation making the payments pennies on the dollar
and/or
2- a real asset that could be sold/traded/rented/mortgaged if/when the new currency appears.
Somebody is gonna be right (about RE, Ag/Au/Pb, meds/food, etc) when TSHTF - we just don't know who, yet. Could be your son made one helluva investment.
Not really... FOFOA covered this ad nauseum... while it might appreciate during a currency crisis/inflationary environment, it will not appreciate as quickly as other assets... aside from the intuitive fact that an abundance of supply typically doesn't convert into riches, regardless of the underlying economic conditions...
However, a house can provide utility other assets cannot...
I'll never buy another house, condo, anything. My property taxes always go up, regardless of the price the property can be sold for. Ownership is an illusion as long as your place can be taken away from you if you don't pay onerous taxes (more than you ever paid in rent) determined by government toads.
I'm with YOU, Town Crier.
Never, ever again.
RV or Tumbleweed house on wheels is starting to look good to me...after the kids have grown and left (if they can). If not, we'll stick together.
Love me some Lance!
bet you say that to all the guys, lol
Defaulting as a stigma has been cleansed from the American psyche, I have been involved in the building side of home building for over 30+ years, custom homes. That fucking market is deader then a door nail until you get into the multi million dollar market. Tract whores are throwing them up like it was 1999 but they are treated the same way as the large banks when it comes to accounting fraud, in house financing and dumping them onto to their Fannie (taxpayer). Fog a mirror, get a new Lennar, KB home. Dirt prices are starting to move up by the minute again. On the re-sale side Canadians, Chinese and young married couples that are taking another crack at a future default.
When the power brokers pull the rug this next time the guys who thought they were buying low are going to be shiting their Dockers.
there is no stigma in doing things that used to be unthinkable-whether it be defaulting on loans or the use of torture by Uncle Sam-and that signals the death knell for the US. relativism is like termites that rot the structure while hidden from view-eventually it will fall albeit in the blink of an eye
booboo, I see some of the same. We visited several tract house builders htis weekend and I was stunned to see the reurn of zero down and almost zero down mortgages. Seems as if nothing has changed. They just pass them on to the FHA (taxpayers) not really caring what your ability to afford the place is.
It's almost heartbreaking to see these young folks lock into a 30-year mortgage when they don't really even know where they will be in three years.
'almost'? if you're stupid enough to buy into the dream, you deserve to face the consequences of your shitty decision.
and the real criminals making the money from these liar's loans walk away scott-free.
fraud is really the only way to make any money in this country anymore.
Housing Schmousing....
I'm not buying a house until they let me do it with my student loans.
All those empty houses I see in my neighborhood (with no For Sale signs) surely are very positive signs in the New Paradigm. Almost as Bullish as the empty store fronts in the mall and rise in local crime.
all over florida the demand way out strips supply. not sure how the rest of the country is. Investories are are super tight and the number of big investment companies coming into the market in the last few months is rediculous.
I personally know 3 legit companies that are trying to buy 1000's of houses each over the next few years. That alone would snap up a chunk of the foreclosures in Florida. There are many many more I obviously dont know.
The bottom has been in for 1.5 to 2 years.
Development is up. Tons of condo projects breaking ground, apartments being built all over. I know of a couple of mid size developers in central Flroida that keep being bid out on tracts of land by the national companies also.
I think there is a paradign shift for real to Florida this time. Climate plus no state income tax. What's not to like?
"I personally know 3 legit companies that are trying to buy 1000's of houses each over the next few years."
There's your demand
Yeah...and there's nothing better than an empty house (or 500,000 of 'em) that have been sitting in the FL heat and humidty for years and years.
Saw a place "just for beans" a few months ago...even the real estate agent for the bank was shocked -- part of the roof had caved in. I'm thinkin' the bank will want to re-think that price or knock it down (hazardous) and sell the land.
I think you're an idiot. Have a look at the data and see how it marry's up with your windage.
According to hotpads.com over 500,000 homes in florida are on the market today.
Three outfits buying 1K homes each isn't going to be much of a catalyst.
Lol hotpads? How about running some real data like I do. Combine realtytrac, real quest professional , Mls, etc. get back to me when you realize how stupid you look.
LMAO at cha....
+500,000
Sounds like this dunce just came from his NAR (National Association of Racketeers) pep rally.
Are you high? ALL over Florida?
I'm in FL. Subdivision with 4 houses built. Super quiet around here.
The subdivision to the north has zero houses and most are bank owned. The HOA isn't even pursuing unpaid HOA fees. More than 1/2 doz more subdivisions that are e-m-p-t-y.
We have properties ready and waiting for buyers - water front and gulf front that when they do sell are going for less than 1/3 of prices from a few years ago.
Some are buying cheap lots and holding - a few building....some say they don't want the existing houses due to toxic titles, etc.