Guest Post: The Echo Boom In Housing-Recovery Stocks

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Is housing in an echo boom? Though the jury is still out, it seems a risk-on speculative fever has returned to some housing-related equities.

Speculative bubbles often produce an "echo boom" a few years after the bubble has burst, as the cultural/institutional memories of the asset's spectacular gains remain operative long after the initial boom/bust. Is the much-hyped housing recovery an organic, sustainable trend, or is it merely a speculation-driven echo boom that is doomed to fade?
Given the unprecedented stimulus that the Federal Reserve has applied to the housing sector via multi-trillion dollar purchases of mortgages and its gargantuan money-printing/bond-buying efforts to suppress interest rates, it is not really possible to claim housing is in an organic trend; that would first require an end to Fed support and a normalization of the mortgage market and interest rates.
Housing bulls claim upticks in sales and household formation are evidence that pent-up demand is driving the market higher. Skeptics suggest the real driver is not higher demand but lower supply as lenders restrict inventory (homes for sale on the open market): The Real Housing Recovery Story.
Roughly a third of all existing home sales in many markets is not organic demand by households, it is speculation by flippers or investors chasing yield in a near-zero (real) yield environment. High levels of speculative activity could be nurturing a false confidence in permanently rising demand that is actually temporary.
Let's start with new home sales, the barometer of new construction. The 20% rise from 2011 is impressive, but this is off a very low base--a mere 306,000 new homes sold, less than a third of the 2006 level. (Courtesy of Calculated Risk)
For context, recall that there are about 75 million homeowners, about 50 million with mortgages, and over 19 million vacant dwellings in the U.S. In this context, 60,000 dwellings is statistical noise.
Annual New Home Sales
Year Sales (000s) Change in Sales
2005 1,283 6.7%
2006 1,051 -18.1%
2007 776 -26.2%
2008 485 -37.5%
2009 375 -22.7%
2010 323 -13.9%
2011 306 -5.3%
20121 367 19.9%
1 Estimate for 2012
Next up: the housing bubble in home prices, using the San Francisco Bay Area as an example:
The initial $1.1 trillion in Fed mortgage purchases and massive home-buying subsidies issued by the Federal government triggered an echo boom in 2010 that soon rolled over. The current uptrend started in early 2012, when lenders began restricting inventory by keeping foreclosed and defaulted houses off the market.
Is this uptick a speculative "echo boom" that is not sustainable? Charts of housing-sector stocks may offer some clues.
XHB is an exchange-traded fund (ETF) of homebuilders. This has roughly tripled off its lows and almost regained the lower boundary of its bubble-top price range in 2006.
Drywall/sheetrock manufacturer USG is a proxy of demand for construction materials. USG traced a classic bubble spike and collapse in 2006, and has recently risen to 2005 levels around $30, roughly triple its lows.
Weyerhaeuser Co. is another proxy of demand for construction materials. WY has returned to its bubble-top highs reached in 2007. This raises a question: can demand for lumber be equal to the 2007 levels when only 1/3 as many new homes are being built?
Sherwin-Williams also reflects construction/renovation demand. SHW exceeded its housing-bubble levels back in 2010, and has followed an exponential line higher since January 2012.
It certainly appears that some housing-related stocks have reached heights that far exceed the modest uptick in new-home sales. Is this the market forecasting stronger profits ahead and speculators front-running the housing recovery? Has the speculative push outrun the modest gains of actual home construction and sales?
Though the jury is still out, it seems a risk-on speculative fever has returned to some housing-related equities, and that euphoria generally ends badly for those coming late to the party.

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which way western man's picture

"Property Rights" are SO GOY

SafelyGraze's picture

mom and dad sold their house to someone who paid cash and turned it into a rental property

they partitioned the rooms so that 40 renters could live there .. lots of sheet rock and paint

then mom and dad moved in with grammy, which involved more sheet rock and paint

us kids are sharing her garage while we go to finish night classes at the University of International Learning Technology on our student loans .. more framing and sheet rock and paint for the garage!

maybe this explains some of the upticks

redpill's picture

The last "boom" had lots of domestic investors, this mini-recovery has been largely driven by foreign investors.  People with money around the world see the writing on the wall, they know that there is an ongoing currency war, they know that government debt equates to negative real interest rates, they know more crises are coming and that there will be a rush into real assets of one kind or another.  Considering the US housing market is only incrementally above trough levels that were resulting from the largest real estate bubble pop in history, US housing looks pretty attractive.  No it's not sustainable, because as soon as it stops looking "cheap" from a price perspective, the foreign investor dollars will start to dry up (a process that is already underway).  The question is whether organic domestic demand will have recovered sufficiently to replace that investor activity when it stops occurring.  With a shrinking economy and ongoing high unemployment, it seems difficult to imagine there will be a lot of normal household-driven purchases any time soon, especially given how many people are still underwater on their mortgages and how many more have decided to participate in renting for the medium to long term.  This "recovery" will continue at it's current snail's pace, but will not greatly accelerate as the optimists expect.

Never One Roach's picture

Good. The millions of empty houses listed and the 13,000,000 in shadow inventory can keep those foreigners busy for a long time.

barkster's picture

"not higher demand but lower supply as lenders restrict inventory (homes for sale on the open market)"


Banks are agressively turning over bank-owned homes to property management agencies, who maintain them, find tenants and send the rent checks (minus management fee) on to the banks. This is the reason not much inventory is hitting the market. This allows the banks to avoid taking massive write-downs if the homes were sold at a loss. It also provides a nice income stream to banks. And it has slowed the fall of property prices to the lows they would hit if all of this inventory had hit the market.

Bicycle Repairman's picture

Eventually the renters will wear the houses out and greatly reduce their value.  So this strategy is yet another strategy that provides relief upfront and more pain later.

jbvtme's picture

deflation is what's for dinner

FL_Conservative's picture

Deflation is what one does AFTER dinner.

LongSoupLine's picture

They all fucking reflect Bernanke's fucking hot stinking fiat diarrhea dump into anything that's not fucking nailed down. HFT's shit eating fingerprints are all over this mess.

Wilcat Dafoe's picture

I think the plan all along was to extract some cash from working suckers in a rising-price environment so that the banks would end up getting paid, then foreclose, and sell to a subsidiary or to some sort of realty corporation that will rent the property out to the people who'd previously been paying a mortgage on it.

The name of the whole game, as I see it, is a "magickal" trick to get people to value worthless pieces of green paper while those with the isuing power gradually acquire real shit in exchange for that paper... as the paper declines in purchasing power, foreclosures and wars increase in likelihood and scope... eventually a new fiat currency will come around, and the same people who are running shit now will run that too...

2008 was like the Iraq war - the same people are and have been preparing to get the country to do the same thing, with the same lazy pack of bullshit.

The future's been rehearsed.

francis_sawyer's picture

 "The name of the whole game, as I see it, is a "magickal" trick to get people to value worthless pieces of green paper while those with the isuing power gradually acquire real shit in exchange for that paper"


That, son... Is what it's all about... But it's not your "birthright" to benefit [if you want to call it that]... Oddly enough ~ there's much GREATER happiness to be found elsewhere...

toady's picture

This little uptick has most of my rentals above what I paid for them... I'm seriously thinking about cashing out & heading to NZ...

eworrall's picture

sorry to tell you but we (NZ) have a whooping great big housing bubble as well that will no doubt pop soon.  Kept alive by waves of foreign money (i.e. Chinese) money washing up on our shores.  higher interest rates attracting inflows. If we lower interest rates then housing market goes even more nuts. Quite obvious we need capital controls but no one talking about it.

ejmoosa's picture

Echo boom?  I'm thinking dead cat bounce.

IamtheREALmario's picture

From the last 100+ years a Case-Shiller of 110 seems average (even though it is supposed to be 100, I think). So, we are still almost 30% over average. The thing that I wionder about is if inflation was accurately accounted for instead of using the government figures, how much lower would Case-Shiller be?

tip e. canoe's picture

that's an interesting question

socalbeach's picture

The Case-Shiller index would be the same if inflation were properly measured, since it is not adjusted for inflation,


Case-Shiller Index Shows Home Prices Increased 0.5% From a Year Ago for June 2012

"The above graph shows the composite-10 and composite-20 city home prices indexes, seasonally adjusted. Prices are normalized to the year 2000. The index value of 150 means single family housing prices have appreciated, or increased 50% since 2000 in that particular region. These indices are not adjusted for inflation."


Inflation measure used in Case-Shiller Index

"The official Case-Shiller index DOES NOT involve any form of inflation adjustment."

Floodmaster's picture

U.S. Desperately Needs Immigrants.

tbone654's picture

your right...  with populations declining, and the cost of raising a child soaring to $230K each...  Immigrants are the only ones we can turn toward to keep our middle class tax base large enough to support everyone, before communism completely takes over...  Immigrants would be willing to raise their children poorer than we would...

yogibear's picture

"U.S. Desperately Needs Immigrants."

Let me fix that...

"U.S. Desperately Needs more fools."

Bicycle Repairman's picture

Yes, established Americans have figured out too many of the games/myths.  A new, gullible audience is needed.

Josh Randall's picture

And...Echo BOOM goes the dynamite

williambanzai7's picture

Why theorize? We have a Keynesian monkey mimicking his predecessors mistakes.

Lndmvr's picture

When homeowners fail to make mortgage payments, their homes may be forced into foreclosure, a legal proceeding in which a lender (bank, creditor, etc.) repossesses the home. Put simply, if a homeowner does not pay the mortgage, the lender will buy out the remaining dues and assume ownership of the property. In some cases, the lender will sell the property to the U.S. Department of Housing and Urban Development (HUD).

Conveyance is the process of transferring home ownership from the lender to HUD. When a bank or creditor buys out a mortgage, the conveyance process begins, but it is not completed without some help from deleted

HUD states that homes must meet certain requirements in order to finalize the conveyance process. As such, mortgage companies hire delete to conduct quality control services that verify whether foreclosed properties adhere to HUD standards.

Lender Processing Services (LPS) is one specific company that has hired delete to perform quality control surveys on foreclosed properties.

LPS QC Surveys bear some similarity Please read those modules first, if you have not already. While some elements of conducting a LPS QC Survey may be familiar, others may not.

The purpose of this training module is to teach you the proper protocol for determining whether a foreclosed home meets the standards necessary for conveyance. Please print out and refer to the delete you navigate this training module.

Important: LPS QC Surveys have a 48-hour time service and must be submitted to QA the same day you complete the survey. Time service is essential because the conveyance process begins as soon as delete receives the survey request, and conducting the survey is one of the last steps in the process. This survey is to verify the property is truly in conveyance condition before being transferred to HUD.


tip e. canoe's picture

who's deleted?

a clue perhaps?

Village Smithy's picture

When you have at your disposal all of the money and corruption available in not one but two of America's centers of plutocracy(Wall St. and K St.), you can move home prices and homebuilder stocks as high and as far as you want them to go.

haskelslocal's picture


So you've demonstrated inflation. It comes out of Bernanks mouth every time he speaks.

Prices are 3x higher today than they were in 2007 via the inverse.

MrPoopypants's picture


1. Fed buys how many $billion MBS per month?

2. Banks keeping houses off the market, inflating prices.

3. Low interest rates.

4. Investors buying up houses with cash - esp. in CA, AZ, FL. Faber was talking up US real estate back in 2011. "AZ houses at comparable levels to Thailand - a buy."

Not all real estate is residential, either.  Farmland getting snapped up too.

NidStyles's picture

Take the advice from a person here on the ground in AZ, these houses are not worth buying, unless you can find suckers to sign on to sub-lend then to before you sign. Most of them are constructed very poorly and are kit homes that have all the normal kit home issues from being assembled very quickly.

Silveramada's picture

And don 't forget 3M homes in the shadow inventory...real estate has a big leg down still hiding behin the banks books.


AynRandFan's picture

Most of the properties Banks have been waiting to foreclose are now going through foreclosure in my area.  It's nice for investors, because we had run out of REO's.  Now, I'm even seeing a few short sales again.  I think we have a long way to go before ordinary folks who bought in the last 7 years are no longer underwater.

Gromit's picture

Many have lost faith in financial securities markets.....making investment in rental houses with a five plus yield and a potential inflation hedge relatively attractive.

AynRandFan's picture

One of the nice things about rental property is that the lease expires typically in 1 year.  So, if it we become Zimbabwe you can simply raise the rent to reflect the value of money.  People need a place to live.  I can't grow food, but I can offer housing.

Notarocketscientist's picture

Instead of giving his friends ZIRP billions to buy these foreclosed properties why didn't he just give those terms to everyone?

geno-econ's picture

Check out David Stockman interview at Yahoo/Finance.  Stockman, former budget director thinks housing recovery an illusion spurred by hedgefunds buying single dwelling housing for purposes of rental income .  He argues this is only a temporary abborition since hedgefunds will sell proporties quickly to reep profits. He also cites demographics and lack of capital by baby boomers to sustain RE market. In my neck of the woods (suburbia) , too many homes are still underwater with banks accepting non payments and forcing clients to sell at breakeven to avoid losses by banks.  Today's NYTimes also has story on BofA questionable loan practices continuing well after the Countrywide acquisition in modifying troubled mortgages at the expense of home owners.  This fiasco is not over and a tremendous drag on economy-----the bankers are doing just fine, but homeowners are far from feeling any recovery. Even those with paid up mortages have less asset value and therefore reticsent to spend or invest in second homes, cars etc..

Village Smithy's picture

When you have truckloads of money available to you (lots of it free from the Fed) you can start an uptrend in anything, let momentum drive it higher, maybe finesse it a little higher still and then top tick the "rally" that you created just before (using your insider status) the whole thing crashes on some actual fundamentals. This has been the Wall St. method for decades. What has changed is that sites like ZH have started reporting real news and illuminating the imbalance between facts and market behaviour.

I Am Not a Copper Top's picture

Local development has been in the works by some apparent knife catchers.  Timeline:

2008 - knocked down a shitload of trees to build road and utility hook ups.  Began construction of "model home."  Pretty sign that named the "Mountain Lake Estates"  50 single family home lots

2009 - Model still under construction

2010 - Model still "under construction"  methinks builder had not sold any "homes" so ran out of money

2011 - Model completed, maybe we got a couple live ones

2012 - Nope:  All 50 lots on the block for $5M.  $100,000 just for one acre of land? in upstate NY?  Really?

2013 - New sign!  New name!  Appears some new idiots ready to take the plunge. Must have the Glengarry Leads.

Let's see how this one plays out.

orangegeek's picture

Philly housing index (HGX) has almost completed its 62% retracement.

adr's picture

Sherwin Williams pretty much resorted to the grand book frying scheme of most public corporations. Every person I know that worked at Sherwin Williams has lost their job. I don't know a single contractor in Cleveland that uses their paint anymore. Two years ago everyone in Cleveland was talking about SWP going out of business. One of my fathers best friends was a VP at Sherwin Williams. He was fired at the end of 2011, probably because he wouldn't falsify documents. He told us the company was complete bullshit and management was running it right into the ground.

The rise in their stock is insane. Somehow somebody conned someone to get them on the Fed stock buy list in 2012. Of course near bankrupt corporations seeing their stocks exceed bubble top highs by 100% is nothing new in 2012. Obviously the best thing a company can do for its stock is to run the business into the ground, fire people, and channel stuff like no tomorrow.

Fuck this con game.

ebworthen's picture

I see this in any number of stocks and companies.

Yahoo! up 40% in just a couple of months? 

The home builders?  Really?

It's all about parasitism.  Management is milking whatever they can get, in essence cashing out for their own sake, and leaving the body to rot.

Hostess was run into the ground like this.  Much management these days is nothing but a bunch of MBA's who never worked in the company, or investment firm vampires that just want to suck a company dry at the carotid artery and to hell with history or industry or least of all the human beings that work at the company.

pursueliberty's picture

Even with a contractor discount I cannot afford sw paint.  It does go on a little better than the cheap stuff I've been using, but flat/mixed for under $10 a gallon is enough for me to overlook.  I think the cheapest contractor grade they sell is around $75 for 5 gallons.

ebworthen's picture

The entire stock market is in an echo boom.

The believers with the latent memories of when markets meant something are still on T.V.

The only market left is FED QE, HFT Algo trading robots, and the trapped money of the regular people.

Notarocketscientist's picture


House price rebound cruising for a fall

By Stephen Foley

Beware US real estate flippers that could cause recovery to flop

When flipping property is a big topic of conversation, we should have learnt by now to be nervous that a housing market is cruising for a fall.

The new flippers of US housing are not the individual speculators of the boom years, who boasted of making tens of thousands of dollars for a few weeks “work”, and they wouldn’t call their plans anything so gauche.

These investors, who have poured into the US housing market since its nadir, are hedge funds and private equity vehicles, and recently (belatedly) individual entrepreneurs. They may be planning to hold the property for a while and harvest rental income in the interim, but decent returns are predicated on a sale, and usually a quick one.

That makes them flippers – and it means that the recent run of strong housing market data may be more chimeric than real.

According to this week’s readout on the Case-Shiller house price index, prices of single-family homes were up 5.5 per cent in November, compared to the same month in 2011. It was the fastest rise since August 2006, and it came on the heels of data showing the inventory of homes on the market has fallen to an 11-year low.

What housing bulls – and the flippers – hope is that we are now into a self-reinforcing upward spiral, where rising prices boost buyer confidence and erase some of the negative equity that is holding back homeowners from being able to move. In a broader sense, the wealth effect should put a little more bounce in the step of the American consumer, and boost the economic recovery more generally.

The risk is that the flippers represent an overhang of inventory that will keep a lid on prices, as they trickle their properties out into the market, potentially for years to come.

It is hard to get a handle on how big this overhang might be. Cash buyers are harder to track than purchases made with a mortgage. But given that Wall Street has given the phenomenon a name – REO to Rental, with REO standing for “real estate owned” – you know it is big.

The National Association of Realtors reckon more than one-third of purchases in 2010 were investment purchases. Some of the early institutional investors, such as Daniel Och’s hedge fund Och-Ziff, have already signalled their retreat from the market, but smaller buyers still appear hopefully active. CoreLogic reports that 13.6 per cent of mortgages taken out in December were from buyers who said they were purchasing a second home or investment property. That beats the previous record of 13.4 per cent at the peak of the market frenzy in January 2006.

All of which begs the question: who are these investors going to flip their properties to?

The risk is that the flippers represent an overhang of inventory that will keep a lid on prices, as they trickle their properties out into the market

Home ownership has declined in the US to 65.4 per cent from its peak of 69.2 per cent, but is only back to a historical average. Affordability is high, as measured by prices and mortgage costs relative to household incomes, but that doesn’t take into account the difficulty of getting your hands on those record-breakingly cheap mortgages – or the fact that they could quickly disappear when the Federal Reserve stops subsidising rates with its mortgage-backed security purchases later this year.

The hedge funds and private equity firms who have bet on the REO to rental market had a more sophisticated exit strategy in mind than simply flipping their properties to the next sucker. The plan has been – and still is – to sell the cash flows from rental income and property sales, by using them as collateral for bonds.

Investor appetite for such REO to rental securitisations, though, may have been overestimated, not least because the bonds are riskier than Wall Street claims. Rating agencies say the dangers include not just another economic downturn, but also failures on the part of the rental property managers, and risks associated with the lack of historic precedent for the REO to rental market.

The American Securitisation Forum’s annual conference in Las Vegas this week was a hugely bullish affair. Investors have been clamouring for securities built out of everything from car loans and credit cards to horse semen and the rights to Snoopy, yet there was a decidedly cool reception for the idea of REO to rental securitisations.

US house prices have clawed their way back up to 2003 levels and are rising faster than they have in six years, but with so many sellers waiting in the wings, the market has much still to prove. Speculators may find their plans to flip turn into a flop.


AynRandFan's picture

Lots of flipping going on near downtown Denver, but not so much further out.  My view is, you better count on being stuck with one or more houses and be prepared to rent them if and when the market chokes again, which I figure is gonna be soon.  On the other hand, if you acquire property with the idea of using it as a rental and appreciation maybe 7-10 years, it's a good investment.  After all, where else can you reliably make income from your money anymore?  When I list a property for rent, I get innundated with offers.

AynRandFan's picture

I'm very active in looking for single-family homes in my own area SW of Denver.  I pull up a map on Zillow and it is a red carpet of listings.  But, every realtor I talk to says the market under $400,000 is very active . . . which is total BS.  I haven't personally seen a house close around here over $300,000 in months.  Sorry, one house did.  Even so, when all the hype started about the "housing recovery" list prices jumped overnight.  Anyone dumb enough to jump into the market and start paying anything but short sale or REO prices is a damn fool who will soon be parted from his/her equity.  IMHO.  For godsakes, anyone with a brain can see that prices now are based on 3.5% interest rates and they certainly aren't sustainable.

Never One Roach's picture

Insurance and property taxes rising fast. I doubt landlords can pass that on to the renter that fast. "All real estate is local" the NAR liked to yell during the FB (First Bubble) and the same applies now. Most localities are not doing well. Except for tiny areas in Cali and NYC, most other locations are seeing little stabilization.


Until American people can buy a house with food stamps or their unemployment checks, until the Middle Class stops getting schtooped, I see a continued steady decline in house prices.