Those who recall about the implicit housing subsidy we discussed when we coined the term "foreclosure stuffing" which is merely the well-planned systemic bottleneck to clearing foreclosed properties already in the system, and thus artificially reduce housing supply will be happy to learn that according to RealtyTrac the average time for a foreclosed property to sell just hit a record at nearly 400 days across the entire nation.
And for those curious what is really going on in the housing market when stripping aside all the artificial supply and demand-side stimuli, here is one of the best summaries courtesy of housing expert Marc Hanson (by way of Doug Kass):
- Per Zillow...>44% of US Homeowners are Zombified; Over 60% when including income/credit restrictions
- As a result, the nations' "Maximum Potential Demand" profile has been gutted; evident in mediocre Existing & New Home Sales volume
- With structurally weak organic "Maximum Potential Demand"; First-Time buyer demand at 4-year lows; Distressed Resales at 6-year lows; New-Era "Investor" demand falling sharply on every dollar house prices rise; and rates rising where will demand come from to carry this sector going forward?
Important research came out of Zillow last week on "effective" negative equity; a term I coined relating to a novel thesis I have been working with for 3 years, which few understand, respect, or model...I suppose until now. (Zillow report link here)
In short, per Zillow 44% of all mortgage'd homeowners -- the core of US housing demand & supply -- are Zombies; 60% when including those lacking sufficient income or credit needed for a loan. As a result, the nations' "Maximum Potential Demand" profile has been gutted.
1) "Effective negative equity" is central to my "structurally broken housing market in need of years of deleveraging before a "durable" bottom can occur", theme. I have been pounding the table over "effective" negative equity for years and finally it's mainstream. Chances are this one report will be blown over. But like with "shadow inventory" -- when this thesis grabs hold -- ultimately everybody will be talking about it, it will raise uncertainty, and economists will have no choice to respect the "math". And the math requires housing sector estimates have to be ratcheted down. This literally changes everything with respect to housing 'demand and 'supply' fundamentals.
The Zillow report confirms there is still a ton of de-leveraging to do before US housing has a shot at a "durable" recovery. Remember, in the past everybody could always sell and rebuy all of the time. Equity -- or a lack of it -- was rarely a problem because before the housing bubble loans required down payments. And during the bubble no down payments were needed. Moreover, house prices always rose during these periods. What created "zombies" prior to the housing crash was employment, income, and rates. But now it's all about the equity. And with such a large percentage of homeowners in a negative and/or "effective" negative equity position the "Maximum Potential Demand" profile of the housing sector is much weaker than it ever has been before.
April Existing and New Home Sales released this week also confirm this fact. Ask yourself this...with several years of pent-up demand sitting out there, sentiment obviously better, and rates never seen before in history, why have Existing Sales rebounded so much more than New Sales? Why are April New Home Sales down still down 62% from their mid-2000 highs while April Existing is only down 27% form the mid-2000s?
There are 2 reasons:
1) the existing sales incremental buyer and price pusher -- the new-era "investor" who routinely pays 10% to 20% more than the house is worth treating it as a high-yield bond or dividend stock replacement trade -- doesn't call Lennar or Hovnanian for opportunities; 2) and because 44% of all mortgage'd homeowners -- the primary builder and repeat buyer demand cohort -- are technically underwater...over 60% when you factor in those who can't sell and rebuy due to weak income, credit, or old legacy HELOCs never written off or bankrupted following borrowers around like a ball and chain preventing them from getting a new loan.
Bottom line, with over HALF of the nation's primary demand cohort stuck in their houses as Zombies, the nations' Maximum Potential Demand' is HALF of what it was in the past. Finite organic buyer demand has serious implications for durability, volume, future sales , and macro housing consensus estimates. This also means that the traditional "6 months supply" being 'normal', for example, is perhaps too high; maybe the new-normal is 4 or 5 months supply.
2) Housing is going through a demand spurt no doubt. The smart money was the institutions that began buying two and three years ago. On Twist -- and a plethora of media coverage on Wall St buying bulk housing pools and participating in County courthouse foreclosure actions at year-end 2011 -- everybody become a distressed house flipper or rental professional. Towards the end of last year all the hoopla and press coverage activated the "dumb money" -- which includes pent-up demand -- which are "retail" who are pouncing early this year and chasing the market into summer. But the numbers are not there...repeats can't support this market. April Existing and New Home Sales and the Zillow data prove it. This market needs investors and first timers, like it had from 2010-2011. But now First-timer volume hit fresh 4-year lows last month and distressed resales 6-year lows. It's a sad state of affairs when rates are at historic lows and First-Time buyer demand is at 4-year lows.
3) I think there is a good chance the housing market is about to experience mid-year volatility never seen before mostly propagated by malinvestment from P/E funds using cheap money to buy up all the distressed housing and turn them into rentals. There is no "housing shortage" problem in the country with respect to "places to live". When including SF construction, MF construction, lack of demolition, the past 5 years of foreclosures of vacant house, rentals and 2nd houses, 14mm vacant of mostly vacant houses, and lackluster household formation I argue there is plenty of houses out there in which "to live". There is simply a transitory dislocation with respect to houses in the "for sale" bucket. Builders are being opportunistic and capitalizing on this right now. But if I am right and the "housing shortage" problem is only a allocation mirage then forward estimates are wildly aggressive. And obviously, if this is still a free market and demand is strong enough this supply will find a way to market.
Bottom line on the Zombie housing market: Of the 54 million homeowners with mortgages -- the primary repeat buyer cohort and a primary builder demand cohort -- over 22 million are dead to the housing market. Of the 70 million homeowners -- mortgage'd and free and clear -- 33 million are Zombies. Thus, we can't expect housing to act like it has in the past. With so many Zombies it will be impossible for repeat and new home sales to perform as expected. The past 18 month bounce -- especially on prices -- has been on cheap and easy money from investors looking for a dividend stock and/or Treasury replacement trade. some foreigners following their lead, and finally the 'dumb money' (retail) chasing into this summer.
But we are running out of greater fools very quickly, especially with first-timers sidelined and new-era "investors" who are quickly pricing themselves out of markets nationwide.