Citi Warns "Housing Sentiment Got Carried Away"

Tyler Durden's picture

The divergence between the NAHB index and other housing indicators has continued to suggest that sentiment was “getting ahead of itself" and as Citi's Tom Fitzpatrick warns would suggest that the qualitative nature of the overall housing recovery is less robust than one would like.  Housing should pause/consolidate possibly even for most of this year as the weather argument that is trotted out by so many commentators does not seem to hold up to even a basic examination with the worst data coming from the West Coast. Simply put, Citi warns, we think housing sentiment got carried away as it did into 1994 and 1998 post the housing/savings and loan crisis of 1989-1991.

Via Citi FX Technicals
Techamentals - Housing Data Doing What Was Expected

The surge higher in yields seen last year along with elevated oil prices, some EM stress, and Fiscal drag seem to finally having their effect.

The weather argument that is trotted out by so many commentators does not seem to hold up to even a basic examination with the worst data coming from the West Coast (Maybe that 70 degree heat was just too much for them)

The chart below has constantly argued that housing should pause/consolidate, possibly even for most of this year before likely thereafter showing some traction again.

NAHB index; Building permits; New home sales; Housing starts

As we saw after the housing/savings and loan crisis in 1989-1991 housing sentiment (NAHB) rose much quicker that actual activity (Permits, New Home Sales and Housing starts)

We saw this in 2 periods in particular

  • Into late November 1993 before the 13 month surge in 10 year yields (287 basis points) as Alan Greenspan “tinkered” by raising interest rates by 25 basis points in Feb. 1994.
  • Into December 1998 before the EM crisis, Russian default, LTCM failure also became a drag on sentiment.

Once sentiment corrected and converged to “reality” we saw housing recover again. That took about 12-18 months in the periods in question.

We would therefore not be at all surprised if housing continues to consolidate/correct for most of 2014 before once again resuming its gradual rise higher again.

What would a path like 1993-1995 suggest?

A move lower in the NAHB index into the start of the 4th quarter to a level around 27 before resuming its rise would fit with what we saw in 1993-1995.

Mortgage Bankers association purchase index

This shows mortgage loan applications submitted to lenders and shows that we are almost back to the low levels seen in August 2011

The peak here (not surprisingly) was seen in April 2013 before we saw a surge in mortgage rates between May and July

In early May 2013, 30 year mortgage rates were around 3.40% and then surged by July to 4.64% (36% higher). Today they still remain elevated to last year (Albeit off the highs) at 4.32%

This area between 156.80 and 159.30 above (76.4% pullback of the 1990-2004 rise and horizontal supports from 1996 and 2011) is big support. If that were to give way then a move back towards the lows set in late 1990 at 53.50 would be a danger.

What this really shows is that a lot of housing activity has not been the traditional taking out of mortgages to buy a home but rather cash purchases; buy to rent; distressed purchases etc. This would suggest that the qualitative nature of the overall housing recovery is less robust than one would like.

Housing affordability: Small bounce but still 18% off the levels seen in March 2013

Rising mortgage rates being the prime culprit of course

So to improve affordability and get housing moving again we are going to need to see lower mortgage rates. How does that look?

US 10 year yield weekly chart: Lower yields in the months ahead remains our base case

Last month we saw an outside month in the 10 year yield (not shown) that suggests lower yields can be seen.(Traded to the high of the trend at 3.05% then fell below the December 2012 low of 2.75% and closed in January below that level at 2.64%). We also saw an outside month on the 30 year yield with the close below 3.74%

Going back to the chart above we look to have a clear Double top potential with a neckline at 2.47%. A close below there if seen would suggest the potential to go as low as 1.90-1.95% again. In addition to the neckline we see significant horizontal trend line support as well as the 55 and 200 week moving averages converging in the 2.40-2.44% range. So bottom line we continue to expect a test of this support area at 2.39-2.47% at a minimum. A weekly close below here, if seen, would suggest extended losses that could take us below 2%.

On the 30 year yield chart the picture is similar with significant support in the 3.48-3.56% area. A weekly close below there would suggest extended losses towards 3.15-3.20%

Overlay of US 10 year yield chart and 30 year mortgage rate.

A move towards the initial support area around 2.40-2.47% on 10 year yields would suggest a drop in the mortgage rate to at least 4.05-4.15% from the present 4.31% while a completion of the double top and a move below 2% would suggest mortgage rates back towards 3.65% at least.

It is feasible the move in mortgages could be even more if the spread were also to narrow as we moved lower.

US 30 year mortgage rate minus 10 year yield

Testing rising trend line support coming from 2007 around 152 basis points. A break below here would suggest further narrowing in this spread which if coming in a downward moving yield environment would go some way towards improving housing affordability again

Summary: We think housing sentiment got carried away as it did into 1994 and 1998 post the housing/savings and loan crisis of 1989-1991.

The surge in yields since last May was “too far too fast”. Add to that the fiscal drag, elevated oil prices and maybe even the weather (as A factor not THE factor) and you get a pause in housing and a fall in sentiment like we did in 1994 and 1998. With sluggish economic data materializing, yields and ultimately mortgage rates will adjust lower (without the need for additional Fed interference) as the bond market “clears” all on its own. This will be simulative and by as early as end 2014 housing will likely pick up once again.

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williambanzai7's picture

NAHB, sounds like a neo-fascist organization.

Wait What's picture

i'm pretty sure they all aspire to be neo-fascists at this point.

Cult_of_Reason's picture

Not impressed with dictator Yanukovitch's estate, see inside former Ukrainian Prosecutor General Pshonka's house. It's like Rothschild's house.

I really want to see inside Putin's house.

TheFourthStooge-ing's picture


I really want to see inside Putin's house.

Yes, you've made us all quite well aware how hard your tiny peepee gets when you think of Putin.


Cult_of_Reason's picture

I do, I really want to see the souvenir of fat dictator Putin.

Check out the souvenir of fat Yanik (Yanukovich) girl found at his house

Emperor Pshonka (sick individual -- public servant who has never been in business)

P.S. For Kremlin bots, "fat Putin" is a joke (but I was serious when I called Putin a dictator).

TheFourthStooge-ing's picture

Waooo, neocon shills and their hero worship fantasies.


Cult_of_Reason's picture

Ukraine's State Border Service says that former Prosecutor General Viktor Pshonka and former Income and Tax Minister Oleksandr Klymenko have made an attempt to flee Ukraine.

"Following law enforcement agencies' instructions, the State Border Service barred citizens Pshonka and Klymenko, who were identified by border guards at the Donetsk Avia checkpoint, from leaving the country," State Border Service spokesman Serhiy Astakhov told Interfax-Ukraine on Saturday evening.

The bodyguards of Pshonka and Klymenko resisted to the border guards in the airport's VIP lounge, which let the two leave the airport's building.

They did not make a second attempt to fly from Ukraine, thus they should be in the country now, Astakhov said.

TheFourthStooge-ing's picture

Yeah, that really pertains to the US housing market.

BTW, up-arrowing yourself is hella lame.

Cult_of_Reason's picture

No, it pertains to "neocons."

How tight is your Tin Foil hat on? Just curious...

It's funny, everytime I say "Putin is a dictator," the Kremlin bots attack my posts and call me "neocon shill."



Hey williambanzai7,

Lately, Zero Hedge "Tyler Durden" has been posting non-stop twisted pro-Kremlin propaganda lies about Ukraine. WTF is going on? Are you guys at Zero Hedge on Kremlin's payroll now?

And why do you, williambanzai7, follow this Kremlin twitter bot?

Croesus's picture

@ Cult_of_Reason: 

Most of the decorations in General Pshonka's house are not as valuable as they appear; 

He's got a couple of vases that look like they're pretty good (KPM, or Sevres, or something similar). Most of the clock and garniture sets aren't anything to get excited about...most of the furniture is more contemporary...well-made, but nothing like the originals. The icons are modern-made, nothing special, with the exception of one (w/o a riza, 3rd one down, in one of the bedrooms, and a couple in the office). The bronzes all look like spelter, or pot-metal, or at-best, late-generation castings. 

If you were to offer me the choice, of anything I wanted out of the house, it would be the contents of these 3 display cases:

He's got a bunch of higher-grade Imperial Russian military awards in those cases, which are worth some $$$. All of the enamels, and the stars are worth some bucks. The lower-grade St. George's are worth some money too, but nothing like the enamels are. The 2nd Class St. George's are selling for around $50-60K depending on the sale, provenance, etc. 

The swords are mostly modern, nothing special (not what I would expect in the house of someone who has some outstanding Imperial awards). 



Cult_of_Reason's picture

I am not an expert, but it looks (Fabergé eggs, gold clocks, paintings, icons, gold everywhere, marble, indoor swimming pool, etc.) excessive over the top for a public servant ($1,000-2,000 monthly salary) in Ukraine who has never been in business.

I guess, it's all relative if you compare Pshonka to Ukrainian oligarchs.

_ConanTheLibertarian_'s picture

That green spike looks scary.

LetThemEatRand's picture

You can drop the mortgage rate to zero and people without jobs, with low paying jobs, and/or with recent short sales still won't qualify.   Of course Citi knows that, but it's so much more fun to pretend that there is a real economy to support a resurgence in home buying.

gatorengineer's picture

Qualify, what language are you using?  We are heading back subprime kids and fast.  Liars loans and no docs.  Want a mill sure why not.  Bank doesnt care, you bust Yellen pays....

Winston Churchill's picture

No secondary market.

Uncle Scam will not be able to fund it thru' the GSE's this time around.

Its dead Jim.

gatorengineer's picture

I will take what is the difference between Citibank, Wellsfargo, and a GSE for $500 jack.....

lotsoffun's picture

oh no.  they will qualify.  they will get the money.  and when the bank does not get the money back from the borrowers, the taxpayers will give it to them.  and the 'homeowners' will do exactly what obama's masters want them to do.  squat in the house for 3+ years and keep spending every penny that they might have not paying the mortgage buying i-crap.


macholatte's picture


I have read snipets where the no-qual loans are back pumping the sub prime sector.  That means to qualify for a job, you merely need to have a pulse and normal body temperature.  It probably helps if you're an illegal from Mexico and don't speak English.   Pump & dump baby.



scrappy's picture

Exactly as far as the real economy goes.

The pump has officially failed.

Look out below.

Chuck Knoblauch's picture

Looking forward to FED announcing new QE in June to fight financial collapse. The market will respond if the USD$ still has global currency reserve status. If not, all is lost.

gatorengineer's picture

interesting to see how the dollar is tanking against taper when Europe is warming up the presses.  What does that say?

kaiserhoff's picture

It says Mr. Yellen won't be as lucky as Ben was.  They are both idiots, but Ben had all of our trading partners following in his wake, a once in a century happenstance.  Yellen will have to raise rates to defend the dollar, or watch the whole economy circle around the toilet, Obamy voters first.

gatorengineer's picture

Actually to my recollection we have been 180 out with europe on Monetary policy for a decade, we print they tighten, they tighten we print....

kaiserhoff's picture

What color is the sky in your world?

Who has tightened in the last decade?

scrappy's picture




Just dumb.


Seasmoke's picture

why cant we just use houses for SHELTER  !!!!!

disabledvet's picture

Andrew Jackson.

"went after the real estate speculators too."
Very serious about his "Government Programs."
Actually wanted to keep the entire Upper Mid-west as an Indian Territory and thus "Governed by the President himself."

Needless to say there wasn't really much in Washington at the time.
Now it's like the place is becoming the very definition of attention.
Hmmm. Looks a little different than when the war started.

buzzsaw99's picture

goat entrails and chicken bones work just as well

Richard Chesler's picture

as it did into 1994 and 1998

Ponzi is the path of least resistance.

Haager's picture

$2 trillion G20 growth package...

B2u's picture

Fuck you CITI....a little late for this crap...

Winston Churchill's picture

They let go of most of their mortgage staff last year, so I'm sure this was a

total surprise to them.

kill switch's picture

This will be simulative and by as early as end 2014 housing will likely pick up once again.


Thats a fucking joke!!!!



This will be stimulative and by as early as end 2014 housing will likely pick up once again

gatorengineer's picture

article misses the obvious gap between housing sales and starts.  Its Obamaville apartment folks... not single family....

AdvancingTime's picture

When it comes to real estate low interest rates at some point becomes a double edge sword, that effects both the value by making it easier to purchase thus driving up prices, and at the same time allowing more building to take place and increasing the supply. Often we reach or exceed demand, this eventually has a dampening effect on rents and people stop buying it as an "investment".

Prices must rise and real estate appreciate more then the natural depreciation from the wear and tear from age or the main driver for owning it vanishes. Oversupply is the bane of real estate and crushes the value of this hard and expensive to maintain commodity. We are pushing on a string and calling it demand when someone who can barely pay the rent is encouraged by the government to buy a house they can neither afford or maintain. We have a shortage of "qualified" buyers and renters. More on this subject below,

mumbo_jumbo's picture

how can anyone afford a $500K starter home in the barrio in southern California?

i know i can't

auntiesocial's picture

I remember coming back from Vegas and stopping in Barstow circa 2004 for gas and there was a house for 500K. I knew back then the whole thing was a sham but I did nothing to protect my ass-ets. 

Another trick is showing a short sale or a fc as a sale. There should be a seperate category and banks should be forced to accurately report all the "in limbo" properties and REO's being held back. But that would help the consumer and readjust the prices in favor of the consumer, and we just couldn't have that, now could we?

SoCal- It ain't Ken and Barbie and beach blanket bong out anymore unless your are TFK. 

wjkins's picture

I have been warning the guys I work with (carpenters) round two is commin up boys. Good stuff Tyler,although it just goes to show how fuck we are.

q99x2's picture

I've seen more homes for sale around where I live than I have in the last 2 1/2 years. I go jogging everyday so I notice that kind of thing. Some are for rent but most are for sale. I'm in the LA area.