Mark Hanson: "Why We Could Be In A Housing Bubble Right Now"

Tyler Durden's picture

From Mark Hanson of Hanson Advisors

Why We Could Be In A Housing Bubble Right Now

Let me preface this note by saying “I am a raging bull over houses”. I love real estate. On any given Sunday you can find me and my family touring open resale houses or new builder communities. My grammar school-aged kids love it too; especially the free cookies and peering into the beautifully staged rooms and really believing that some lucky kid has every gadget or musical instrument ever made and with utter amazement on how clean he keeps his room. Of course, my wife and I fully propagate the lie by saying “did you two see how clean the Lennar boy and Pulte girl keep their rooms? Why can’t you do the same?”

I think it’s safe to say that America — especially the American media and Wall Street firms — has fallen in love with real estate again. But, this time around it’s not ‘all of America’ like the last time; when the most exotic mortgage loans known to mankind turned every ma and pa end-user homeowner into a raging speculator. One has to look no further than the generationally low level of purchase loan applications — with rates at generational lows — to realize something isn’t ‘normal’ about this housing market. Rather, controlling this housing market over the past three years has been a small, unorthodox slice of the population that “invests” in real estate using tractor-trailer trucks full of cash-money slopping around the financial system put into play specifically for this purpose. Over the past few years so much cash-money has been deployed into the housing sector by unorthodox parties, that in many regions ma and pa end-user hasn’t stood a chance to buy. Especially, if they need a mortgage loan, which of course presents numerous risks to the seller vs the all-cash buyer.

In part, this is why I believe we could be back in a house-price bubble right now and not even realize it. And also because everybody is looking at the wrong thing…house prices. Sound confusing? It’s not, really.

A brief history of the “mortgage-loan, house-price governor”.


1) In a normal housing market, in which at least 80% of all house purchases are done with “fully documented” mortgage loans, house prices are solidly rooted to contemporary “end-user fundamentals”. That is, the mortgage loan with it’s LTV, appraisal, DTI etc guidelines is the “house-price governor“.

Bottom line, when the majority of houses are purchased with mortgage loans it is virtually impossible for house prices to wildly detach from end-user fundamentals unless credit goes haywire like from 2003 to 2007. Sure, there have been exceptions to this over the decades. But, for the most part housing is a pretty simple asset class that for decades leading into the change of the millennium remained mostly in-check to fundamentals and a great inflation hedge.

People will say that this is an unfair analysis because post-crash “mortgage lending is too restrictive”. I say “compared to what?” The mostly thoughtful mortgage laws enacted by the Government post the great mortgage collapse still leave mortgages today — through the GSE’s and FHA — easier than most periods in history. Sure, non-GSE/FHA, bank portfolio lending (loans that the banks make to keep on the books) has suffered because of the lack of a robust securitization market and much tighter capital requirements. But, if a borrower has a downpayment, documented income, and good credit — three things that always should be present when buying a house anyway — mortgage lending is back. It simply isn’t as easy as from 2003 to 2007, which astoundingly is what everybody points to when saying “mortgage lending is too tight”. This is so radical to me, as they also point to bubble-years peak house prices as a benchmark to where prices should go. However, they fail to realize that if prices did return to 2006 levels — and 2006 was in fact a “bubble” — then housing would be in an even larger bubble than back then! Those looking/hoping/lobbying for a return to 2003 to 2007 mortgage lending will not only be disappointed, but if it somehow happened, would end up very sorry it did. Be careful what you wish for.


2) Enter 2003 to 2007, when the “mortgage-loan, house-price governor” was removed by the introduction and wide acceptance of exotic loans; in particular stated income, interest only, pay option arms, and HELOCs. Through the power of exotic lending, the ‘incremental buyer’ always earned $200k a year and had more-than-enough dollars in the bank when it came to qualifying for a loan to buy a house…credit went ‘haywire’. This allowed house prices to completely detach from fundamentals. Then, when the mortgage loan governor was strapped back on in 2008 — on the sudden loss of all the exotic loans over a short period of time — house prices quickly “reset to end-user fundamentals“. House prices quit plunging in 2009, as affordability using new-era 30-year fixed rate, fully-documented loans recoupled with real income and asset levels. This “bottom” should have set the stage for housing to once again be rooted to fundamentals / governed by contemporary mortgage lending guidelines. But, they couldn’t leave well enough alone.


3) Enter, the 2010 to 2013 “all-cash”, new-era “investor” era, which was almost identical to the 2003 to 2007 era in the effect it had on house prices . That is, during this period the incremental (the ‘majority’ in many markets) all-cash buyers work without a ‘house price governor‘, instead base their purchase and pricing decisions on individual, random, emotional, uneducated, or hopeful models or guesses. Some buy for appreciation, some for rental income, some to flip and some because they have to in order to get paid at their fund. In any case, without a mortgage loan governor the price they pay for a house is more often than not, subjective vs objective.

House prices being up 25%, 50%, or more in the past two years should have everybody sounding loud warning signals, as this is a tell-tale sign housing is being led around by the nose by something ‘other than’ end-user fundamentals. It’s not like employment or income gains in the past two years in the regions that experienced the greatest price gains — not coincidentally the same regions that were the ‘bubbliest’ in 2006; crashed the hardest in 2009; had the greatest institutional investor interest from 2011-13; and that were first to experience significant demand destruction beginning mid last year — grew at levels to support such gains. Rather, they simply assume this is the new-normal — in an era when anything in any financial market is possible — and point to the 2006 peak as proof housing is not overpriced yet.

In short, it’s very easy for an all-cash individual or institutional buyer to overpay for a house by 10%, 20% or even 30% in the heat of the deal, when competing against a dozen other all-cash buyers, and using flawed assumptions and return “models”. Overpaying for a house to this degree is impossible if mortgage loans and appraisals are required. As the bubble blows and prices become detached from reality there are always greater fools that can and will chase the market keeping it elevated for a period of time. But, outside of the all-cash cohort the number is finite unlike the 2003 to 2007 era when everybody could always overpay using exotic loans. Some will say “all-cash purchases for rental investment are rooted to fundamentals…that’s rents”. I say “hogwash”. I have seen many single family rental assumption models from some of the largest investors, and they are beyond rosy. I can easily change a few numbers in their Excel spreadsheet models and turn a 6% annual return into an 6% loss. Most all-cash, buy to rent or flip, flop, flap or frolic investor assumptions and models I have reviewed make the most bullish Wall Street sell side stock analysts look downright pessimistic.
Bottom line: It’s very easy for a demand cohort — as flush with easy liquidity as this era’s all-cash cohort — to push national house prices well above what the average end-user can pay. And that’s exactly what’s happened over the past two years and why in leading indicating regions, in which new-era investors flocked first, demand is plunging and supply surging. Just like in 2007.


4) All-Cash buyer demand

This chart from Black Knight (formerly LPS) says it all…the all cash cohort — without a “mortgage-loan, house-price governor” — has been fully in control of the US housing market for a long time. It’s very easy for a demand cohort — as large as this era’s all-cash cohort — to push national house prices well above what the average end-user can pay.

Housing market history is littered with instances of investors and first-time buyers flooding into the housing market all at once on some sort of catalyst, only to leave all at once, over a very short period of time. In ‘this’ housing market, however, first-time buyers are not a presence. This in itself, should be a huge red flag to anybody analyzing this sector. But, if the all-cash buyer cohort has finally eaten it’s fill and it’s demand drops back to historical levels, there is not another demand cohort to pick up the ball and run with it. In other words, if the all-cash speculators leave — or even downshift a bit — I am worried that certain housing market regions all over the nation — particularly the ones that have experienced a parabola in house prices over the past two years — could have substantial house price downside ahead.

Why we are in a housing bubble1


5) House prices are more expensive today than in 2006 on a monthly payment basis using the popular loans of each era… a true apples to apples comparison

Those looking at “house prices” — especially relative to 2006 — for signs of a “bubble” are looking at the wrong thing. That’s because to the end-user, the monthly payment is generally more important than the price. As such, when comparing the ‘cost’ of houses today vs 2006 one has to normalize the data for a true apples to apples comparison.

On an absolute basis, investors have significantly lightened up their purchases in all of the leading indicating regions I track so closely. This paradigm shift from an “investor-driven market” to an “end-user driven market” is causing considerable consternation.

That’s because when all cash investors, without a “mortgage-loan, house-price governor”, hand the market off to the end-user cohort with a fully functioning mortgage-loan, house price governor a “demand void” can appear. Not necessarily because the demand isn’t there. Rather, because average house prices are too high for the average, fundamentally-driven end-user to afford. This is what’s happening now. And based on how expensive houses are today relative to 2006, this should prevent any further upside this spring and summer, especially with rates up 100bps from a year ago. In fact, we are seeing seasonal weakness in offer prices much further into the year than typical meaning house prices have a strong chance of going negative YoY in the summer.

The Bubble Data

The chart below compare the ‘cost to own‘ the average priced house today vs 2006 using the popular mortgage loan financing of each era. When normalizing the data in this manner — vs simply assuming everybody always used market rate 30-year fixed loans, which clearly wasn’t the case from 2003 to 2007 — one can see clearly just how expensive houses are today.

Bottom line, in the first ‘results’ column, house prices in 2013 were 11% lower than in 2006 yet the monthly payment was 35% higher and the monthly payment needed to qualify was 29% greater. Taken one step further, see the second “results’ column to the far right. That is, to buy the 2006 bubble priced house using today’s mortgage finance vs the popular loans of the 2006 era, the monthly payment is 54% higher and the monthly income needed to qualify 44% greater.

Every time I review these data after updating prices in our database each month, I am amazed. I ask myself, “if 2006 was a bubble then based on the data below if if costs more per month to buy today’s average house why isn’t the sector in a bubble again?”

Affordability Comps 2


In closing, I do think higher house prices are mostly always good. That’s of course unless the reason for the rise is “unfundamental”.

General consensus has once again returned to the overwhelming belief that “house prices always go up and 2007 to 2009 was a fluke”. That’s plain wrong and dangerous.

I am not calling for another house price crash even though I think that housing is back in a bubble based on the monthly payment comparisons between now and 2006. What I am saying is that housing runs a real risk of price downside if the new-era investors — that have largely supported the entire sector and run up house prices beyond the reach of the average end-user through cheap and easy liquidity over the past three years — take their balls and bats and go home.

On the other hand, bubbles can deflate while house prices remain flat if the underlying fundamentals improve rapidly…strong employment, income gains etc. But fundamentally-driven housing markets take a lot time to develop, especially after so many years of running on unfundamental stimulus. Perhaps our economy can “grow into” today’s house prices over the next few years. Perhaps not.

As we saw in 2007 nobody can predict what house prices will do and the general consensus is usually the wrong one. Be careful out there. Buy a house because you need shelter and buy what you can truly afford using a 30-year fixed mortgage. Don’t buy because everybody else is unless you can clearly afford it — both financially and psychologically — especially if next chapter for this housing market is a consolidation of the past few years of gains.

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Its_the_economy_stupid's picture

I am becoming increasingly concerned w this site. My browser Firefox is locking up and if this site is open in a seperate tab myn other tabs lock up. I have to close and delete hx repeatedly.

Any constructive rep[lies?

madcows's picture

NSA< TSA< homeland security has been watching you.  You've been scheduled for reprogramming.  watch out for the thoughtpolice at night.

Headbanger's picture

Whoa dude!   That's scary!  I just put  another layer of foil on my head..

24KGOLD FOIL HAT's picture

With gold foil, anothr layer is superfluous.  Next time, use gold!

max2205's picture

Same here. Quite reading here on a PC.    Now only use smartphone.


PS... my PC is more reliable now...thank god

Yes We Can. But Lets Not.'s picture

If I understand correctly, Mr. Olson maintains that there may be a bubble being driven by all-cash buyers (i.e. investors/pros) who are routinely paying 10-30% over what the properties would appraise for, which presumably approximates market value.

I find that  *really*  hard to believe.

-.-'s picture

Funny that you mention these issues:

I am not sure if it is ZH site or something else, but in the past, oh, ten days my browser has been acting noticeably glitchy when it comes to refreshing, closing tabs, and, for some reason, when I would refresh my ZH screen (so as to update article distribution) it would automatically land me on TestosteronePit with a pre-filled search of that site for "Student Debt"...WTF

TheGermanGuy's picture

It´s when they redirect you to that you need to start to worry

TaxSlave's picture

NoScript and Ghostery.  You should already know this.


N2OJoe's picture

No browser should be without NoScript and Ghostery.

Dr. Destructo's picture

Ghostery is a load of crap -it sells info on what's being blocked to the corporations.

Use ABP instead.

N2OJoe's picture

Didn't know this but it warrants further investigation.

HisNameIsRP's picture

ZH is always unstable to my browser, the audio on the add to the right is always getting blocked by blocker and causes the page to sometimes refresh.  very annoying

Max Cynical's picture

May be a router issue...

TaperProof's picture

Good let the bubble pop, half price McCastles after the crash!

Notsobadwlad's picture

Turn off active scripting in your browser tools/options. You will have to look at the site without all of the advertising, but heck there are sacrifices with everything, no?

Scoobywan's picture

I put Shockwave and Java on "Ask to Activate" in the Add-ons section of the browser. Now all the ads are grey boxes with a LEGO block in the middle asking me to "Activate Adobe Flash".

Runs smooth as silk now.

Hope that helps

Lost My Shorts's picture

ZH is a massive collection of javascripts, designed I think to defeat adblockers.  It tries to verify that the ads are loaded before showing you any content.  Can't blame them for that, but it does create problems if one of the ad servers is not easily accessible to your computer.  The whole page can lock up waiting for the missing ad.  It might happen sporadically because ads and ad servers rotate in and out.  Perhaps your ISP or employer or you (inadvertently) have blocked a particular ad server, or the connection to a particular ad server is slow enough to get dropped before the ad can load, or whatever.  In broadband-land I never have problems, but in remote areas it can be tough to read ZH -- I think some small-time ISPs block or de-prioritize some ad servers to conserve bandwidth on expensive international cables.

TaperProof's picture

my typical adblock apps seem to work fine and the site for the most part works.  Really though ZH needs some code upgrades, these needle thin comment replies are ridiculous.   

Larry Dallas's picture

I can bottomlink this *entire* article in 4 words while sparing you the Frasier Crane-laced bullshit.

"Its the debt, stupid!"

But I do love this article though.

OldBoy's picture

I had same issue and switched to Google Chrome. Seems fine now.

Yes We Can. But Lets Not.'s picture

ZH is a total wreck in Firefox, unusable.  A usable mess in IE.

Cugel's picture

Using AdBlock to block 's stream worked for me.

Turin Turambar's picture

The shockwave plug-in in Mozilla is always locking up for me, and I get tired of waiting on it.  I no longer use ZH as my home page due to these issues and find myself reading less daily.  I refuse to go to IE.

Iam_Silverman's picture

"My browser Firefox is locking up"

Disable Flash Player and it will get better.  Too much crap all trying to load and run at the same time.

Shizzmoney's picture

This looks more like "We Are In" as supposed to "Why".  

icanhasbailout's picture

The original housing bubble never fully deflated, thanks to unprecedented intervention.


Quick housing bubble test: Which way have incomes moved over the past few years? Which way have housing prices moved?

Lost My Shorts's picture

It never fully deflated, but it definitely reflated since 2011.  In the market where I am looking (a place overrun with libruls, tree-fuckers, and metrosexual hipsters by the way) prices are up 40 - 50% in three years.  Prices are now back to 2005 levels, not far off the peak.

Arthor Bearing's picture

Mark Hanson: Why We Could Be On A Small Rock Orbiting The Sun Right Now

Buckaroo Banzai's picture

"But, if the all-cash buyer cohort has finally eaten it’s fill and it’s demand drops back to historical levels, there is not another demand cohort to pick up the ball and run with it."

Duh. Just print MOAR cash for the all-cash buyers!


new game's picture

your logic is sound because the plunge protectors have to keep the illusion in tact...

NihilistZero's picture

+1000  These analyst fucks are so disconnected from reality and the struggle to maintain that everyone is experiencing they think that a 25% run up in one year "could" just as likely be based on sound fundamentals.  When considering how bubbles happen in the first place see champagne sipping dildos at socialite parties discussing the "resilience" of the American consumer and his ability to buy more expensive housing with ZERO wage growth.  To see the look on these fucks faces if the masses ever storm the gates...

Arthor Bearing's picture

Mark Hanson: Why Russia Could Be A Bellicose Antagonist Of The West Right Now

Sardonicus's picture

You need a house to escape the weather.

Banker runs on nail guns make existing nails more valuable too.

I don't see any bubbles or what the author sees.

nightshiftsucks's picture

I don't see any bubbles or what the author sees.

Maybe you should wipe the shit out of your eye's,or maybe you live in an undesireable area.

Sardonicus's picture

I guess it was not obvious that I was being sarcastic.


Charles Nelson Reilly's picture

wife and i make good money, not that we consider ourselves wealthy.  we refuse to buy anything north of $400k. i'm convinced we're driving our realtor nuts cause it's been 9 months or so now & he's a pretty patient asian guy.  our friends just plopped down $525k for their 4000 sq ft "ego" home.  she's a stay at home mom, he probably pulls down $175k.  they probably have $15k of credit card debt, two new cars and all the gadgets & new toys for their kids.  I'll be shocked if it doesn't end terribly for them.

new game's picture

as aformer r e broker i would have dumped you a long time ago...

Max Cynical's picture

I think the word "former" says it all...perhaps you should have paid closer attention to the needs of your clients.

swmnguy's picture

I don't have a problem with "New Game"s comment, and I and my wife are very much of the CNR mold.  Clients like myself (and, it seems, CNR) aren't where the money is for an RE broker.  Of course, we also aren't going to bankrupt ourselves putting an RE broker's kid through college. So I'd say it evens out, and from my limited perspective, works in my favor.  When I go to buy a used car, I know going in, and the dealer knows only a second or two into the conversation, that there's no money to be made from me.  I'm going to get what I came for at a fair price, either at this lot or another or another or another.  That's just how it works.  I'd say "New Game" either ran out of suckers, or got sick of fleecing suckers, or realized serving clients like me and CNR wasn't going to yield enough money for the work it required.

tarsubil's picture

That is basically the American economy. Pretending you are a going concern when debt has already made you bankrupt.

Almost Solvent's picture

I work in the BK world and I can tell you for a fact that many "middle class" families look exactly like what Charles describes above. 


Keeping up the "middle class" lifestyle is expensive these days. Throw in 2-3 kids in college and those Parent Plus loans on top.


Not pretty and getting worse.

homiegot's picture

You know what they say about Asians.

vulcanraven's picture

I was browsing the dating site "Plenty of Fish" last night and I came across the profile of a good looking hispanic woman who was 28 years old. In her bio it mentioned "proud mother of 4 children" and she also had a picture uploaded with her and all 4 kids. The very next picture was an Audi RS7 with the caption "my baby"

When I scrolled further I checked out her occupation, guess what it said?


Now, pray tell, how in the fuck is a single mother of 4 driving an Audi RS7 and supporting FOUR children on a Starbucks income???????????

Ex husband is surely getting assfucked on alimony/child support while she is surely also holding a Mount Everest of debt. Now here she is "fishing" for new men, having her cake and eating it too. It brings me back to this comment from an earlier ZH post by I believe Jack Burton. So good I had to email it to myself:

I am sure married people experience job losses in different ways. Suppose the wife is terminated from her office job. This cuts deeply into family income, but the man likely has a full time income and a employer health insurance that can continue to cover mom and the kids. The wife thus has a safe haven, i.e. her home and husband, from which to venture out into the jobs market, or go back to school to gain more employable skills. Most families I know of, have weathered a wife's job loss and come out the other side pretty intact, even if wife ends up at lower pay. Two income families are a stable and secure way to go through life.

Let us suppose the man is the one who is terminated from his job. He too has the love, support and security of his wife and her income. So he too has that safe haven from which to venture back out into the hard job market, or upgrade his education. Again, the two earner family is the most secure way to go through life. But, and this is a big But! Women, especially wives have a very stern view of their man's role in her life. She will likely begin to consider her divorce options the instant husband breaks the news. Unless he looks set to return to a job of equal income and prestige very soon, she will begin to note that they are "no longer on the same page". She will note they have not really been "in love" for some time. She sees now, at last, that she is being held back by this drag in her life, the man. Running the numbers in the evenings, she comes to how much the man will pay in support and child support when her no longer compatible husband is divorced. The number look good, she will get the house and car as part of her childrens due. She will get most of any income he can produce, and the courts will demand he produce a lot! Thus the burden of forcing him to get back out there and earn is now upon a court and police agency. Her job provides and stripping him of all assets and forcing him to pay support, no matter what type of job he can find, the court cares not. She is entitled to a certain level of support. Thus he will soon get his walking papers and pack up for a shit hole apartment, while she redecorates and considers the bonanza a new boyfriend or husband could bring to her. A new Dad for the kids, and a new Third income for her to spend.

Given American family law, I would believe the man is totally fucked should he lose a job, the woman on the other hand, may see the perfect opportunity to get rid of someone she just discovered she doesn't love, on the very day he is fired. Her hopes for another man to move in after she redecorates is probably pretty good. As a man can see she comes with house, car, job, child  support and his income will just be a cherry for them to enjoy life on. Not to say this is always the case, yet, I do know of quite a number of these cases just in the circle of people I move in.