The US Housing Market's Darkening Data

Tyler Durden's picture

Submitted by Brian Pretti via Peak Prosperity,

When looking at residential real estate, we often tend to focus almost solely on recent price movements in assessing the health of the housing market at any point in time. But as both homeowners and income-earners in the larger economy, of which the housing market is an important component, to really understand what's going on, we need clarity into the larger cycle driving those price movements.

The more we look at today's data, the more it looks like that we are in a new type of pricing cycle -- one that homeowners and housing investors have no prior experience with.

And the more we learn about the fundamentals underlying the current cycle, the harder it becomes to justify today's home prices on any sustained level. Meaning a downward reversion in home values is very probable in the coming years.

Housing & The Economy

Housing construction has been meaningfully additive to overall US GDP in virtually every economic expansion cycle on record. Moreover, sales of home furnishings, appliances, landscaping and gardening equipment, etc. have contributed to expansion in consumer spending, the largest singular component of US GDP. And maybe most importantly, residential real estate investment has been a key wealth-generation asset for the middle and lower classes for decades.

Residential housing has typically been purchased with leverage that has been paid down over time accompanied by a commensurate increase in household equity as homeowner’s age and mortgages are paid off.  Particularly for the middle and lower classes, residential real estate investment has been the single largest contributor to net worth expansion of any household investment asset class.      

With the clarity of hindsight, we know that the prior 2006-2009 period witnessed the most serious downturn in residential real estate prices in a generation. Few saw it coming as it was an event never experienced in their lifetimes. One would have to travel back to the 1930’s Depression period to find a similar occurrence. There is an old saying in the markets -- People don't repeat the mistakes of their parents, they repeat the mistakes of their grandparents --  and this was certainly true in residential real estate markets in the middle of the prior decade, as the buildup of excess and often reckless leverage was ultimately the key provocateur leading to price declines, as was the case in the 1930’s.

Recovery At Last (?)

Accompanying the current economic expansion that began in June of 2009, residential real estate prices have recovered. In fact, in high-ticket geographic areas such as many parts of the San Francisco Bay Area, New York, etc, current prices have well exceeded the prior cycle peaks of 2006.

Indeed, the following chart (using data from the US Census Bureau) shows us that the median price of a single family home in the US has now recovered to a level just above the prior cycle peak:

Remember, this incorporates meaningful and often anomalistic sales activity in very high priced areas such as New York and San Francisco, clearly skewing the median numbers higher.

In one sense, the recovery in price is at least graphically pleasing and simplistically suggests a return to longer term normalcy, or trend, in the overall residential real estate market. But as we look a bit deeper beyond just price into the important components of housing activity as they relate to the real economy (GDP) and household balance sheets, we see something very different: as the prior cycle downturn was a once-in-a-generation event, so, too, is the character of the current housing recovery. The anomaly of the current recovery has implications for both the real economy and investment activity ahead. 

In headline fashion, the contribution of housing to US economic growth is found in new home sales and housing starts.  Demand for new homes drives demand for building materials and construction work, both important in prior cycles in driving job growth, the bedrock foundation for consumer spending. Again, if one only looked at residential real estate price trends, one would assume a very normal recovery.

The Data Tell A Much Darker Story

But the data below show us that actual new home sales and housing starts currently rest very near half-century lows.  How can this be?  What we see at present with new home sales and construction starts is what we saw at the depths of every US recession of the last 50 years. These data points suggest that the current is anything but a normal housing recovery. 

Here are the numbers are current through April of this year:

(Source: US Census Bureau)

Accompanying the dearth of new home sales and starts is the fact that the number of new mortgage purchase applications currently rests near the lows seen since 2009.  Just how can prices be ascending so spectacularly when new home sales are in prior recession territory, new housing starts have not recovered, and the number of new mortgage purchase applications has not climbed from the depths seen in 2009-2010? 

Accompanying these trends is the fact that the US homeownership rate post the peak seen in 2004 has fallen to a near 19-year low. The message is that although total household formation has marched forward, households are increasingly choosing to rent their primary residence as opposed to own residential real estate.  Of course, this is the reason that median rents in the US, seen in the bottom clip of the next chart, have incrementally marched to new all-time highs: 

(Source: US Census Bureau)

How Will This Contradiction Resolve?

The key macro conclusion of the current cycle is that we are not witnessing a “normal” residential real estate recovery at all, but rather an investment cycle driven by actions of central bankers (think the Fed), global flows of capital, and a new entrant to the residential real estate market from the institutional investor side.

In Part 2: Get Ready For Falling Home Prices we identify the new primary drivers of home values in this unfamiliar pricing cycle and examine their implications for the broader economy, and household consumers specifically, as we look ahead.

Long story short: price reversion is coming. If you own housing as either a residence or an investment, don't let yourself be caught as vulnerable as you were in 2008.

Click here to access Part 2 of this report (free executive summary, enrollment required for full access)

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Jack Burton's picture

Home Equity Line of Credit loans are back with new found vigor. We have come that far since 2008. HELOC's are being snapped up by the middle class looking to fund their kids college or just pimp their own lifestyle. It is a sign that housing will blow up. And remember, many people before the crisis had taken long term interest only HELOC's. NOW, these HELOC's are about to adjust to where they must be paid back in full, or interest and principal will now have to be paid. Meaning many thousands of HELOC holders will see their monthly payments sky rocket! Many will be bankrupted. Interest only was good sounding at the time, but now the clock has run out and the interest and principal is now up for payment.

TeamDepends's picture

Paid back in full?  Er, what exactly does that mean?

max2205's picture

Even if housing prices drop rents will be flat to up

Everybody is set payment wise with low rates they can fathom affording in retirement. And renters have been forced cornered into their own hell dependent now on their landlords.

The only other shoe to drop will be massive job loss again but the renters have no where to turn.

Long sheriffs

wintermute's picture

I still cannot believe that MERS has been permanently swept under the carpet. I consider that the US housing market will never recover unless all the clouded titles are rectified according to each state's law where land registry operates. This means disemboweling the big banks and Fannie and Freddie who set up and ran MERS.


DeadFred's picture

They're just waiting for the statute of limitation to resolve the issue. IMHO

BrosephStiglitz's picture

Not convinced to be honest.  What you say might come to pass, but it will be a temporary phase at best.  Most honest people are sick of being bent over a barrel by tax, inflation and debt.  If rent becomes steep you are talking about enormous civil unrest.

Don't forget- the '07 sub-prime crisis is likely to only be the tip of the iceberg.  When the financial economy starts to slide, and believe me it will, interest rates will spike.  When that happens anyone who isn't on a fixed-rate mortgage and is fairly deep into the housing market is going to get obliterated.  There will be a glut of housing with no buyers (again).

House prices have a very high probability of going down.  There has been a 70 year bull market on credit, mortgages etc.   If you have been productive and repaying those mortgage payments for 50 years you'll just take a haircut on your home value.  If you are a recent market entrant it is time to start thinking outside the box.

Jack Burton's picture

It means you can repay the entire HELOC principal, or begin to add the principal paydown to the already existing interest only payment. Those with this type of HELOC will see large monthly payment increases as they are now obligated to start pay down of the entire loan.  This will destroy a number of homeowners.

rbg81's picture

Property taxes will ensure that you are never paid in full.  And they are increasing all the time.  Mine doubled in the last 10 years.  Now more expensive than my mortgage.  It's even worse for new buyers.

1stepcloser's picture

401K lines of credit are booming as well!  But not to buy much except food stuffs and set of tires.  Maybe some PMs???

The International Jew's picture

Anyone have a link to HELOC median rates for the last 5 years?

syntaxterror's picture

If 50% of americans are making $27.5k or less, the future of the housing market is blindingly bright, no? I'm guessing that the flood of Chinese buying real estate here helps matters though.

SF beatnik's picture

In the S.F. middle class suburb of Albany, CA, sellers of smallish houses with tiny yards are asking 800,000. (I looked at several such houses, last week - so did hordes of shoppers / lookers.)


Realtors attribute this to "lack of inventory".  But I suspect R E supply and demand are quite flexible.

And I wonder whether those houses will sell for a fair price of 350 K, three or four years from now.



GubbermintWorker's picture

Fair price of 350K? Shit, I could own a starter castle with acreage here for that much!

sleigher's picture

In the Bay Area, they would have to use San Bruno Mountain to fill in the bay to get more land.  But yeah, I am with you.  I could get 100 acres here for that price.  Probably more...

blindman's picture

anyway ...
not that it might fix anything? but these
pathos do offer emotional revelation for those
few still connected in this regard.
here a song of the sacred secular variety.
Tom Waits - House where nobody lives
what constitutes a "person"?
will that person "live" there in
that home or house? how will they do
all that? some kind of credit ....
why is love a four letter word?
" what makes a house grand
ain't the roof or the doors,
if there's love in a house
its a palace for sure ...
without love it ain't nothin'
but a house, a house where nobody
lives. ..." t.w.
add up all the houses where nobody lives
and you have a state and then a nation
manifest as just that, contrary to some
popular sentiment or personal observation.
a remarkable state of being in a remarkable
virtual realm, a balance sheet problem.
full lyrics for them inclined or curious.
tom waits, " house where nobody lives "
There's a house on my block
That's abandoned and cold
Folks moved out of it a
Long time ago
And they took all their things
And they never came back
Looks like it's haunted
With the windows all cracked
And everyone calls it
The house, the house where
Nobody lives

Once it held laughter
Once it held dreams
Did they throw it away
Did they know what it means
Did someone's heart break
Or did someone do somebody wrong?

Well the paint was all cracked
It was peeled off of the wood
Papers were stacked on the porch
Where I stood
And the weeds had grown up
Just as high as the door
There were birds in the chimney
And an old chest of drawers
Looks like no one will ever
Come back to the
House were nobody lives

Once it held laughter
Once it held dreams
Did they throw it away
Did they know what it means
Did someone's heart break
Or did someone do somebody wrong?
So if you find someone
Someone to have, someone to hold
Don't trade it for silver
oh Don't trade it for gold
I have all of life's treasures
And they are fine and they are good
They remind me that houses
Are just made of wood
What makes a house grand
oh Ain't the roof or the doors
If there's love in a house
It's a palace for sure
Without love...
It ain't nothin but a house
A house where nobody lives
Without love it ain't nothin
But a house, a house where
Nobody lives.
bonus link .
Renaissance 2.0 - Financial Empire - Full Length - Damon Vrabel

chunga's picture

Can you figure out the meaning of this song blindman?

I can't...every time I listen the guitar takes over my brain. I wish I could play like this. But I will settle for drinking beer while I try. And beer time starts, right now.

Jerry Garcia & David Grisman - The Ballad Of Frankie Lee And Judas Priest

Well, Frankie Lee, he panicked
He dropped everything and ran
Until he came up to the spot
Where Judas Priest did stand


"What kind of house is this," he said
Where I have come to roam?
"It's not a house," said Judas Priest
It's not a house, it's a home


DeadFred's picture

Waltz time for those so inclined.

disabledvet's picture

"Markets that mania keep the mania, markets that depress stay depressed."

I would give the current real estate "recovery" weeks not years.

If I am right (and I always expect to be...i'll let history be the judge of whether or not i in fact was/am) the implications of this are profoundly negative.  When it comes to me "you can skip the small talk."

I'm from New York. I expect your Bank to be obliterated in a matter of minutes...not days.

q99x2's picture

Nice essay. Very clean and college-like. I have to write one on modernism and post-modernism this weekend. It will not be so college-like and clean. But ya, when I'm out jogging I see more signs go up each week. The neighbors put theirs up last week. If yu are going to sell do it now.

Winston Churchill's picture

Now may be too late, judging by the price reductions on zillow

emails coming to me.-5 to -10% off asking,the downward leg is gathering speed.Was just 5k off

off a month ago.

One of my clients is a realtor, and her biz has sloped right off.

homiegot's picture

We sold a year ago from a booming market and moved out to a more rural area, but growing as well. We made about a 5.5% return on the place we sold over 9 years. Rolled the 'profit' into a place that was bigger, less expensive price per sq. ft. and tax-wise, and has some land. I commute 40 miles one-way to work. I thought I would hate commuting, but given what I see happening in the city we left, rising property taxes, insane housing apprasals, crowded conditions, shitty traffic, I wouldn't trade it.

The guy who bought our house rahabbed it and flipped it to some sucker that paid 110% of what we origionally bought the place for in 2004.

And this: Someone I know at work just paid off their mortgage in the city we left recently. That's great, but his taxes and insurance per year total what his mortgage payment used to be. Residents are up in arms about this year's appraisals, but that's the price for a successful economy? Higher taxes? Most folks can't afford to buy real estate here now and the majority of new construction are trendy condos and higher-end stuff.

People are pretty muched fucked.

logicalman's picture

When I was a kid, a house was to live in, not a financial instrument.

Guess I'm getting old.

bh2's picture

No, you've just lived long enough to know the difference. As long as people continue to believe they are being abused if they don't "own their own homes", they will not see that one's personal housing is only an expense.

skidsmango1's picture

Property taxes and interest to the has always been a scam.

kurt's picture

Bottom Line

Poor peoples' shit is going to be worth less and rich peoples' shit is going to be worth more.

They both burn just as easy.

Dear Government,


AdrenalineTrade's picture

I just sold my property.  I'm out.  Renters life for me until this insane bubble in British Columbia real estate peels off 30%.

I Write Code's picture

You said:

How Will This Contradiction Resolve?

As it must.


beentheredonethat's picture

No contradiction here- housing prices are not rising- the value of dollars is falling.

This is pure inflation at work, hense no increase in construction or household formation or home ownership. 

Inflation is everywhere and always a monetary phenomenon!

Quaderratic Probing's picture

No deflation allowed. Just make it against the law to sell for less than you paid.

bh2's picture

There are at least two basic ways to value real estate:

1. Market value based on comparable sales and...

2. Investment value based on rental income

Market value based on comps matters only if you sell.

Investment value based on income matters when you buy.

Rule of thumb (conservative) valuation based on rental income is ten years rent; and if you have no need to sell that productive asset, "market value" is essentially meaningless.

Moreover, new construction happens only in response to unsatisfied demand for existing residential properties. With existing SFH still in surplus (and at subdued prices outside SF, NY, and other hot areas including those which cratered), it can be no surprise there is relatively little SFH new construction (at generally higher prices for comparable location, size, and amenities). But there is considerable MFH new construction (built to rent) now in progress. This is a market response to actual demand. It isn't a "problem".

The lack of new total construction demand certainly has a negative impact on the economy (specifically construction), but it does not necessarily have a dire impact on total real estate values. Granite countertops installed in refurbished existing homes cost no less than those installed in new homes. But it's often cheaper to remodel an existing home (including the one you live in) than buy new construction.

None of the above is intended to suggest the US housing market will now glide smoothly forward with only lollipops and rainbows on the horizon. The hard down for elevated resale prices (where those exist) may be yet to come. But (disregarding a "dark ages" scenario) this may also wring out most of the remaining bad debt, which must happen before the economy has any real chance to appreciably recover.

In the meantime, if rents continue to rise, the more valuable is rental property (based on realizable income). QED

If rents eventually decline, it can only be because people are 1) increasingly living under overpasses or with relatives OR 2) because, on balance, more people are buying homes and abandoning rent (which would put upward pressure on for-sale market prices).

Therefore two questions for alarmists:

1. How exactly would property valued as an investment based on realizable rental income inevitably decline in the face of rising rents? And, conversely,...

2. How would existing property market values be driven down if relative demand for them increased because people quit renting?

It is true that financing is a drag if mortgage money from banks is dear. But the present problem isn't that money is dear. It's amazingly cheap by historical measure. The present problem is too few purchasers able to qualify for a bank mortgage because of impaired credit and/or property they must sell in order to buy something else.

During previous similar "tight" conditions, homeowners have sold their properties using land contracts. This is a free market contract and legal in most (all?) states.

If closing costs at sale are, say, ten percent, then a downpayment of that amount at least gets the property sold, and the seller retains power to foreclose if the buyer persistently cannot manage agreed payments.   It also allows for contractual terms and conditions no bank would permit (cuz they want to sell their paper on to Fannie as a "conforming" mortgage). A land contract can often be a more favorable financial arrangement for both parties and doesn't require bank approval. It also doesn't require a lawyer, but land contracts drawn up by amateurs can be treacherous (and lawyers' fees are relatively cheap).

MATA HAIRY's picture

pre-manufactured housing/trailer homes will become more common--in other words, cheaper home construction.

telefunken's picture

YOU kinda need a job to buy a house-what do you think this is-2006?!?

bh2's picture

You kinda need a job to pay rent, as well. Not having a job is a large problem. Having to rent (vs. buy) is not.

DOGGONE's picture

Look at this.
Note that over 1958-1998, inflation-adjusted home prices were UNCHANGED. BOTH nominal home prices AND the consumer price index rose a factor 5.6 over these 40 years!

Leaving these price histories unshown
is intellectual savagery. But, that guy who originated the term The Big Lie would approve (Mein Kampf, 1925).

telefunken's picture

I just looked-real inflation cpu adjusted is literally off the chart!

bh2's picture

It is perfectly true that real estate market value does not ordinarily increase in real terms, but neither does it ordinarily fall over the same long time horizon owing to ever-present government sponsored inflation. What does increase over time is rental price and, if leveraged, the owners's share of equity as debt is paid down.

Inflation therefore significantly benefits landlords who aren't owners of rent-controlled properties.

When the mortgage is finally paid off (by someone else, if a rental), the owner may continue to rent out the property or live in it without mortgage expense.  During all periods the property remains under rent, depreciation expense offsets taxable income derived from all sources, a benefit which increases in proportion to increasing tax bracket of the landlord. There is a time limit for this game, but investors may swap free and clear comparable properties with little or no tax imposed and thereby reset their respective depreciation "clocks" to zero.

Hedge funds and other investors with substantial free cash flow can also borrow money at ZIRP and in unlimited quantities printed by the FED. They buy right (based on net ROI, not the pattern of the wallpaper), buy in cash (from desperate zombie banks, not home-"owners"), and gain outright title from the get-go.

These well-heeled investors have been steadily removing surplus properties at market-clearing prices when that market is favorable to them. When market prices rise, they stop buying (cuz it's a poorer investment at higher prices), which moderates investor impact on the market.  At the same time, marginal properties are steadily eroding toward worthlessness.

These two grim forces will eventually clear the market of excess surplus. Where prices will stabilize is difficult to forecast, but it seems likely they will return to the long-term (ever-rising) trend line which tracks long-term inflation.

kareninca's picture

"Just how can prices be ascending so spectacularly when new home sales are in prior recession territory, new housing starts have not recovered, and the number of new mortgage purchase applications has not climbed from the depths seen in 2009-2010?"

Shadow inventory; houses are still being held off the market in huge numbers by the banks.  The banks don't actually foreclose, but they aren't getting mortgage payments, either!  Perhaps this situation will change.  About six months ago, my home town in New England went from almost no pre-foreclosure listings, to as many of them as there are regular listings.  I presume that at some point they will actually be available to buy.  These people have been squatting in these houses, mortgage-free, for years.  That has to be propping up prices (however they are still falling).

Since the banks have been bailed out; since they have unloaded their crap mortgages on the Fed, I am wondering something.  Will they just let a bunch of houses literally rot  -  totally sellable houses (albeit at a steep loss) in decent towns  -  just because they can?  Since they are safe from taking a hit?  Could it work that way?  Will the towns prevent that?  It reminds me of burning oranges, during the First Depression. 

Winston Churchill's picture

I bid on a house last year.

On the title check it had $120k in accrued (and accruing) code violations.

Most all of the held off the market inventory is in the  same boat accrding to my local council

techs that deal with them every day, and no, they will not negotiate them down.

bh2's picture

"Will the towns prevent that?"

Where this is commonly occurring, local governments are broke -- not least because of carrying cost of pensions for present and future public employee retirees. Eventually many more will declare bankruptcy.

Except by seizure and tax sale of properties with back taxes, most municipalities have neither the financial resources nor legal basis to prevent reversion of title to lenders when borrowers default.  Tax seizure alone simply hangs another financial albatross around the neck of city hall and has no favorable market effect -- witness Detroit. Towns can assess added costs for improvements, but may only resort to lien if the property owner doesn't pay. Checkmate.

Until new capital enters a declining market, it will continue to decline, along with the tax base. But the bankers will be saved and that's the only important thing to the people who print the money.

Last of the Middle Class's picture

I see foreclosed homes around here unsold at the end of their contract, the relisted for $10,000 more. That is not due to a healthy market. I've flipped some houses and i'm moving out of it now, the metrics don't add up and we're in bubble territory again. Time to sit on the sideline and watch this insanity from afar. I'm not losing my ass on the casino that is the stock market or a real estate market artifically inflated by QE money. This doesn't even look like inflation, it looks like just what it is, federal money descending en masse to the home market everywhere and calling it a recovery.

Last of the Middle Class's picture

Same thing here, I see houses that you can't even get home owners insurance on because of the violations and they're relisted for more after they don't sell. Insane.

bh2's picture

Perfectly sane, actually. Simply devious.

The banks are uniquely privileged by emergency accounting rules to avoid mark-to-market valuations on mortgages and to treat non-performing loans as if they were performing. Since assumption of title by foreclosure costs banks something like 5 grand each, on average, banks can drain cash flow if they take on too many at once. And homes left empty tend to loose value as they are eroded by time. Even a non-paying "tenant" (probably the former owner) may be better than none.

There's been some credible scuttlebutt circulating that the FDIC also forceably limits flow of REO houses to the market by requring deadbeat banks to set unrealistic prices for those properties they don't want released and foot-drag on offers. This is to defend balance sheets of upside-down banks (and thus avoid draining the FDIC pocketbook) because the loss need not be realized until an actual sale occurs. Many realtors have simply refused to make offers on REO properties because the usual result is months of waiting for an answer -- and the answer usually "no".

This is about saving the banks. It is NOT about saving ordinary citizens struggling with an economy impaired by a trainwreck of bad debt which will -- and must -- eventually be written down.

Rubbish's picture

In laws home near Pasadena will sell any day for $1.8MM and be torn down for a mansion.


Not even 1/3 of an acre.


Someone has money to burn.