Mark Hanson Is In "Full-Blown, Black-Swan Lookout Mode" For Housing Bubble 2.0

Tyler Durden's picture

Submitted by Mark Hanson via mhanson.com,

Speechless: The Kardashian’s are now house flippers

“No more neighbors, friends whose past Real Estate experience is renting an apartment or buying a starter house, or stay-at-home moms flipping houses locally;  young, flamboyant Realtors on reality, cable TV shows selling multi-million dollar trophy properties to those from abroad with briefcases of cash that until this year bought a lot relative to the ‘weak’ US dollar;  20-something Silicon-kids paying $2,000/sq ft for a house they could buy 20 miles away for $500;  large, institutional private equity firms buying 10s of thousands of single-family houses for rental purposes — sight unseens using computer programs —  thinking a 3% yield is acceptable long-term and somehow, someday economies of scale will emerge;  or individual / “family-style” speculators committing lending fraud at a pace that rivals 2006 chasing their share of the “easy money” in Real Estate, are needed to prove to me that Bubble 2.0 is not just a monster, greater in intensity and energy than Bubble 1.0, but will end the very same way…”

This week on the Kardashians, Scott Disick, the baby daddy of the oldest sister, revealed he was a new entrant to the house flipping scene with the purchase of a $3.7 million Beverly Hills “fixer-upper”.

When his interior designer flaked out on the job, he asked his Kardashian sister for help. He said he wants to “buy as many houses as he can”.

To his credit, he showed genuine concern when she started suggesting uber-high-end remodel ideas saying (loosely translated) “I am a concerned. The object is to make money”.  And then he outright fired her, opting to hire somebody that he had control over.

Seeing common sense prevail in such a way, perhaps if he doesn’t get in over his ski’s with projects, doesn’t fall in love with his houses, and sells quickly to ready buyers when the time comes he has a shot of ‘not’ becoming a famous bag holder.  But, with big, longer-term house projects come big liquidity risks that Scott is simply too young to ever have experienced, as he was in his early 20s during Bubble 1.0.  Good luck LD.  Don’t get greedy, listen to your gut, and always be a seller.

 

Bag-Holder population is exploding

Real Estate is a highly “illiquid” asset class ‘most of the time’.  It always has been and always will be.  However, some times, such as now — and from 2003 to 2007 as a prime example — when liquidity is flowing like water, Real Estate’s illiquidity is masked.  Speculators can do no wrong.  Simply having access to short-term or mortgage capital to purchase Real Estate guaranties a double-digit return.  This continues until one day, suddenly, it doesn’t.  When capital markets tighten up a bit, or a lot, due to one reason, another, or another, the snap-back to the true, historical illiquid nature of the Real Estate sector happens suddenly and is amplified at first. This creates a snowball effect from which both house supply and illiquidity surge at the same time.

Price then becomes the liquidity fulcrum and will drop, relentlessly ripping speculators faces off, until capital begins to view the asset class as a relative value once again.

In periods of mania, most don’t recognize when Real Estate has once again lost its levitation juice and keep buying even as liquidity conditions turn downright bearish. Some buy all the way down comparing the lower prices with peak, liquidity bubble prices a couple of quarters back thinking they are getting a “great deal”.   Quickly, they are underwater, or sinking rehab capital into a depreciating asset.

Then, what seems like “all of a sudden”, a wave of fear engulfs the sector.  Supply ratchets higher, as pricing power continues to weaken.  Before most realize what’s happening, “month’s supply” of houses is ‘through the roof’, Realtors are telling sellers that their ‘expectations are a bit high’, and Real Estate’s true color — illiquidity — has taken control of the entire sector stranding owners and speculators from their invested capital.  This is event horizon.

These “correction” cycles can be tame, moderate, or extreme like from 2003 to 2007.  In my opinion the severity of the correction is directly related to the amount energy that preceded it, meaning given the “all-in” global Central Bank monetary and Gov’t debt policies of the past 6-years, the next “correction” has the potential to make 2007 to 2010 look moderate.

 

Focus is no longer “if”, but “when” and “how much”

My job is no longer to prove a new mega-house price bubble has blown under everybody’s noses, but to time it’s ultimate top and inevitable retracement. I need look no further for evidence of Bubble 2.0 mania nationally, across all price levels. The past several quarters of wild anecdotes piling up on each other serve as icing that caps a couple of years of solid and compelling data collection and analysis all pointing conclusively in the same direction.

No more neighbors, friends whose past Real Estate experience is renting an apartment or buying a starter house, or stay-at-home moms flipping houses locally;  young, flamboyant Realtors on reality, cable TV shows selling multi-million dollar trophy properties to those from abroad with briefcases of cash that until this year bought a lot relative to the ‘weak’ US dollar;  20-something Silicon kids paying $2,000/sq ft for a house they could buy 20 miles away for $500;  large, institutional private equity firms buying 10s of thousands of single-family houses for rental purposes — sight unseens using computer programs —  thinking a 3% yield is acceptable long-term and somehow, someday economies of scale will emerge;  or individual / “family-style” speculators committing lending fraud at a pace that rivals 2006 chasing their share of the “easy money” in Real Estate, are needed to prove to me that Bubble 2.0 is not just a monster, greater in intensity and energy than Bubble 1.0, but will end the very same way, as the similarities and drivers to Bubble 1.0 are not just all present, but far outnumber yesteryear in egregiousness.

I am now more convinced than ever before (even in 2006 when I was literally giving lunatic fringe seminars to the mortgage sector on what I believed was an impending mortgage and housing crash) and convicted to my “far out” analysis that US housing — locally, regionally, and nationally — is at the end stages of an epic bubble blow just looking for prick. And as the bubble has blown to epic proportions, armies of pricks have come out of the woodwork.

It simply isn’t different this time around. I am in full-blown, black-swan look-out mode over here. And Bubble 2.0 could end up being a lot more volatile than from 2008-10 due to the sheer amount of capital and liquidity in the sector that blew the bubble in addition to:

  • Muscle memory; the second house price “correction” in 7-years will be taken more seriously, sooner, than the last time around causing inventory to rise substantially, earlier in the downturn.
  • The record pace of “unorthodox demand with unorthodox capital” by a small slice of the population suddenly going to the “sidelines”, or rather “getting sidelined”, will hit demand much quicker than millions of end-users all changing sentiment over time like at the end of Bubble 1.0.
  • The Fed and Gov’t have far fewer rates, stimulus, and modification tools at their disposal this time around.
  • An entirely new generation of low-down payment, underwater homeowners created from all of the low-down FHA, Fannie and Freddie purchases done with over-inflated appraisals over the past few years.
  • The record supply of non-owner occupied single and multi-fam “investment” props – and fraudulent loans for “vacation houses” that are really flips or rentals — owned by a small slice of the population will hit the supply chain much quicker than millions of foreclosures did from a wide base of the population in Bubble 1.0.
  • The Gov’t won’t be able to stop the private house for-sale supply flood like they did last time around vis a’ vi bank and servicer mortgage mods and foreclosure moratoria.
  • New, large-scale, well-capitalized demand cohorts rising from the ashes — like institutional and private foreclosure buy-to-renters & flippers and foreigners with cheap relative dollars did post Bubble 1.0 explosion — will be tough to find.

My proprietary Bubble 2.0 analysis of the contemporary housing data are compelling.

  • Houses cost far more to the incremental, end-user, owner occupant buyer using the popular mortgage loan of this era versus 2003 to 2007 (SEE 5/3 NOTE COPIED BELOW).
  • Hard-core speculation is back – some 40% of all transactions according to my calcs — complete with occupancy and appraisal fraud, process incompetence, willful blindness, and relationship-driven dissonance in lending, just like 2003 to 2007.
  • All cash transactions in this era have replaced exotic loans of Bubble 1.0 in bypassing the “mortgage-loan house-price governor”.
  • Demand has been extremely weak relative to Bubble 1.0 – end-user, owner-occupied demand more/less flat since 2008 — yet price gains have been far more powerful; a divergence that cannot persist for any great length of time.
  • Demand for primarily owner-occupied builder houses has remained far more depressed than resales, which attract a substantial percentage of speculators.
  • “Stale listings”, another term for “houses priced too high to sell”, at record highs and a serious house price headwind.
  • This end-user, owner-occupied “demandless” house price bubble proves something other than traditional, end-user, owner-occupant fundamentals are driving prices.

Bottom line: This all is big, potential trouble because for prices to remain in a positive trajectory, a wide base of fundamental and permanent demand is always needed and flippers, buy-to-renters, foreigners with volatile capital, high-tech kids, and lending fraud is not a foundation a true ”housing recovery” with “escape velocity” can be built upon.

 

Note, I have ZERO clue what happens next with housing. Maybe house prices double or triple. Maybe prices get cut in half.  Everything here is a derivative of my research and my opinion only.  I have been wrong for the past year calling a top but I believe very right about this being a bubble. Note, I was very wrong calling a mega-bubble in 2005/06 as well…for about 18 months.

 

Excerpt from my 5/3 note… Housing Affordability Far Worse than Bubble 1.0 Peak;  Apples to apples comparison of Bubble 1.0 and Bubble 2.0

If 2006 was a bubble, then higher prices, greater monthly mortgage payments, flat income, and a higher unemployment rate today must be as well.

“All-cash”, historic low rates each year, lending fraud etc acting on house prices just like exotic loan did in Bubble 1.0; “mortgage loan house price governor” removed allowing prices to unhitch from end-user fundamentals.

Data used for this bubble 2.0 analysis and comparison is from the most recent month’s housing data….

Bottom line: If versus 2007, it costs the incremental, “end-user, owner-occupant” buyer 13% to 35% more on a monthly payment basis and they must earn 41% to 72% more to obtain a mortgage, then how can houses not be back in a bubble?

House prices are too expensive for the typical end-user, owner-occupant buyer. This is the reason substantial volume has never returned to the US housing market, other than during transitory periods immediately following stimulus events or Fed-induced rate plunges, which create “some” incremental and “a lot” of pulled-forward demand, but never any “durable” demand.

The most recent demand “uptick” following the rate plunge in Q4’14 is simply another “transitory” period of increased demand. And ultimately, it will lead to significant disappointment in Q3/Q4 (sooner if rates continue to increase at the past week’s pace) when everybody realizes that once again this demand spurt did not reach “escape velocity” and was not “durable”. Same movie, different rate plunge.

Bubble 1.0 vs 2.0.

Question: How can house prices be so detached from end-user, owner-occupied fundamentals yet again, especially with mortgage lending so “tight”?

Answer: In this bubble cycle, unorthodox demand with unorthodox capital and occupancy fraud in lending have replaced exotic loans as the instruments that suppressed the “Mortgage loan house-price governor”, allowing house prices to reach levels not supported by local, end-user, owner-occupied fundamentals.

Apples to apples “affordability” 2004 and 2007 vs 2015 “affordability”.

1) Builder house prices in 2015 are up 13% from 2006, yet the total payment is 35% higher and income needed to qualify is 72% greater using the popular loan programs of this era. Thus, the chronically weak demand for builder houses.

RESALE AFFORD APR 2015

2) Resale house prices in 2015 are down 9% from 2006, yet the total payment is 13% higher and income needed to qualify is 41% greater using the popular loan programs of this era.

Resale affordability metrics are measurable better than in the builder segment, but still blown-out relative to 2004 and 2007, which accounts for resale volume performing better than builder volume, but nowhere close to 2004 to 2007.

BUILDER AFFORD APR 2015

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The_Peeper's picture

Who's Mark Hanson?

PartysOver's picture

Who's Mark Hanson?

Don't know, doesn't matter.  There is a lo of truth in that article.  I think the next one is going to be worse than the first Housing Bubble.   Good news is that I might be able to pick up  a Prime Beach Front Property very cheaply. 

t0mmyBerg's picture

well the thing that sunk the system last time was banks marking down their loan holdings.  I do not think the current environment will see a repeat of that and so it will not be worse, though the actual housing market might go down as much or more.  stock markets will collapse for some other reason though.

corporatewhore's picture

something else will go wrong.  history repeats but not always in iambic pentameter

ACP's picture

Mark Hanson was a mortgage broker who made a series of youtube vidoes talking about how the real estate market was going to implode, back in 2008. Now a consultant.

One of his old videos:

https://www.youtube.com/watch?v=kb9byJ2QWcg

 

MHansonAdv's picture

Great video and timely for early 2008.

lordylord's picture

Where I live, houses are cheap, but land is expensive.  No point in buying a house if it got no land.    

chumbawamba's picture

I wish these market geniuses would stop using the term "Black Swan" as it is now utterly and completely useless.  It may as well mean "what's going to happen tomorrow" the way it's used these days.  Whereas before a "Black Swan" was by definition an unpredicted event, nowadays every douchefag with a financial newsletter is predicting the "next" Black Swan.

Fucking imbeciles.

I am Chumbawamba.

eatthebanksters's picture

In areas where employment is strong and earnings are high, demand will continue to drive prices higher while interest rates are low.  Areas without a strong employment base or growth will not see the big price increases.  If and when the stock market takes a shit, then you will see housing prices drop very quickly.  As stocks drop there will be layoffs.  Between higher unemployment and the hit to stock equity that was used to purchase or borrow against to buy real estate, the money to purchase hiomes will diminish and demand will fall.  This will be reflected in prices adjusting downward. Until the stock market takes a dump, things will keep going and maybe level off.  But when equities take a shit and the market corrects, then the Fed wil have no more arrows in its quiver to inflate home prices.  I have been in the biz for 35 years and got stung bad in 2008. I'm sitting on the sidelines right now waiting to see how our governement and the CB keep our economy propped up.

OpenThePodBayDoorHAL's picture

People are idiots. The obvious answer is that the money's not worth anything anymore. $100M for a house in Mayfair, $180M for a Picasso, $1.5M for a tiny apartment in Sydney, $1.5B for an internet company with no revenues. Confetti.

Osmium's picture

We have got to be getting close.  Saw on the local news last night on the Tee Vee that a few houses sold for MORE than the asking price after being on the market 2 days.

 

Seller: "I'm asking 300k for this house"

Buyer: 'I'll give you 325k and NOT ONE PENNY less!"

cosmictrainwreck's picture

Ditto Portland, OR...anecdotals are they sell in a day and "little guy" buyers priced out, out-bid and ALL CASH buys, Of course Californians historically a factor, but I sure run into a lot more New Yorkers lately

motorollin's picture

Buying a house in the Portland Metro area right now. Very lucky to be the first bidder. 

MHansonAdv's picture

Being the first bidder is great.  The last bidder is the baggie.

zeroaccountability's picture
zeroaccountability (not verified) MHansonAdv May 13, 2015 5:16 PM

Wife works w/lady who just sold house:  22 showings 1st day, 4 offers, accepted offer $15,000 over asking price. (Colorado)

 

It is insane here. (I sold my house here Feb 27th....I'm currentyl renting.)

 

Edit: She was going to ask $240k.  Realtor sez no, list at $275k.  Under contract, $290k.

The303's picture

I am also in the Denver market. It is totally, totally insane here. Tried looking last year with no luck. May try again, but not until there is a price correction of some kind. 

El Oregonian's picture

It's "The Wile-E-Coyote and the ACME blow-up house Syndrome". This will not end well for most. Beep-Beep baby...

BandGap's picture

Damn right it's going to be worse. There is no backstop this time.

Making sure I have cash and liquid assets. Will use cash first to get what I need during deflation.

NotApplicable's picture

You don't think Yellen Capital LLC will backstop this crap... AGAIN?!

NihilistZero's picture

They always let it crash first.  It's how the Oligarch Rentier economy is built.

First by inflation, then by deflation...

Duty Chief's picture

F'ck beachfront.  Cheap rental property. Better yet, government subsidized rental property.  Minimum wage debt slaves are going to need to live somewhere.  They sure as shit won't be able to afford to buy.  

Headbanger's picture

Moar like a wedge of black swans on the way!

I kid thee nott..

KnuckleDragger-X's picture

All that magic money the FED handed out and the market's are more messed up than ever, who'da thunk it......

Mike Honcho's picture

The "To Catch a Predator" guy

Sages wife's picture

Whoever he is, it sounds like he belongs here.

monopoly's picture

Mark is the best out there when it comes to housing. He has been following housing, mortgages, banks and trends for many, many years. His knowledge of the real estate market is second to none and he speaks the truth. Do not dismiss what Mark has to say. His timing may be off as it is for many of us but his facts and outcome are right on. One smart Dude.

lordylord's picture

Note, I have ZERO clue what happens next with housing. Maybe house prices double or triple. Maybe prices get cut in half.  Everything here is a derivative of my research and my opinion only.

Yeah, he sure sounds like the best.  Looks like he's just trying to sell "advice" while not actually giving any. 

 

MHansonAdv's picture

Not trying to give advice Lordy.  Just my opinion.  I enjoy sucking in data, synthesizing is, and see what comes out the other side. And this note ended up with a bottom line about like the Kung Pao chicking I ate last night.

zeroaccountability's picture
zeroaccountability (not verified) MHansonAdv May 13, 2015 5:19 PM

That must've been BEFORE doing the 2 gigantic rails, huh?

MHansonAdv's picture

Back then, before housing started to really crash, shit was a hundy a gram too.

booboo's picture

Handons pretty sharp on real estate, general all around good guy but has a thing for Abby Joseph Cohen, I think he wants to do her (sorry Mark, had to say that)

MHansonAdv's picture

EWW DON'T GET ME STARTED ON THE ABBSTER. SHE MAKES MY JUICES FLOW ESPECIALLY WHEN SHE WEARS TAN FLANNEL. OH MAN...HUBBA HUBBA!

MHansonAdv's picture

Just the way to talks about stocks and bonds makes my lower estremities quiver.

 

Here is a recent video of Abby on deflation that makes me "inflate"

 

http://finance.yahoo.com/video/abby-joseph-cohen-giving-deflation-113403...

 

 

zeroaccountability's picture
zeroaccountability (not verified) MHansonAdv May 13, 2015 5:21 PM

Sizers, much?

zeroaccountability's picture
zeroaccountability (not verified) zeroaccountability May 13, 2015 5:22 PM

Yes Questions....you still out there, bro?

Burt Gummer's picture

Of course we are in another housing bubble, home ownership is at 29 year lows. 93 some million not in the workforce, wage growth flat to negative, who the fuck can afford a house these days?

https://www.youtube.com/watch?v=h56UaFEpCOw

j0nx's picture

RE will not crash this time. You know how I can make such a bold statement? Because I sold my hovel 2 years ago and have been renting ever since with cash in hand ready to buy when it does. That alone will prevent any RE market crash from happening because the Gods would never smile upon me in that fashion. At least in my area. We gave up this spring on our house purchase because RE is way out of control here in NoVa right now. Almost 2006ish in many areas. Waiting game stuck in a nasty rental continues...

lordylord's picture

Buy now or be priced out forever. 

eatthebanksters's picture

That is the favorite line of unscrupulous real estate agents.

j0nx's picture

If you've never heard of MH then you weren't paying attention in 2007 and 2008. I started following him right after my hood took a shitnap and started dropping 15% a month in value during the bust. If only I had found him and KD 6 months earlier then I would have sold off at the peak and avoided the nightmare that I lived for 5 years in that section 8/illegal alien infested hood that it became after the bust.

new game's picture

was in your situ a year ago. cash at zirp and watch prices go up and calculating missed opp.

bot and have been double rewarded. 2 for 1 on improvs and 8 percent increase. ie vacant rural acreage prop. could sell in a heartbeat and pocket a nifty 100k with 30k improv cost, but instead heloc'g to raw land.

lots of running around but found a demo at 20 k - 15 acres, almost done. 500 into removal and a shit ton of ugly grueling work, but could be a nice double roll in 6 mos. or build and sell existing.

play the safe side. when it is avail, come out balzing with cash...

former re broker of 20 yrs...

slightlyskeptical's picture

Apples to oranges. If you are not paying any principal down of course your payment will be lower.

Mercury's picture

Steady, across the board, quality hard asset inflation is probably the result of something other than a bubble.

Perseus son of Zeus's picture

Hey bro. We're still waiting for China housing meltdown. Let's stay focused, one melt down at a time.

Winston Churchill's picture

Had to start using my toes to keep track of all this shit coming together for our

'autumn(fall) of discontent'.

durablefaith's picture

"Price then becomes the liquidity fulcrum and will drop, relentlessly ripping speculators faces off, until capital begins to view the asset class as a relative value once again."

Been there, done that, lost the tshirt...

corporatewhore's picture

All I see here in flyover country are crafty real estate agents whipping their unsuspecting customers into a frenzy to put orders on homes to make sure it doesn't get away.

The last time I saw that was right before my department was downsized and I was without a job.  2007/2008 redux coming soon.

gatorengineer's picture

I look at it this way, each 0.25 percent rise in the 30 equates roughly to a 5-8% drop in housing prices as people buy to a payment not to house price.  That being said, I know someone who bought way over their head with a no principal 5/1 ARM (no principal the first 5 years) under the assumption that housing will only go up from here, and he will sell at year 4.... I want to see how that works out for him...