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The Destruction Of Real Estate Fundamentals

Tyler Durden's picture




 

Submitted by Ramsey Su via Acting-Man.com,

Housing is a very important component of any economy, and often an indicator of the well-being of a society.  In the US, housing has been deteriorating since the sub-prime crisis.  The changes are not only cyclical but structural.  Past experiences need to yield to an objective analysis of where we are heading.  Here is the way I see it.

Defining Recovery

Ten years ago, mortgage financing was a free for all.  Non-existent underwriting guidelines with over 100% LTV, limitless debt to income ratios, no verification, no documentation, no qualification and no income resulted in a manufactured peak for real estate prices.  Home sales and construction were at historical highs with total disregard for underlying demand.  Is this the desired housing market? Should a return to that era be considered a recovery?  Of course not, and yet, that is exactly what the market and policy makers are striving for.

 

unreal_estate_03

 

 

 

Case-Shiller

S&P/Case-Shiller Home Price Indexes – click to enlarge.

 

Defining a Healthy Real Estate Market

Real estate is basically shelter, a utility.  Once upon a time, in most parts of the world, the rich and powerful lived in castles, palaces and mansions while the peasants had a simple roof over their heads.  In the modern world, shelter has become a form of entitlement and per the United Nations, a human right.  Right of ownership, at least in principle, is guaranteed by respective governments and was not granted by monarchs or rulers of the day.  Under these circumstances, how do you measure the health of a real estate market?

For a capitalistic free market society where the right of enjoyment is protected, here is the way that I would define healthy market conditions:

Every household should be able to afford a minimal standard for shelter, a roof under which there are the basic utilities such as running water, sewer, electricity, high speed internet connection, etc.  Affordability is best measured by housing costs as a percentage of household income, at the entry level. 

There is little need to look beyond the entry level because a healthy market at the bottom level would provide support for trade-up levels.  The health of housing should be measured at this entry level and not by the price of million dollar penthouses in Manhattan.

Using this definition, housing in the US is decaying, not in recovery.  Prices should be coming down instead of going up.  Housing expense for the entry level, as a percentage of household income, has been going up.  Hence the question – should we strive for more sales, more new construction, higher prices, or should we seek a healthy market where housing costs do not consume a disproportional share of household income?

Price increases without corresponding income increases aren’t a positive sign.  The same is true for rentals.  Income inequality is manifesting itself in housing.  If compounded by other forms of inequality, the consequences may not be something we are prepared for.

There are three major forces that hinder recovery:

1. Beating a Dead Horse – the Fed

Every time I look at housing, the Federal Reserve jumps out as the great destroyer.  Here is a simple example.  Say we have a housing market where the median price of a starter home is 3X that of the annual income of a starter household. Now the Fed decides to manipulate interest rates, resulting in a higher price of 5X annual income, but because of the lower rates, debt service payments remain the same.

The Fed may call this a recovery, but these households are paying a higher price for the same house, taking on a much higher debt amount, but are tricked into believing things are similar to before because their monthly payments are identical.  Is this a good thing?  Why would any policy maker want to inflate an asset by manipulating rates, so borrowers have to take on higher amounts of debt just to buy the same unit of enjoyment?

 

Fed, mortgage backed securities

Mortgage-backed securities held by the Federal Reserve System – the Fed’s interventionist policies have led to economy-wide price distortions, but the real estate market has been affected more than many other sectors – click to enlarge.

2. Secondary Market For Mortgages – the Agencies

Equally guilty as the Fed are the agencies Freddie and Fannie, now in their 7th year under conservatorship of the Treasury.  These once quasi-private organizations are now a permanent arm of the government.  They pretend to do good, but in reality, these agencies are promoting home ownership at unaffordable levels of debt.

95% financing at an over 50% debt to income ratio is a trap.  Fortunately, the masses are not as stupid as the policy makers have hoped for.  Still smarting from the sub-prime spanking a decade ago, consumers are not in a hurry to jump back into the fire, in spite of unprecedented QE by the Fed and overly accommodating lending practices by the agencies.  See the latest survey from Fannie Mae:  Americans’ Outlook on the Home Selling Market Cools amid Economic and Financial Concerns. 

 

3. Over-Regulation

Policymakers have swung from no regulation to over-regulation, starting with the Consumer Finance Protection Bureau.  The industry fears “TBD regulation” the most.  TBD describes regulation “to be determined” in the future, if the real estate market repeats another down cycle.

This fear is preventing the industry from innovating and creating new products to meet changing needs.  Regulations also extend to all areas of housing, from tenant/landlord laws, to permits, to property taxes, fees, etc.  Yes, many of these are necessary, but the inefficient administration of each of these bureaucratic obstacles adds to the cost of housing directly and indirectly.

 

CFPB

The somewhat ominous-looking CFPB logo …

 

Conclusion

Real estate is a long term hold, either as a home or as an investment.  The lack of a solid foundation is worrisome.

*  *  *

In closing, I would like to offer a few articles of interest below, pertaining to debt and the housing market.  Have fun reading them.

The first one is from Black Knight, previously known as LPS.  The rise in non-mortgage-related debt is alarming.

The second on is from PEW charitable trusts. It offers some interesting data on debt. The Complex Story of American Debt.

Finally, from Fannie Mae, this is a real hype piece with very shaky data: Invisible Equity: Do Homeowners See How Much Home Equity They Are Sitting On?

 

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Mon, 08/10/2015 - 15:12 | 6411038 ted41776
ted41776's picture

it's the recovery, stupid

Mon, 08/10/2015 - 15:20 | 6411053 KnuckleDragger-X
KnuckleDragger-X's picture

Or the stupid recovery.....

Mon, 08/10/2015 - 15:44 | 6411136 kaiserhoff
kaiserhoff's picture

Case-Schiller is an urban index.

Outside the cities, things are different,  very different.

Mon, 08/10/2015 - 17:37 | 6411569 Squid-puppets a...
Squid-puppets a-go-go's picture

that link to the fannie may article. phuk me... i mean, usually it takes a generation or two to forget a powerful lesson. these idiots forget in 5 years. and this from a quasi-govt agency?

did the word 'prudence' just disappear from the english freaking language altogether?

Mon, 08/10/2015 - 18:16 | 6411711 GhostofBastiat
GhostofBastiat's picture

That's an old sounding word...like virtue, thrift...two syllables and hard to pronounce. 

But porn, house, car, pot, now... those fit right into the long term memory levels...but pot gives you CRS(Cant remeber sh*+) so 5 years is amazing retention...

Mon, 08/10/2015 - 18:38 | 6411793 Salah
Salah's picture

Absolutely.  Outside urban concentrations see Trulia or better yet, Landwatch.  Both have some smoking deals with acreage in places ideal for preppers, off-grid, small town, etc. and in locales that will stay relatively warm for the coming mini ice-age.

Mon, 08/10/2015 - 15:23 | 6411065 daveO
daveO's picture

"Why would any policy maker want to inflate an asset by manipulating rates, so borrowers have to take on higher amounts of debt just to buy the same unit of enjoyment?" 

Gee, I wonder, too. /sarc

https://411w15.econ.lsa.umich.edu/wp-content/uploads/2015/04/federal-stu...

Mon, 08/10/2015 - 15:30 | 6411084 ebworthen
ebworthen's picture

yup, recovery, everything is awesome!

Buy a house!  Go on!  Take out that loan!

Mon, 08/10/2015 - 15:50 | 6411148 toady
toady's picture

It's the recovery, bitchez.

Mon, 08/10/2015 - 16:28 | 6411273 doctor10
doctor10's picture

Real Estate prices are entirely artificial. On th ecommercial side, held up by monopolies with their "triplle-net" lease schemes and their local regulatory schemes that support their monopolies.

On the residential side, "mark to reality" remains post-poned by a variety of forces trying impede the inevitable mini-bond rout on the horizon.

 

 

Mon, 08/10/2015 - 15:16 | 6411049 PoasterToaster
PoasterToaster's picture

All these articles tend towards the same point.  Money printing enabled massive theft.  None of this crap about loose regulations or unworthy borrowers matters a damn bit, and it is intended to get us hating each other.

Mon, 08/10/2015 - 15:28 | 6411080 ebworthen
ebworthen's picture

Yes.  Rates are at 0% and loan rates a historically insane 3.5%-4.0%, which mean prices are just as insane and urealistic, and the incomes are not there to support payments.

Taxes are totally out of control as well.  Land might be worth something, but not a "house" or "housing" in any of the fantasy dome hamlets and markets of the new normal.

The current bubble is that much worse than 2008; people are mortgaged and equity loaned and reverse mortgaged out the ass, and when it comes toppling down most won't be able to pay.

Mon, 08/10/2015 - 15:32 | 6411090 RaceToTheBottom
RaceToTheBottom's picture

At least in Star Trek, when you got free living accomidations, and you wore a red shirt, you got vaporized.

Mon, 08/10/2015 - 15:56 | 6411174 giggler321
giggler321's picture

Funny you say that - just waiting for them to rent prison cell's to inmattes, payable on their good return to society, along with their new college degree studied for behind bars

Mon, 08/10/2015 - 18:38 | 6411794 Louie the Dog
Louie the Dog's picture

They already charge inmates a per diem (rent) in my county. An inmate is still on the hook for these charges even if the charges are dropped or he's proven not guilty at trial.

 

Mon, 08/10/2015 - 15:20 | 6411054 Groundhog Day
Groundhog Day's picture

please stop the crazy train, i want to get off

Mon, 08/10/2015 - 15:31 | 6411085 Skateboarder
Skateboarder's picture

We aint at the top yet. San Jose, CA currently has an avg. home price of $783K.

http://www.zillow.com/san-jose-ca/home-values/

I predict that when the avg. price in San Jo hits $1M, we will be at the top.

And I will be saying as in previous years, "dad, for the love of god, please cash out while you can!"

Mon, 08/10/2015 - 15:44 | 6411135 Handful of Dust
Handful of Dust's picture

It's the "Houseless Rekovery," unless your a Chinese ... or Russian ... or Drug Lord.

Mon, 08/10/2015 - 16:03 | 6411199 toady
toady's picture

I lived in S.J. in the nineties, cashed out when my condo doubled. (Truthfully, I was job transferred,  but the cash out made it a lot easier)

Anyway, I worked with an older dude who bought a house and five acres in Menlo Park (near Stanford) in the 40's for something like ten grand. He built three or four guest houses over the years,  his kids and in-laws were living in them. When I left the property(s) were valued at 12.5M. I can't imagine what they're worth now.... 

Mon, 08/10/2015 - 16:30 | 6411275 toady
toady's picture

Check out this 2 bd, 2.0 ba, 913 sqft home at 370 N 4th St APT 1 that I found on Zillow: http://u.zillow.com/p1K77C

Went and found a condo in my old building. Not the same unit, the one in the ad is the only one that had a garage. Bought mine when it was new for $20117know, sold it three years later for $254k, now look what it's going for...

Ah, the good ol' days...

Mon, 08/10/2015 - 16:39 | 6411317 Skateboarder
Skateboarder's picture

When one of my uncles was in the early years of his career in SV tech in the early 90s, his boss in his Cupertino office told him, "look at that condo across the street. It's going for $250K. You need to buy that up son." Alas, uncle was not in position to buy a house at that time. Twenty years later, it's about $2M.

Glad you cashed out at the right time. It's all a game of hot potato around here.

Mon, 08/10/2015 - 18:29 | 6411762 Consuelo
Consuelo's picture

"When I left the property(s) were valued at 12.5M. I can't imagine what they're worth now.... "

I'd whiff at $40M+   But that might be way low...

 


 


Mon, 08/10/2015 - 16:07 | 6411210 ZD1
ZD1's picture

And I will be saying as in previous years, "dad, for the love of god, please cash out while you can!"

No doubt your Dad's house is paid for and he has low property taxes thanks to California's Proposition 13?

Where would he go with all that equity when home prices in most metro areas are higher than the last real estate bubble?

Mon, 08/10/2015 - 16:33 | 6411282 Skateboarder
Skateboarder's picture

Nope. Meager returns invested from selling our previous home of decade+ into current home, purchased last year. Property taxes aint that cheap either. I gave my justifications for why a house should not be purchased in these times, and dad gave his for why it's not all going to blow up tomorrow, and even if it does, fuck it. I can't make up my mind either, whether the bubble will burst tomorrow, or if it will last another five years. The construction in this area has been going absolutely nuts. Tons of demand for new construction from the richer immigrant population and foreign money.

Tthink dad is right on this one, and when the time is right, we'll hopefully walk out with $150K, devalued a bunch w.r.t. 2015 dollars, which aint much in the grand perspective.

As for me and my generation, buying a house where our parents raised us... haha good one.

Mon, 08/10/2015 - 16:35 | 6411299 negative rates
negative rates's picture

Casey says, NO NO NO!

Mon, 08/10/2015 - 15:20 | 6411055 The Merovingian
The Merovingian's picture

If you aren't treating you house like an ATM, then you ain't living right!

/sarc

Mon, 08/10/2015 - 15:21 | 6411057 Professorlocknload
Professorlocknload's picture

Long term hold, eh? Hedge much?

Mon, 08/10/2015 - 15:26 | 6411072 Ayr Rand
Ayr Rand's picture

According to Black Knight, there are fewer mortgages extant now than when the housing recovery started in early 2012. In other words, all demand is being driven by investors (e.g., REO-to-Rental). If you check their books, these REO-to-Rental companies are losing money operationally, and their only hope to profit rests on continued housing appreciation.

It is a house of cards that is absolutely reliant on the continued flow of low-interesting funding and/or investors who don't check the books of the REO-to-Rental companies.

We will see.

Mon, 08/10/2015 - 16:47 | 6411352 Fiscal Reality
Fiscal Reality's picture

Investors have backed off since 2013 in FL because prices got too high for the buy to rent formula to work. The counties LOVE IT cause now they can start raising property taxes again. Thank God for the Homestead Exemption!!

Mon, 08/10/2015 - 15:28 | 6411079 assistedliving
assistedliving's picture

NYC RE has become obscene.  Reminded me when I travelled to London, Beirut, Dubai even Miami.  Ridiculous prices paid by money launderers for $1m-10M+ condo's SITTING EMPTY 90% of the time.  Like Trump, these crooks suck all the oxygen out of the system driving prices up until you reach the boundary where they won't even look.  There prices there are sane to depressed.  The 'locals' hate these carpetbaggers and the pols say "oh but look at the tax money they generate" while they yacht for free on some crooks ship in the Med. 

I blame :

1.  the Fed

2.  Fannie/Freddie

3.  U.S. Foreign policies including trade

4.  AirBNB

Heck, if it weren't for the latter, 1/4 of my neighbors would have to leave the City.  Btw UBER makes Air look like a law abiding George Washington.  Half the time I hv no clue who my new "neighbor" is.

 

Mon, 08/10/2015 - 15:52 | 6411154 Skateboarder
Skateboarder's picture

You can call them "neighborists": Neighbor + tourist.

Mon, 08/10/2015 - 15:54 | 6411161 Handful of Dust
Handful of Dust's picture

Money laundering has never been better from what I read/hear. No questioned asked when some Chinaman, Russkie, ME Muslim, Nigerian, etc shows up with $5 million to buy 2-3 houses.

 

You mentioned several causes above...I would add Globalization.

 

 

Mon, 08/10/2015 - 18:14 | 6411652 Mr. Ed
Mr. Ed's picture

...yes, they are a bit lax when it comes to criminal foreign nationals and money laundering; but as a counter-balance, the "Patriot Act" -crazed banks are busy flushing out domestic extremists!!!

Just try to open a checking account if you are traveling and don't have a permanent physical address where they can find ya (you never know, ya know)... ain't gonna happen.  NO CHECKING ACCOUNT FOR YOU!

So, if you're a domestic extremist (extremely honest, extreme conscientiousness, have extremely strong belief in the constitution, etc) or, you just wanna open another checking account and you're always traveling, you better be careful.

/s

Mon, 08/10/2015 - 15:55 | 6411164 ZD1
ZD1's picture

WTF? How does Trump suck all the oxygen out of the system driving prices up?

Tue, 08/11/2015 - 13:47 | 6411082 RaceToTheBottom
RaceToTheBottom's picture

Since banks do not have to account for the worthless houses still on their books, why should people be concerned with mundain things like paying their mortgages?  Are not companies, people?  If they get bailouts and being thought of as TBTF, why not people?   We are obese enough to count as TBTF...

 

Just print up a few more tens of Trillion dollars.  Better yet, give the houses away.  Give one to every mom that squeezes out another baby...  Give them two if they name their kid after the bankster company they are emulating.  Maybe three if they name the budding Fegusonite "Jaimie Dimon"

Mon, 08/10/2015 - 15:31 | 6411088 buzzsaw99
buzzsaw99's picture

hud and the fha have done more to ruin real estate values than the fire bombing at dresden in 1945

Mon, 08/10/2015 - 15:32 | 6411092 Dr. Engali
Dr. Engali's picture

"This fear is preventing the industry from innovating and creating new products to meet changing needs."

WTF? It's the creation of monster financial products that got us into this mess. Here's a novel idea; require the buyers to have a down payment and make the banks hold onto the loans so both parties have a vested interest in making sure the underwriting is sound.

Mon, 08/10/2015 - 15:36 | 6411106 gregga777
gregga777's picture

The government exempts itself from the Law. I exempt myself from the Law. I recommend that everyone exempt themself from the Law.

There! Parity at last!

Mon, 08/10/2015 - 16:43 | 6411332 negative rates
negative rates's picture

There is a law for unis, and there is a law for weins, and they AINT the sang law!

Mon, 08/10/2015 - 15:55 | 6411166 dexter_morgan
dexter_morgan's picture

Thank you admiral Akbar.

Mon, 08/10/2015 - 15:57 | 6411176 TeethVillage88s
TeethVillage88s's picture

Anyone else here think the thumbnail looked like a Vagina?

Mon, 08/10/2015 - 18:31 | 6411770 Consuelo
Consuelo's picture

With the obligatory upside-down 'triangle trim'...?

Mon, 08/10/2015 - 15:57 | 6411181 it aint paranoi...
it aint paranoia if they really are out too harm you's picture

Policymakers have swung from no regulation to over-regulation, starting with the Consumer Finance Protection Bureau  

 

There are regulations (law/regs as written) and then there is whether or not the regulations/ laws are enforced.  Two different steps, now add selective enforcement/ Corzine effect.

 

How can there be "no regulation" given the behemoth that is our government and the pages upon pages of regs produced daily? 

 

Maybe better to say policymakers went from never regulating the Finanacial Class Criminals to faking regulation of the Finanacial Class Criminals

 

Or maybe they went from faking to regulate the Finanacial Class Criminals to faking it worse, add in more lawyers, find a scapegoat.

Mon, 08/10/2015 - 16:42 | 6411320 Fiscal Reality
Fiscal Reality's picture

A couple of additional points need to be made about the housing market and why it is out of balance.
1. Housing is predominantly demand driven. Supply FOLLOWS demand, so the market is never completely balanced. Demand is currently being driven out of balance by limited supply, lower lending standards, and buyer expectations of continued price increases.
2. Historically low interest rates make home prices historically high. This pricing distortion is masked by the "low monthly payment" psychology.
3. Wall Street, the FHA, and the federal government are complicit in this charade because they allow disassociation of lending risk. The "lenders" have no risk because the loans are pre-sold, the risk is shifted to the American people ( we guaranty the loans through the FHA) or to the end owner.

There are many other factors but these jump out as red flags.

Until the purposeful manipulation ends, or the buyers takes smart pills, this will continue. It will end just as ugly as 2008.

Mon, 08/10/2015 - 19:14 | 6411931 theyjustcantstop
theyjustcantstop's picture

would reverse mortgage have anything to do with all this data, and who buys these reverse montages?

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