Three "Red Flags" That US Housing Is Starting To Roll Over

Tyler Durden's picture

With the S&P500 hitting new all time highs every day, one question that has emerged is whether this newfound "paper wealth" is finally trickling down into the US housing sector which still has to surpass its pre-crisis levels.

Alas, a new report shows that a new threat is emerging for US housing. Or rather, an old and very well-known one: house flipping by third party investors at auction is back with a vengeance. According to RealtyTrac, the share of foreclosures snapped up by third-party investors at auction just hit a record 31% in June. This is a redux of the "same fervent speculation that pushed the housing bubble."

 

Call it Red Flag #1:

 As Bloomberg puts it, "almost nine years after the housing-market bust helped trigger the most recent recession, RealtyTrac senior vice president Daren Blomquist sees the industry waving a red flag."

According to Blomquist, many of the third-party buyers are inexperienced "mom and pop" investors with less experience, said Blomquist. At the same time, institutional investors, a subset of the third-party investors who purchase at least 10 properties a year and who are more familiar with the nuances of market supply and demand are ducking out of the market.

"It's somewhat counterintuitive — as the market gets better and there are fewer foreclosures available, demand for those good deals, those bargains in the market goes up," said Blomquist. "When you see this high percentage of the properties going to third-party investors, that is a sign that these speculators may be over-inflating the market."

Bloomberg adds that the third-party investors are gaining a bigger share of a shrinking pie, as foreclosure auctions made up 8 percent of all home sales in June, the lowest since August 2006. Meanwhile, institutional buyers made up about 38 percent of those investor purchases at foreclosure auctions in June, down from a steady trend of around 50 percent in the first five years of the expansion, the data show. They accounted for 2.5 percent of all home purchases in June, down from a peak of 9.8 percent in February 2013.

While investors at foreclosure auctions could rely on about a 40 percent discount from the previous sales price in the early years of the expansion, this year they're only garnering about a 30 percent markdown, Blomquist said.

"The pressure is building in the pressure cooker, and at some point that's going to need to be released," Blomquist said. There's a little time — "probably not in the next month or two but in the next couple of years," a downturn should set in, he said.

Overall, the housing market looks great so the latest data showing a rise in speculation by non-professional investors was an early warning signal, Blomquist said. "Real estate is cyclical — it's not this steady trend upward."

Why is this a red flag? Because the same kind of decline in institutional buyers was a dramatic harbinger of the last downturn as more seasoned stakeholders headed for the sidelines.

"Their analytics are telling them it's not a good time to buy — that's definitely another red flag that they're pulling back at the same time as the less savvy investors are ramping up," he said.

Which brings us to Red Flag #2:

Because one thing they may be looking at is the startling decline in spending on furniture and home goods stores, traditionally a reliable metric for concurrent interest in home purchasing.  According to the latest aggregated Bank of America credit and debit card data, spending at home goods stores has been on a slowing trend since the middle of last year. However, the most recent data shows a tick lower, with the yoy pace reaching the lowest since the recession period.

BofA adds that it sees a similar pattern with spending at furniture stores. "This shows that consumers have delayed spending on housing-related items, which could be a sign of weakness for the housing market."

And then there is Red Flag #3.

In its latest survey of real estate agents, Credit Suisse reported that "Traffic Stumbles with Economic Caution Compounding Inventory Issues." This is what else it found:

Traffic Falters in June: Our Buyer Traffic Index took a sizeable step back in June, slipping to 41 from 52 in May, indicating traffic levels decidedly below agents’ expectations. The decline was also more severe than recent years’ sequential change (-11 pts m/m vs. prior 5-year avg. of -2 pts). Our Weighted Traffic Index was down 10 pts m/m. Although some local markets remain on solid economic footing, more agents are citing buyers’ concerns with the broader economy and volatile financial markets as holding activity back. Moreover, high-end market trends continue to lag those of the low-end in many metros. Prospective buyers also continue to be deterred by a persistent shortage of affordable inventory across markets, with agents frequently highlighting buyer pushback to rising home prices. On the other hand, agents repeatedly mentioned that low mortgage rates were crucial to supporting demand, a trend that merits watching given the decline in rates in early July. All regions showed sequential declines, with the Pacific Northwest the most resilient market and the sharpest falloffs in Florida and the Mid-Atlantic.

 

Most Markets Fall Below Expectations: In June, only 8 of the 40 markets we survey saw higher than expected traffic (17 in May), 7 saw traffic in-line (10 in May), and 25 saw lower than expected traffic (13 in May). The Mid-Atlantic’s decline was driven in part by Philadelphia and DC, while TX saw weakness in Houston, Dallas, and San Antonio. FL disappointed in all markets except for Tampa, with Fort Myers, Miami, and Sarasota soft. CA deterioration was led by Inland Empire and SF. Stronger markets included Seattle, Portland, Denver, Minneapolis, Austin and Kansas City.

 

Pricing Gains Remain Broad: Our Price Index edged down 3 pts in June to 71 from 74 in May, still indicating widespread price appreciation. Despite the softer traffic and buyer pushback on prices, the low rates, relative lack of quality inventory and resulting competition between buyers are continuing to allow sellers the upper hand. Of the 40 markets we survey, 34 saw higher prices in June (35 in May), 3 were flat (2 in May) and 3 declined (3 in May). Strength was seen in Raleigh, Seattle, Denver, Orlando, Charlotte, and Inland Empire. Houston prices declined for the second straight month (and 8th of the past 9).

Ironically, as the Fed remains desperate to push rates higher (but not too high) to signal a recovery, the direct impact would be to make housing even more unaffordable for most buyers who, if CS is correct, are increasingly on the fence about jumping into a purchase. A quick look at the latest MBA mortgage purchase numbers reveals that the bulk of recent activity has been in the refi arena, with very few new actual purchases as is, as such higher rates would only further depress demand for housing.

Which begs the question: has the Fed thrown in the towel on reflating US housing - the one asset in which the US middle class has historically invested the bulk of its net worth - and is now focusing solely on the S&P which remains the playground of the 1%? If so, the surge in populist anger witnessed around the globe in the past year is certain to get even worse in the US, just as racial and class  tensions in the country have never been worse.

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ss123's picture

Something's happening because CNBC has been talking 'money on the sidelines' lately.

Exact same language they used during the Great Recession...

Life of Illusion's picture

 

STOP FED MBS PURCHASES AND SEE WHAT HAPPENS IN A "REAL" REALESTATE MARKET!

 

https://www.newyorkfed.org/markets/ambs/index.html

yrad's picture

"Overall, the housing market looks great so the latest data showing a rise in speculation by non-professional investors was an early warning signal, Blomquist said. "Real estate is cyclical — it's not this steady trend upward."

Lesson learned?!?! Golf clap...

Harry Paranockus's picture

It isn't going to stop. It is planned.

Goldbugger's picture

Such a move in the euro to exceed last year’s high would most likely result in a tremendous setup for a FALSE MOVE and the slingshot we see that appears to be unfolding from next year onward. Everything from oil, turmoil in Saudi Arabia, commodities (including metals) to stocks, bonds, and currencies, are all warning that we will see the crazy times ahead in trading where most will lose everything.

https://www.armstrongeconomics.com/future-forecasts/are-the-markets-crea...

Hohum's picture

There's a nice house on my street that's been on the market for two months. It must be the end of the beginning, at least.

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) Jul 14, 2016 11:10 AM

1 Red Flag that its not rolling over fast enough: Check Zillow home sale prices in your local market and be amazed at how high the numbers are.

NumNutt's picture

Funny you say that, I have been trying to use Zillow to locate investment properties, and dammit it is worse then Craigslist, if it is a good deal it has a contract on it in like 15 minutes.

Houses Depreciate's picture

Houses are never an investment.

Harry Paranockus's picture

They are when you buy one for $212,000 and sell it 5 years later for $430,000 and both times without a realtor.

Houses Depreciate's picture

That and a dollar will get you a cup of coffee.

 

Post a link.

catalysis's picture
catalysis (not verified) NumNutt Jul 14, 2016 3:33 PM

Where I live, houses are already sold and closed before they even hit zillow.  You need to have MLS access and make your offer within 24 hours (preferably all cash or it will not be a strong offer).  Out west, the housing market is HOT.  Typical offer is 10-20% over asking, close in 7 days.  People who say nothing is selling must live out in rural midwest or undesirable metro area like detroit or chicago.

tryinsohard's picture

Check out MEDIAN home prices on FRED

Houses Depreciate's picture

Problem is nothing is selling. 

 

Remember.... I can ask $$50k for my ten year old Chevy Pickup but where is the buyer at that price?

 

So it is with all depreciating assets like houses.

Abitdodgie's picture

As an indecator I follow my old house in Venice CA and its price peaked in Jan at 2.2 million , last month alone it fell by 56,000 dollars so yes I think we are past peak.

Here2Go's picture
Here2Go (not verified) Abitdodgie Jul 14, 2016 11:20 AM

How can that happen? Isn't that where they filmed 'Roller Boogie'? That area should be a National Park by now.

buzzsaw99's picture

Ironically, as the Fed remains desperate to push rates higher (but not too high) to signal a recovery, the direct impact would be to make housing even more unaffordable for most buyer...

WRONG ANSWER BITCHEZ. mortgage rates are set by the us 10y, not the ffr. any asserted correlation between the ffr and the 10y is spurious. egad i get tired of pointing this fallacy out on here.

First There Is A Mountain's picture

Raising rates and sending yields higher (10-year too) doesn't equate to a higher fixed 30 year how?? Of course housing prices will decline in response to higher lending rates but I'm confused why you think raising rates won't impact lending.

Tyler Durden's picture

This article said rates, not short-term rates. That's what helicopter money is for: to force a selloff across the curve on a surge in inflation expectations

Consuelo's picture

 

 

 Nothing said about the overhang of forclosures (off the books presumably) leftover from the last wash-out.   Did all that Bank-owned inventory get bought up...?

venturen's picture

MUST HAVE NEGATIVE RATES....then mass extinction event!

 

 

tryinsohard's picture

If you look at median home prices, instead of average prices which are skewed by high end homes, the worm has already turned.  Check out FRED median home price chart yoy

Pumpkin's picture

I just came here looking for more boobs.  I hate charts.

monad's picture

foreclosures snapped up by... a record 31% in June

the grateful unemployed's picture

in this part of socal projects of scale are what really moves. go big or stay at home

Youri Carma's picture

Finally watched The Big Short (2014) yesterday, better than I expected btw. Because I hate to catch up on an ol movie when a new one is coming out.

RMolineaux's picture

Are we supposed to shed crocodile tears over the withdrawal from the market of professioanal speculators who now can get properties at "only" a 30 percent discount rather than the previous 40 percent?  What we need is a correction of home prices where necessary to put them within reach of a larger number of buyers.  Low mortgage rates help, but they have gone down to the point where lenders will disappear as soon as overall interest rates make the smallest move upwards.