Guest Post: Charting The Housing Market

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

Charting The Housing Market

By a number of measures the housing market has not recovered.

I asked frequent contributor Chartist Friend from Pittsburgh to apply his technical insights to the housing market. His charts and observations are illuminating:

I've looked at the charts a little further, and the pattern that emerges is this: fatal collapse - attempt at resuscitation - imminent reading of the last rites.


In technical terms that would translate to "a" wave breakdown (in most cases to new lows), "b" wave correction/pullback to previous support neckline, then "c" wave to lower lows.


It saddens me to have to report that, even with mortgage rates at historic lows, the American housing market is dead.

Let's start with the backbone of affordability, the mortgage rate. The Federal Reserve has pursued two strategies of resuscitation: lower interest rates so mortgage rates have fallen to historic lows, and purchase impaired mortgages to clear the system.

In this chart depicting the mortgage debt change from the previous year, we see that the year-over-year change in mortgage debt skyrocketed in the bubble and plummeted in the post-bubble collapse. Despite the Fed's $1 trillion purchase of mortgages and super-low mortgage rates, mortgage debt has barely budged.

In terms of housing prices, year-over-year price change in the 10-city Case-Shiller Index recovered sharply from the bottom but has once again turned down.

The Consumer Price Index (CPI) measure of housing costs (once again, year-over-year change) has traced out a similar pattern of sharp recovery and renewed decline. Recall that the CPI uses "owners equivalent rent" as the basis for calculating housing costs.

Housing starts--the key metric of building activity and employment in residential construction-- bounced from the post-bubble lows but remain at historically depressed levels.

Single-family home sales sharply rose as prices fell and "short sales" (in which the bank sells the home for a price which is less than the outstanding mortgage) paid with cash (reflecting investor activity) rose to 25% to 30% of many markets.

Lennar Corporation, a large home builder, can be viewed as a proxy for the home building sector. The stock has recovered but has traced out a bearish flag pattern and appears to be close to rolling over. This may reflect the realization the housing recovery has stalled.

Add all these charts up and we get a snapshot of a housing recovery that seems to have stalled or rolled over. The reasons why are apparent: mortgage debt remains elevated, a vast "shadow inventory" of underwater or foreclosed homes remains off the market and household income has stagnated or declined, as reported in What If Housing Is Done for a Generation?.

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Spitzer's picture

How can I  pull a John Paulson on the housing bubbles in Canada and Australia ?

People here are still full on retard. You  tell them that house prices could go down and they roll their eyes and laugh at you. They even laugh if you tell them to hold off on buying. "If you dont buy now, they will be just 100k more next year"

monkeyboy's picture

The Oz housing market blows me away! I never thought the market could defy gravity for as long as it has, it perplexing, totally mind boggling.

Prices have definitely come back here in Oz, but they still seem to be at stupid prices.

Spitz maybe we can get our own Short Oz Mortgage fund going ;) 

(we don't have subprime here in Oz just as the banks &  REIA keep repeating that mantra in the news! Safe as houses here in Oz)




Village Smithy's picture

Keep in mind that relative to China the CAD and the AUD markets are very small, and thus easily influenced by Chinese demand. The story in Vancouver and Toronto is that the Chinese are pulling out money from their domestic economy and diversifying. Couple that with Chinese benchmark rates at 6+ % and CAD's at 1+ % and its easy to buy in Canada and keep your Yuans invested at home with a nice carry profit to boot.

Metalredneck's picture

Hongcouver & Tranna are going squirrelly, still.  Things in my half-acre have dropped 15% YOY.  Financialization is making me use my still in the woods a lot more.

Spitzer's picture

We should.

What could be more of a sure thing.. I don't know why these bubbles are not talked about more. But I guess nobody learned from the RE bubble in Japan, nobody learned from the US bubble so Cad and Aus will go out with the same bang with the typical end result.

FranSix's picture

From watching interviews in the business channel, hedge funds and banks are short.  But they would be far ahead of the curve and have to pay pennance for an exaggerated period of time before the asset price collapse.

I think it should happen soon, now that the down tick rule has been abolished in Canada since last year.  It would have been abolished during this session of parliament, though it has had virtually no effect whatsoever.

What we have occurring in Canada is an unprecedented banking bubble.  Share prices saw their high as late as spring, 2011, and rallied this year to near their previous high.  You want to short the housing bubble in Canada, you short the banks.

Easier said than done.  Just like buying TBT over TLT, you would have said that TBT was a sure bet a few weeks ago, but been ultimately frustrated in your investment resolve.

Arnold Ziffel's picture



The other CA bubble – Canadian housing bubble ripe for popping. Vancouver real estate increased by 142 percent from 2002 to 2011. Average detached home in Vancouver costs roughly $1 million while the median household makes $67,000 per year.

Diogenes's picture

1) Everyone knows we are due for a period of high inflation because of rampant borrowing and money printing.

2) Mark off Toronto and Vancouver on a map of Canada. You will see 2 tiny dots on the biggest land mass in the world.

3) Check house prices anywhere in Canada outside of Toronto and Vancouver. You will see they are just about the cost of building a replacement house, slightly lower than replacement, or much lower depending where you are. Canada never had a crazy boom in housing in the 2000s because we did not have the crazy lenders making crazy loans.

4) Canada's population is growing thanks to loose immigration laws.

5) Living in houses is very popular due to the cold weather. There really is no alternative.

Therefore I don't see any big drop in house prices outside the 2 cities named.

By the way I bailed on some good RE investments in small town Canada in 2008 fearing the same thing was going to happen in Canada as happened in the US. Prices dipped 5% or 10% for a month or 2 then took off again. Wish I had those houses back at the price I sold them at.

When you see the same predictions fail to come true for 4 or 5 years in a row as I have you begin to doubt them.



Element's picture


That's not what I'm seeing and hearing anecdotally, and seeing on the streets, there is distinct and mildly worrying softness in RE in aust, except within areas the pop is growing fast, due to minerals boom (which continues to grow strongly, but seems less over-the-top than in 2010), and resulting internal migration to the north, and West, soaking up available houses and units in those areas, and yes, people are mostly optimisic to complacent in these prosperous areas.

But where they are leaving is declining, as the previously extremely high immigration rates have also become a very VERY hot potato.  Tourism has also died back, people don't have as much money and previous tourism dependent centres are in a protracted economic mallaise since early 2009 GFC and global trade collapse.  And of course the AUD gives us much cheaper electronics than before, but now our major retailers are closing stores everywhere, and whole national chains are beginning to close.

Resulting in high and rising CRE vacancy in many areas ... but not everywhere

It is a slow attrition that's been taking place over the past 4 years, so when another Lehman's + global trade collapse takes place, we will no longer be public debt free, with a huge surplus, and no longer accelerating into rising inflation and rates, and managing to avoid a technical recession, via direct heavy stimulus.

And one look at the poles trends, and recent election results, paints a clear picture that the lower 99% in Australia are very far from happy with the economic trajectory, or Govt, or policy settings and plans.

Today's sentiment is nothing like the growth mania atmosphere in early 2008, or even the resurgence of late 2009 and early 2010, for that matter.

That said, things are also not too bad in most areas, and there is steady but noticeably weaker demand.

2012 has so far been softer than 2011, and 2011 was a softer than 2010.

The momentum is not with us any more, we are at best coasting along now, so when the recession debt-revolt in Europe metastasises .. and the US debt-ceiling rating kafuffle and down-grade debacle erupts again, and markets shut up shop ... we will go into recession like the rest ... and that's without considering China ... not to mention, <shiver> Japan, who has been a massive trading-partner for several decades. 

But commodities and real assets will provide some backstop, and if the AUD tanks that also may be very positive domestically for currently AUD damaged sectors ... except that imported fuel will cost that much more again when AUD drops.

I think the net outcome is house prices are going to stagnate and fall, and are doing so.

Amish Hacker's picture

And just who is supposed to buy all those homes in shadow inventory when wages are flat-to-falling and jobs are scarce?

When the Fed hammered down interest rates, it wasn't to revive the housing market (as they claimed at the time), it was to save the TBTF banks. Mortgage rates are below 4% already. If low rates were really the answer, wouldn't we have seen some evidence of that by now?

Woodyg's picture

If the fed wanted to actually save the housing market they could have bailed out the underlying mortgage and homeowner which would have still saved the banks - but for cheaper than bailing out the TBTF banks and the highly leveraged Derivitized mortgage -

Considering the housing market is one of the main drivers of the economy - and considering that the fed has done everything in their power to destroy it I'd say the fed is in traitor to the USA territory.....

I've heard the banks are setting up a prop mgmt Corp to buy up the foreclosed houses on the cheap to further financialize the housing and rental market.

The citizens of the world had the right answer when they hung Mussolini from the nearest light post......

q99x2's picture

Housing prices fell for 30 years in Japan and then they had the Fukushima nuclear disaster. I will wait until after the revolution to buy.

flattrader's picture

and the news out of Japan just keeps getting worse.

The shaking and quaking won't stop.

Pictures of what's holding up SPF far.

New evidence that the 35 ton fuel rod crane fell into SPF #3

This appears to be recent video verification of what many assumed to be the case.

Houses in Japan will be mighty cheap real soon.

toady's picture

Buy low, sell high.

CoolBeans's picture

If the goobermint wanted to save housing - long ago they would've actually ENFORCED regulations on the TBTF banks and their servicers.  The TBTF banks get away with everything short of murder.  That's not a good reputation for repeat business from consumers.   

rosiescenario's picture

..and as prices decline, more home owners discover they are under water and elect to walk away, adding yet more supply. So far the retreat has been somewhat orderly...

spastic_colon's picture

what IF? IS done for a generation....wait until rates rise just 50bps....two generations!

Bam_Man's picture

Yes, thanks to the Fed mortgage rates are very low. But has anyone noticed how homeowners insurance rates have skyrocketed? Thanks to ZIRP, the insurance companies now earn peanuts on their bond portfolios and (surprise!) have had to sharply raise premiums to make up the difference. Yet another example of how what ZIRP provides with one hand, it takes away with the other.

Bicycle Repairman's picture

Forget about charts.  Just think through all of the drivers of housing prices and the long term effect of them.  Housing as a whole is going one way: down.  For a generation.  However, housing markets are local and there will be differences by locale, so your mileage may vary.

AndrewCostello's picture

Housing is still grossly overpriced and that won't change until we stop all the manipulation.  We have protected people who wanted to buy and flip homes for 50 years, and it has been a massive drain on our planets wealth.


Read this and get out from under the tyranny now.

tahoebumsmith's picture

Until home prices fall in line with median household income, prices will continue to drop... It's really that simple. Without the bag of tricks Wall St. used to blow up the housing bubble ie.. Option arms, alt a, no income verification loans ect... to sell their MBS and CDOS as AAA investments to suckers, the housing market will continue its decent into the abyss because Joe the Plumber can't qualify. Median household income is close to where it was in the 90's so just Zillow your house back in 1998 and there you will see the true value. If your home was built in 2005- 2012 don't even bother, just take what you paid and subtract 45% to find where the bottom is. Jobs being created at Walmart and Walgreens is not going to help the situation. Remember the spike in home sales when the Government sponsored the $8000 home buyer tax credit to hoodwink unsuspecting serfs into the American Nightmare? Well here we are 36 months later and a large percentage of those loans are already underwater and in default. BRAVO! Give it up already, either you can afford a home or you can't... Most people can't and as incomes continue to drop and inflation continues to nickle and dime unsuspecting prospects, the reality will be clear that home ownership will become a less likely option for most... If you want a good RE investment tip here is a good one, trailer parks.

flattrader's picture


IIRC the place where home price equal 3x median income (for conventional 30 yr. fixed rate loan, not mortgage theivery with tricks) takes us back to mid-early 1990s.

We have much further to fall...and will.

Amish Hacker's picture

+1, Mr. Smith. The other likely growth industry, in addition to trailer parks, is going to be property management. When the Warren Buffets of the world start snapping up thousands of homes and apartments and renting them out, someone is going to have deal with all the "tenants and toilets."

In parts of southern California right now, it's cheaper to buy than to rent. In other words, the market thinks that there's a lot more downside to house prices, and people are willing to pay a premium to avoid owning a still-depreciating asset. 

TMT's picture

Very bullish for Class B and Class C apartments.

One other point worth mentioning - if (a big if) the residential market metrics start to show signs of life there are two big headwinds that will pull it back down.  First, the stigma of renting is virtually gone.  People now see that buying a home isn't a sound long term investment.  Second, many of the homes are being purchased by investors (~40% in my city).  These investors will flood the market with inventory once they can make their lift.

besnook's picture

the biggest difference between the japanese market and the usa market and zirp is that japan was(no longer) in a classic deflationary cycle where ALL prices went down, not just asset prices, and savings were huge. the average japanese person has benefited in many ways from the past 20 years as the increased purchasing power of their money offset income and asset stagnation.

in the usa the average american has been screwed. his main asset has lost value, there is hardly any return on savings and the price of necessities has inflated while wages have deflated.

so what will the real estate market do? homes need to be affordable for the new poor american so there willl be a return to the 1200 suare foot house at a price under 150000. a household income of 40 thousand can afford it. the oversupply is in the mcmansion market. no prudent person wants one anymore so the price will have to drop below $100/sq.ft. to get any interest.they may even be split into 2 or 3 unit apartments to make them a viable investment.

so until this transition takes place the market is dead.

Dingleberry's picture

I recall hearing a proverb (I think Chinese) that went something like "wealth does not survive three generations"

first generation parties on and loses their wealth

second generation learns hard lessons from generation #1

3rd generation forgets it all and squanders everything on whores, booze, stocks, and in this case houses.

Welcome to the 3rd generation, bitchez.

Which means we have about two generations to go before we re-bubble the housing market. Before you laugh....look at Japan. And our own markets. And adjust for REAL inflation....not the hedonically adjusted shit.

Diogenes's picture

I think you mean the American or possibly English proverb, shirt sleeves to shirt sleeves in 3 generations.

Meaning, first generation rolls up their sleeves and goes to work, amassing a fortune.

Second generation, party hearty

Third generation, broke and back to work.

The US has been in second generation mode since the sixties.

Stuck on Zero's picture

I see Green Shoots in those charts!

Westcoastliberal's picture

Many homes built in the past 10 years in California are subject to "Mello-Roos" taxes, meaning the developer, instead of paying for the roads, sidewalks, streetlamps, etc. to develop a community simply passed these costs onto those buying the homes.  The amount is fixed against the size of the home and can effectively double the annual property tax the home is subject to for a period of 20 years or more.

These communities, usually out in the boondocks and not commuter-friendly, will become the new ghettos of America as the taxes will wipe out any buyer advantage of lower purchase prices.  No one will buy them.

BlackholeDivestment's picture, ''own'' a home. If you have ever paid in full for your home, you know you never owned it, every time you paid property tax. You can't call yourself free and independent as a home owner if you pay anything beyond the full price. Land of the free my ass. American freedom and independence does not exist, that is a bad joke and a lie taught to children by the public joke of a school system, run by commie bastards. Only in a commerce tax only system can you be a free and an indepenedent owner, otherwise you are paying for a prison cell evil bastards built.