Guest Post: The Housing Recovery - Based On What?

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

The Housing Recovery: Based on What?

The real-world foundations of housing--income, debt levels, housing formation and jobs--are all weak or declining. How can housing "recover" if its foundations are crumbling?

The real estate industry announces the housing recovery is finally underway every year. 2012 is no different from previous years: various positive data points are duly cherry-picked (multiple offers are back in West Hollywood, sales are up year-over-year in Las Vegas, inventory is down, etc.) to back up the claim the "bottom is in" and the recovery in sales and prices is rock-solid.

We understand the industry's extreme self-interest in attempting to re-inflate housing, but let's begin with the obvious question: what's the housing recovery based on? The standard answer is of course "super-low mortgage rates, courtesy of the Federal Reserve."

But people need a sufficient income to qualify to own a house, regardless of rates, so let's look at income by age, and focus on the key homebuying ages of 25 to 44. The only age group whose incomes continued rising during the past five years is the over 65 cohort--the very group who is "downsizing" or selling their homes to live in assisted living. The key homebuying cohorts have seen their incomes plummet since the housing bubble popped.

The official employment numbers are flim-flam because they include self-employed people earning $100 a year, people working one hour a week, temp jobs and contract labor, none of which supports the purchase of a house. The only jobs that enable home buying are full-time jobs with benefits. (If you have to buy your own healthcare insurance, that is so expensive it stripmines the household budget of disposable income. Only the top 10% can afford their own health insurance and a house.)

The number of full-time jobs has crept back up the level reached 12 years ago. Regardless of who you count in the workforce, tens of millions of people have joined the workforce since 2000, but the number of jobs that can support buying a house is unchanged.

There are 75 million households that own a home, about 65% of all households, so how many people who don't already own are qualified to buy a house?

This chart of "jobs plentiful less jobs hard to get" gives us some idea of the job market from the point of view of those seeking employment, and it's not exactly rosy.

Given the poor prospects of full-time work, it's no surprise that household formation is trending down. It might seem that household formation correlates to population growth, but that is not the only factor: you need a decent income to afford an apartment or house of your own.

The future home buyers of America are staying in school to live off student loans and living in the basement/their old room at home.

Since the interest rates on student loans can be higher than mortgage rates, $100,000 in student loans will cost as much as a mortgage. Everyone with a mortgage-sized student loan will be unable to qualify for a mortgage unless they vault into the top 15% income bracket. Everyone below that high-income tier will have too much debt to qualify and too little income to service hundreds of thousands of student-loan/mortgage debt.

It boils down to one or the other: get student loans and forget owning a home, or avoid student loans and eventually hope to qualify for a mortgage. Few will be able to do both.

According to the Wall Street Journal, the Fed is worried about the "debt divide:" most people are over-indebted and cannot qualify for more debt, while those in the top income tier are scooping up cheap loans because their debt load is modest and their incomes are high.

The Fed's goal is to turn every American household into debt-serfs, and its very success has it worried: now that it succeeded in turning 95% of households into debt-serfs, they can't take on more debt to fund their consumption. Only the top 5% can borrow, and a lot of them are wary of debt and won't borrow more regardless of the low rates offered by the "pusher," the Fed.

Millions of households are valiantly paying the mortgage even though their house is worth considerably less than the mortgage, i.e. they're underwater. The key take-away from this graph is the enormous pool of homeowners whose primary incentive to keep paying their mortgage is the hope that housing prices recover sharply enough to enable them to get out from underneath their mortgage. If that hope fades, then the incentives to keep dumping money into the mortgage for decades fades, too.

For some of these underwater owners, it may be cheaper to keep paying the mortgage than it would be to rent, so it makes sense to stay put. Others may want to keep their credit unimpaired so they can borrow money for other purposes. The key point here is there is no equity to tap, and there is little equity being built. If the mortgage is $150,000 and the house is worth $100,000, then equity will finally appear when the principal loan balance dips below $100,000. If the owners have a standard 30-year mortgage, that principal reduction takes a long time.

In the meantime, the Fed's stealth campaign to inflate away the value of the dollar is eating away at the purchasing power of whatever equity is built. If the mortgage is finally paid off 25 years hence, what will $100,000 be worth in terms of real-world purchasing power?

The real estate industry is crowing that inventory is declining, but this could be an artifact of lenders gaming the true number of impaired mortgages. Anecdotally, there is evidence that banks (unless required by state law to report all delinquent mortgages) are not reporting all delinquencies. There are myriad ways to "hide" delinquencies and houses that are not officially in the foreclosure pipeline.

If we place ourselves in lenders' shoes, we would play the same game, too: artificially restrict the inventory going to market so supply will fall below demand. That squeeze will boost prices, and the lenders will be able to off-load their off-market inventory over time at much higher prices.

But gaming a market whose foundations are crumbling is not a long-term positive. If the homeowner isn't maintaining the house or paying the property taxes, the lender is paying those expenses. It isn't "free" to hold a house off-market; even zombie houses cost a lot to own.

That suggests lenders' gaming the inventory cannot stave off the larger cyclical forces that are pushing housing along an S-curve of stagnation and decline. The duration and channel of the S-curve's decline is unknown, but if we review the factors that must be in place for people to buy houses--stable full-time employment, low debt loads and ample incomes--we find weakness rather than strength.

Yes, there is plenty of buying by investors, and we'll look at that tomorrow.

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SilverTree's picture




Odyssey Marine suffered a costly legal loss to Spain over $500 million worth of silver and gold pulled from a sunken warship, but the two sides may work together again.

Spain's ambassador to the United States, Jorge Dezcallar de Mazar, conceded his country may turn to the Tampa-based salvaging company to recover artifacts from other shipwrecks.

Colombian Gringo's picture

Based on nothing except political promises.

Thomas's picture

In my little burg (Ithaca) houses are cheap and taxes are high. My four bedroom farmhouse with two acres and barn is $300K, but taxes are $10K. If you assume 4% of the value of the home in repair (i.e., depreciation), which is probably a low percentage estimate in cheap markets, then you add another $12K per year. My net monthly rent, therefore, is crowding $2000. Horrible? No. Higher than anybody else in town realizes? Certainly.

If I had a mortgage on top of that, you could add, at current rates, another $1000 per month.

ACP's picture

A recovery based on jack shit, BITCHEZ!

Oh yeah, and Jack left town.

bdc63's picture

Never foget: 30% of all homes in the United States are owned outrght (no mortgage)

SilverTree's picture

You still have to pay taxes so do you really ever own a home outright?

WTFx10's picture

The state takes it from you for your own good. The logic is flawed. You pay for a home, you pay a hefty price in interest to the Bank for creating the loan.  Yet if you can not afford your taxes the state reclaims the land&home and releases it back to the banks to generate more Taxes to pay the loans the state has with the Banks.

America land of the free & home of a commodity of 330 million + - Americans

Well I guess the logic isn't flawed if you are the banks and the State.

Well they say Life ain't fair here is one reason of many.


riphowardkatz's picture

You still have to pay taxes on your silver.  Do you ever really own it?

Rentier's picture

"You still have to pay taxes on your silver." that is funny.

Jumbotron's picture

You still have to pay taxes so do you really ever own a home outright?


Amen brother.  You may own your HOUSE.....but if you don't own the land underneath it you do not own your HOME.  And if you have to pay property tax then you do not and will never own your home.

mrktwtch2's picture

i only have 6 yrs left on mine and then i will own it clear and will be nice to finally be rid of that pesky 1100 a month payment..

Seasmoke's picture

sorry to tell you but you will never own it

kito's picture

even in north dakota, where the teachers unions killed an amendment to end property taxes............

meanwhile the only ones buying houses hand over fist, and in effect skewing the numbers for now, are the large investors/hedge funds....who see the future in single family rentals.....the american dream has been slashed and burned.................

swamp's picture

And teachers' salaries are funded by ....

Dr. Richard Head's picture

Shit, 25 years left here.  Just refied into a 3% (after being in the house for 5 years) and kept the 25 year mortgage.  Others have been encouraging me to pay down that debt at a quicker rate, but the inentive to do so (housing values 23% in my hood and falling).  then again, tit would be nice to be out of mortgage debt. sighhhhh

WTFx10's picture

And what happens if you do not pay your property taxes? Who owns it then?

FEDbuster's picture

If you have no debt secured by the home, you can always tear down the house rather than let it go for taxes.  They will get the land, but they don't have to get the house.  Of course you have to pay for a permit to tear it down.

A Nanny Moose's picture

After the boating accident sent my small fortune to the bottom of the nearest body of water, I was so distraught, that I took up smoking and drinking. Curtains soaked in alcohol sure burn fast.


Itch's picture

Theres the Euro off to the races again, what a rollercoaster ride...i even threw up on the guy sitting behind me.

SwingForce's picture

If only those people underwater would walk away, we'd then have a whole new market of homebuyerz..... So, there you have it, the Builderz are getting screwed by the Banksterz- not by low mortgage rates or qualifying for a loan, but by holding the customers captive in their old homes. Crazee, man.

Vincent Vega's picture

I heard a radio ad today from the NAR touting the advantages of home ownership (puked a little).

Offthebeach's picture

It's The Flow, Baby! The action, the turnover, the sizzle. "
No Flow, no commish.
We could be colliding with Saturn in two weeks and agents would be saying now's a good time to buy.
Losing your house? Now's a good time to buy.
Going to prison, dying, just had your 12th birthday? Now's a good time.

davinci7_gis's picture

Hell I see all kinds of homebuilding activity going on ..well, at least I can say that I can see someone adding another room to that "van down by the river" - Matt Foley, Motivational Speaker!

robertocarlos's picture

Housing recovery will be based on zero interest rate mortgages.

riley martini's picture

Recovery = house prices based on millions of mortgages written using fraudlent incomes and savings .

davinci7_gis's picture

I can't wait until the rates get so damn low that the banks pay me to borrow thier money!!!!!

sessinpo's picture

That will happen when you become a bank. Even at ZIRP or below, consumers still pay to borrow or hold fiat currency. It is the primary dealers that get the discount you hope for.

riley martini's picture

 Recovery when real incomes and saving match the fraudlent incomes and savings submitted by the banks .

mind_imminst's picture

Funny thing where I live, they are burning a lot of houses, for fire-fighting practice. These are old homes for which there used to be buyers...definitely fixer-uppers...but live-able. Very cheap (sub $20,000 typically) but no one buys. The city condemns the property and burns the houses (has to be over a half dozen in my neighborhood in the past year). Now there are empty lots. Some people want to make tiny parks of the lots (which happened to one of them). The city hopes someone will build a new Mcmansion or business on the lot, but no one can afford it. Catch-22. Destroy cheap housing, but then no one can afford to build a new one.

orangedrinkandchips's picture

people need a sufficient income to qualify to own a house, regardless of rates


Iconoclast's picture

What a thoroughly well researched and extremely well put together article, nice work.

Bicycle Repairman's picture

When the real estate industry "crows", they are lying.

SmittyinLA's picture

The soon to be indicted LA County Assessor John Noguez was replaced temporarily today by a vote from the LA County Supervisors, they unaminously voted to give the temporary replacement position to another long time County insider from another Dept with no experience.

No matter what, no outsiders are going be to allowed to review the Los Angeles Assessors office or its tax assessment and collection activities.

LA County is going to handle things "inhouse".



SeattleBruce's picture

Things are getting dicey in Kalifornia...

chistletoe's picture

I recently applied for a refinance mortgage for the house I live in.


My credit score is 821, in 30 years I have never missed any payments on any mortgage or other bank loan.

the new mortgage would be for less than half the nominal market value of the property.

The payments on the new mortgage would be 20% lower than my current payments, and only 17% of my income.


They did not turn me down, exactly, they just fell silent ... six weeks ago ....


Some recovery .....

Laura S.'s picture

We have the same problem in Canada. I read the Real Estate Board monthly report for B.C. every month and they never admitted that Vancouver is a housing bubble. This is just ridiculous. Home Prices in Vancouver and Canada just barely started to drop and suddenly the Real Estate Board started to talk about the recovery. Recovery from what? I feel sorry for all people who pay mortgages and live in those uncertain times. Lowering median income and more and more debt burden are destroying our countries. We need more government regulation in the housing market. I´m saying this since the real estate boom in the 90s.

Sokhmate's picture

I'm considering buying a house in 2034.

Sokhmate's picture

I've been hearing about people underwater on thier house for years now. I am amazed how long they can hold their breath. I would've been dead within minutes.