Guest Post: Housing Recovery - Hope And Reality

Tyler Durden's picture

Submitted by Lance Robert of StreetTalk Live

Housing Recovery - Hope and Reality


Every year for the past three years there have been recurring calls for a housing bottom and recovery. The importance of an eventual recovery in housing should not be dismissed as it is a critical component of an economic recovery due to the large multiplier effect of each dollar spent. The recovery in housing would signal that a foundation for a more lasting economic recovery would be in place. That is the hope anyway.

However, as we have discussed in the past (see here, here, and here) the reality is that while housing construction and sales may have bottomed after the largest decline in history, it is highly likely that a correction in prices likely has further to fall particularly if interest rates rise for any reason. The one overlooked issue is that while it is likely that housing may have found its natural bottom — a bottom and a recovery are entirely different things.

During the past couple of weeks there has been a tremendous amount of ink spilled in the press about home sales, both new and existing, starts and permits which all showed some very modest improvement. It is important to note that the improvement in the data is welcome news. It is a bit premature, however, for it to be called a recovery. With mortgage rates currently below 4%, employment somewhat stable, major banks continuing to stall the foreclosure process and the home buying season moving into full swing — we should see improvement in the housing data. If we weren't — that would be very bad.

The current "bottom," and I use that word loosely, in housing appears to have occurred in late 2010. However, we also saw a "bottom" in 2009 as well. With continued support to housing from artificially depressed interest rates, bailouts, write downs, forgiveness, tax credits and incentives — housing data does appear to show a bottom.

The most recent release of April's data, on the surface, appears to support the media's proposition that housing is in a continued recovery process. Not so fast. The problem with the April data, on a seasonally adjusted basis, is that this was the warmest April in six years and the second warmest in the past 31 years. The unseasonably warm weather, combined with the lowest amount of precipitation in a decade, has artificially influenced the adjusted data in much the same way as we have previously discussed regarding the employment data. While April did show a rebound it came on the heels of two monthly declines and failed to fully recoup the previous losses. What was worse is that on a non-seasonally adjusted basis this was one of the weakest Aprils in the past decade for existing home sales.

housing-starts-completions-052512If you look at the first chart you can see that even with the many supports discussed above combined with depressed prices and unseasonably warm weather it takes a rather strong magnifying glass, and much "hope," to say that a recovery is here.

 Apart from new and existing home sales the housing starts, permits and completion data does not look much better. Considering these data points are still at the lowest levels since data began to be collected there is very little evidence that a recovery is officially underway. When these data points are combined with new and existing home sales we can argue the case for a housing bottom. However, a bottom and a recovery in housing, as stated previously, are two vastly different things.

This is evident by the data coming from the home building companies themselves as they continue to curb their inventory. This is a needed but defensive posture by the homebuilders and inventory has declined to a 5.1 month supply. Even given lower inventory levels it is still taking nearly 8 months to complete a sale. The reality is that the demand for homes remains extremely constrained and any negative shock to the economy could quickly turn the recent modest improvements back on their head.


Digging Into The Real Housing Situation

In order to really know what is going on in housing we need to look at the proverbial "forest for the trees" by examining what is happening to the total number of houses. We know that many housing units have been converted into rental properties in recent months as excess homes are sitting vacant. As full-time employment remains elusive, a large and available labor pool suppresses wages and access to credit remains tight - the dream of "home ownership" has slipped from the grasp of many Americans. However, as the population continues to expand, "renting" becomes the preferred choice. The chart shows the percentage of homes that are "occupied", either by a renter or homeowner, as a percentage of the total number of housing units in the U.S. There are two important issues in this chart. The first, and most obvious, is surge in homes being rented versus owned. The second is that home occupancy rates are only 1/2% higher today than they were during the recession. As I stated before — you must look very hard to find a housing recovery here.


One issue that will continue to confound the real estate market in the near term is the level of inventory that is being held off market for various reasons. This does not include the shadow inventory held by banks which is an additional issue. As we have stated in previous reports the housing market is driven by the activity "at the fringes" between those actively seeking to buy a house versus those with "for sale" signs in their yard. Today, roughly 1/3 of all homeowners are under water on their mortgages. Therefore, it is no surprise that many are holding homes as long as possible hoping for a price recovery. However, at some point these "vacant" houses, along with the excess shadow inventory and trapped homeowners, will come to market either due to force or desperation. The excess supply will continue to pressure home prices, more supply than demand, in the future further exacerbating the problem for those already drowning in their home.

Ultimately there is only one truth to whether there is really a housing recovery or not. How many people own a home? If new and existing home activity, as seen in recent reports, is truly on the rise then we should see the number of individuals that are "home owners" on the rise as well.


The chart shows the home ownership rate in the U.S. As of the latest quarter the level of home ownership has declined back to levels last seen in 1980 before the Savings & Loan crisis. That particular real estate related debacle had a profound effect on the real estate market at that time as homeowners mailed their keys back to the banks. It was then that the government set up the Resolution Trust Corporation to efficiently dispose of the houses that were required to be foreclosed on. While the level of home ownership "bottomed" in the early 80's it took more than a decade before housing, and consequently home "ownership" truly began to recover.

While there is a tremendous amount of hope for a housing recovery in 2012, just as there has been during the last 3 years, the simple reality is that a "real recovery" may be a very long time away. A weak economic environment growing at a sub-par rate, burdened by excessive debt levels which sap potential growth, high unemployment and rising temporary work suppressing wages, tight credit standards and trapped borrowers all work against a housing recovery at the current time. Unfortunately, for many Americans, the dream of home ownership turned into a horrifying nightmare. The psychological impact caused by the housing bust is also something that will impede a real housing recovery in the future until the painful memories have faded into the mist.

Is there a bottom in housing? It is entirely possible. However, for all the reasons stated herein, both financial, economic and psycholgoical, the "calls" for a housing recovery may be a bit premature. This is particularly true if our estimation of an economic recession in the next 18 months comes to fruition. The strains on the housing market caused by a recession will cause a secondary decline in housing. The reality of a recession is not a question of "if" — it is only a question of "when" and how bad will it be?

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HelluvaEngineer's picture

It's a great time to buy, rent, or burn a house!

world_debt_slave's picture

better success catching a falling, double edged, light speed, and multi-dimensional knife

Xkwisetly Paneful's picture

Left out deconstruct.

For the zerobrains outcome to materialize-sky rocketing commodity prices and a no bottom ever housing market- homes will eventually be deconstructed for the underlying raw materials.

Of course that is not happening in anyone's lifetime around here, leaving the imbecile to predict one comes down while the other goes up-or shockingly another two huge wrong calls by the zerobrains crowd.

Where's the gold recovery hope and reality?

reader2010's picture

Jim Rogers says the money can be made by converting those into pig farms.

HungrySeagull's picture

Well, some homes were worked on only to sit unlived... I suspect soon the scavengers will come.

Vultures, all.

They forgot one thing.

We are upgrading, adding on and making changes etc to support our paid for home into something that will bring even more money and raise value when, if ever it is time to sell.

It takes huge amounts of cash to make it happen.

slewie the pi-rat's picture

like what?  most of my friends who want to own a vault just buy a vacant bank

one guy with whom i did some deals about 25 years ago already had bought a bank building and rented out office and retail space

  • the vault still works, i'm sure, right?
  • yep!
  • what doya keep in there, jim?
  • bodies, slewie:  bodies!

now, i knew he was connected, but that was totallyRidiculous!

Rubbish's picture

Love the weaponry angle, just bought a tack driving scope for my .22 LR. Screw the house payment.

fuu's picture

"This is particularly true if our estimation of an economic recession in the next 18 months comes to fruition."

WTF have you guys been?


Bubbles don't just burst and then come right back. 

Seer's picture

Yup.  And when one bursts it doesn't reform on the very same thing.  The capital flees to another target, which, like everything else, piles up until IT pops; and only after this shift plays out would there be any such "return" to the previous crime scene (housing).

GubbermintWorker's picture

Bonds..........Treasury Bonds.

max2205's picture

Stocks. Stocks. Stocks. Blow Ben blow

HungrySeagull's picture

Burn Baby Burn.

There corrected for you.

Sometimes I wonder if wall street has slaves sweating in the toil and labor shoveling falling paper into the furnaces to generate power and keep the traders above comfortable.

Xkwisetly Paneful's picture

so I shouldn't be expecting gold to hit $2000 again anytime soon?

HungrySeagull's picture

Define soon.

when gold was 250 about decades ago, interest payable to you approached 15% in some banks.

No one imagined it will be 500 then 100 then make a run for 2000.

Unfortunately the 50 dollar run back in the Hunt Brothers time and the last year's assault was suppressed.

The more they suppress it this year the greater the power it gains.

In about 10 years or so Silver and Gold should be something worth fighting for.

Stack it and quit worrying about a buck here and ten there.

thiscreepingmalaise's picture

sheep fucker? Really? That's the best you got?  

No One's picture

"The importance of an eventual recovery in housing should not be dismissed as it is a critical component of an economic recovery due to the large multiplier effect of each dollar spent."

has someone done a study on the multiplier that these QE's, Bailouts, etc. have had on each dollar parked on a shaky balance sheet?

Yes_Questions's picture



Shakes the Balance Sheet Clown.


Available office parties, weddings, Bar mitzvahs and Gang Bangs.

reader2010's picture

The bust was artificially engineered in the first place, so that those big capital holders can finally lower the living standards in the West before they move their entire farming machinery to the East/South. 

devo's picture

I have a feeling we'll be having this same conversation in ten years.

Seer's picture

Own any carrier pigeons?  Just trying to figure out how we're all going to communicate after it all crashes... (and it WILL crash long and hard before 10 years' time)

Rubbish's picture

Blanket and a camp fire.

thiscreepingmalaise's picture

when a problem comes must whip it!

Mark123's picture

It is my understanding that almost all mortgages are now guaranteed by the government (i.e. taxpayer subsidized).  Until that changes there will be no recovery because uncle sam is broke and is quickly going to be forced by its lenders to stop supporting the market.


Just imagine what would happen if tomorrow we went to a free market system and all mortgages/loans had to be retained by the banks who issued them (no actual or implied govt backing).  I would guess that house prices would collapse by at least another 99%......

devo's picture

You know, I was going to write the exact same thing, but I'm a lazy American and figured someone else would do it. Thanks!

Ned Zeppelin's picture

It is quite true that well over 90% of all mortgages right now are through Fannie, Freddie, FHA or VA.  Once the private MBS bubble burst, the private mortgages were gone, the hole filled by the Feds,  There is no real interest on the part of any bank with half a brain (OK, that might be questionable to begin with but stay with me) to hold the paper on a conventional residential mortgage loan (look at the rates, with nowhere to go but up) so acting as a servicer for federal program mortgages is the only game in town. 

Right now, today, if those programs were to go away. . . . there would be no housing market. Period.  It would all be local and sporadic, with much higher interest rates to compensate for the need to hold the paper for an extended period (Duration risk). 


brettd's picture

How many homes DO NOT have a mortage?

If you own your home outright, does that make you the 1%?

Fox-Scully's picture

Whats a mortgage?  Doesn't everybody pay cash?

HungrySeagull's picture

We are outright and our utilities cost less than local rent. I suppose that makes us the 1% but you must consider much much much more expensive things like access to a light jet, limo etc etc... things that will make you a target.

Half the area is HUD. The rest is elderly housing.

Yes they are building new homes not far away.

Will we move? Possibly. Dopes it matter? No.

neidermeyer's picture

In Florida abour 45% of homes are mortgage free ... The remaining 55% are mostly underwater ... I see a scenario similar to my aunt in Brooklyn ,, she bought a house in 1973 at the bottom of the market and can barely make the tax payments ,, the residents in her neighborhood are now either rich Muslim immigrants or old people barely hanging on.

Dingleberry's picture

Ned is correct.  The Gov is the entire market.  No sane bankster or investor (or you) would touch backing mortgages for a few percent interest.  They would demand at least 7-10 percent for full doc loans. And you could guess what that would mean to prices......people buy payments, not houses.

narnia's picture

I wish I could short suburbia.

Tinky's picture

Too late; Howard Kunstler snapped up all of the best options years ago.

Ned Zeppelin's picture

you mean Jim Kunstler of The Long Emergency and Clusterfuck Nation fame?

YC2's picture

20 mins into my ambien I figured it all out.  




with Kevin Costner


Rated Arrrrr

Jack Burton's picture

It is quite true that any possible recovery in average house prices across the nation will be shot down in flames when a new technical recession takes hold in the USA. No matter the subsidies, the low interest rates and the tax breaks and hype, if the US goes into recession, the nation's workers will find it hard to buy a house and hard to get a mortgage.

The European, Japanese and perhaps even Chinese economic slides are going to affect an already debt soaked America. Remember too that the USA faces needed austerity to bring government spending down to a level tax revenues and borrowing can fund. This austerity, though badly needed, also bring with it a deep cut in spending into an already weak economy. US austerity will need to be decades long as the debt overhang is massive.

To sum up, their are a great mant reasons why the US economy will be dragged into a jobs killing recession and world wide economic and financial crisis. NO WAY this feeds a bullsih US house price jump. On the contrary, housing is dependent on workers incomes and job security, both are under grave threat!

Housing is toast, even if their may be local regional hot spots for real estate. The broader picture is one of more economic pain and NO reason to bid up house prices.

In fact, in my local area, the inability of people to afford to buy a house or their inability to get a mortgage with their weak downpayment abilities and threatened income earning abilities has put these people into the rental market. The rental market locally is coming under higher and higher demand. Some people I know who rent are faced with rent increases and landord demands for longer term lease deals. If the renter doesn't accept the new stricter terms, lots of renters are in line for the apartment.

Seer's picture

As usual, great post.

Further adding to the death-spiral is the fact that all this reduction in mortgage activity is also a BIG reduction in revenues for municipalities; municipalities then have to cull jobs, resulting in more foreclosures, lost revenues; and on and on down the rabbit hole...  A shame, as some municipalities are likely decent ones; they'll have been crushed by the trickery of the white-shoe-boys (who control the Federal govt and, the game).

pursueliberty's picture

My wife has sold around 10 non investor homes this year.  Only one was a conventional loan, the rest were USDA and a single VA. 


USDA is 100% financing.  No money down, no skin in the game, you don't even need to have $100 in your checking account.  As a matter of fact, one of the buyers couldn't afford a uhaul to move.  I think the minimum credit score is around 620.  How are these loans not asking for a foreclosure?


I have no problems finding great renters.  I've got a house that will be vacant in september that I plan to go up around 25% on.  I'll clean the carpet and mop and move in the next one.  Current tenant built a new home, but waited about 18 months to figure out what they wanted to do.

Overfed's picture

Sux that you can't have a USDA loan if you already own a home. :-(

pursueliberty's picture

You really should think outside the box, if you do indeed meet the income standards for a USDA loan.

What is to stop you from calling your current home a rental?

Overfed's picture

The credit report that shows a mortgage company as my only debt.

media_man's picture

Residential real estate will continue to decline until the employment situation reverses itself.  Why would anybody want to take out a 30 year mortgage to buy a home, only to be stuck with it when the layoff notice arrives?  Given the low return & high fixed costs (points, transfer taxes, maintenance) buying a home is a sure fire way to go broke.

Permanent professional jobs are all going the temp contractor route.  That won't change.  It may take some time but most people will wake up to that reality, & the notion of "owning" a home will have to be radically altered.  At the very least, eliminating the high fixed costs of buying / selling will need to be drastically reduced or eliminated. 

Rubbish's picture

Just rent an industrial unit and pretend your in business to survive. Pull an RV inside and good to go. Fire depts. are being cut anyway so inspections will be lax, leave your doors locked, make them make an appointment.


Industrial units are less than 1/2 the price per sq. ft. of apartments.

HungrySeagull's picture

There are some who live in storage units for 50 a month. The smell of frying chicken off the single overhead light wiring gives them away.

The Alarmist's picture

Boomers are all retiring and downsizing.  Next generation are debt serfs.  Immigrants are picking fruit and veg or scrubbing toilets for fairly decent money considering the investment they make in skills, but they only buy one house for each 20 or so of them.

So, where is all this demand supposed to be coming from?

Vince Clortho's picture

Central Bankers buying more vacation properties.

Bunga Bunga's picture

Next home buyer generation is broke on arrival.  I wonder how first time home buyers can get a loan when they must show their balance of 100k+ in student loan debts.