Yesterday I notified, In Case You Didn’t Get The Memo, The US Is In a Real Estate Depression That Is About To Get Much Worse. Today I will show specifically how things will get much worse. The numbers came out for new home sales today, and they were atrocious – and that’s after a downward adjustment for the previous month’s numbers. Follow the chart with the pretty colors below, keeping in mind that many economists believe that new housing construction is a pre-cursor to economic recovery.
New building sales have nearly come to a relative standstill, and would look like even more so if adjusted for inflation and population growth. As you can see, the economic sales volume served as a strong indicator in the downturn in pricing a year later at the top of the bubble. New home sales growth has just dipped again, as has Case Shiller prices, which is in and of itself overly optimistic.
Why such a drop in new sales? Well, outside of the macro factors involving credit, income and employment, there is the big elephant in the room – Shadow Inventory.
Yes, toxic assets are taking up more activity than healthy assets. This is what it has come to. Again, I request subscribers reference the Shadow Inventory Analysis model for what I consider to be the elephant in the room. Go through the whole model, of course, but pay attention to the first chart, “Years to Clear Shadow Inventory Backlog’, then the tabbed chart Delinquency and Home sales, then move on to the back of the model to examine the date behind this chart. It is frightening. At this point, we are actually digging a deeper hole for ourselves while the media is portraying signs of a recovery!
Jump across the world, and you see middle east turmoil and EU nations pushing default. To wit:
- ECB Swallows Massive Portuguese Bond Losses As It Is Clear That The Third State Will Soon Join The Bailout Brigade – Haircuts, Here We Come!!!
- The Coming Interest Rate Volatility, Sovereign Contagion, Geo-political Unrest & Double-Dip Recessions: Here’s The Answer To Valuing Global Real Estate Through This Mess
For those of you who feel these global events are unrelated to your neighbors foreclosed house across the street on Johnson Street in Peoria, listen closely. This “Real Estate Depression” has occurred with the most favorable interest rate environment possible, due largely to significant manipulation via monetary and fiscal policy in order to suppress rates – see Buried Deep Within The Files That The Federal Reserve Released On Thier MBS Purchase Program, We Found TARP 2.0!!! More Taxpayer Money To The Banks! as well as FASB Appears to Have Bent Over For The Final Time & Accuracy In Financial Reporting Dies An Ignominious Death!!!
This fairy tale, Goldilocks rate environment cannot last forever and will spell very bad words if rates shoot up faster than income. Guess what… The Inevitable Has Finally Been Admitted In Europe: The Macro Experiment Has Ignited Inflation Without Commensurate Growth & Rates Will Spike.
There are a plethora of nations ready to default/restructure any minute now, kicking off a rate storm that will cause havoc and spike cap rates. I even detailed Portugal’s scenario and made it available for all to see, haircut analysis and NPV losses to investors and all. Anyone interested in seeing the entire scenario analysis for Portugal should look here, you will find it nowhere else: The Truth Behind Portugal’s Inevitable Default – Arithmetic Evidence Available Only Through BoomBustBlog
For graphical evidence of what will happen to the housing market when the fecal matter flips off the fan blades, let’s revisit a topic that the popular media has forgotten about – Adjustable Rate Mortgages.
Above you have the Case Shiller composite 10 city index superimposed against the Freddie Mac 30 year and 1 year adjustable ARM historical rates. Tell me, which has the tightest correlation to prices. You can see where they dipped and caused a massive bubble, they rose and that bubble popped, and they were artficially supported and that bubble was partially reblown. Yes, the bubble was purposefully reblown, reference Buried Deep Within The Files That The Federal Reserve Released On Thier MBS Purchase Program, We Found TARP 2.0!!! More Taxpayer Money To The Banks!:
We have conducted analysis on all MBS sale and purchase transactions conducted by the Fed whose data was recently released. Of the total 10,058 MBS transactions, 72% were done at a yield of less than 5% (5% below yield of 4.0%, 32% between 4.0%-4.5%, 35% between 4.5-5.0%) with an average yield of 4.75% on all MBS transaction. The table below presents the number of transactions under their respective yield category.
We have also analyzed the yield on MBS purchased and MBS sold, looking for price discrepancies between MBS purchased and MBS sold. The data points out that the average yield on MBS purchased was 4.71%, 29bps lower than average yield for MBS sold, thus implying MBS purchased were at a higher price than MBS sold. You know that old government adage, buy high and sell low!
Yield on sale: 5.00%
Yield on purchase: 4.71%
Difference in bps: 29.1
Now, imagine this artificial suppression, both in the form of MBS purchases (which are supposed to be over) and QE in the form of Treasury Ponzi purchases, are overpowered by the market driven rate storm brewing ahead. After, even sales volume is correlated to ARM rates.
For those who haven’t seen the video I went into this in detail during a recent presentation. Of course, this can all be encapsulated in a more concise form. You know what they say – a picture is worth a thousand word… How likely is it that we can have 20 more years of housing price declines?
Note: There is a typo in the chart below. The 74% figure is carried over from the CRE Japanese chart.