Change, nothin' stays the same
Unchained, and ya hit the ground runnin'
Change, ain't nothin' stays the same
Unchained, yeah ya hit the ground runnin'
SO did housing prices actually go up in 2012? And if they did go up, how much, where and why?
For some time now, I have been speaking with my colleagues at Carrington about the changes occurring in the residential housing market. One of the impressions we have and a view that is not reflected by other analysts is that the change in average home price appreciation or “HPA” in 2012 and before was the result of the steady evolution of the market, from a largely distressed marketplace to a market environment that is increasingly approximating normal. And this is a good thing.
Tomorrow from 7-8 AM on Bloomberg TV, I am scheduled to be on as guest host with Tom Keene, Scarlet Fu and Sarah Eisen. We will have an opportunity to speak to Jed Kolko from Trulia (http://www.trulia.com/), one of the leading data aggregators and analytics providers in the residential housing space. He told me in a note yesterday that “my sense is that the price appreciation isn’t driven by the narrowing conventional-distressed spread.”
Jed reflects the impression of many people in and outside the housing markets; that the rise in residential home prices augers a true recovery in real estate prices and not merely a decline in distressed sales at relatively low price points. I use the plural deliberately because we are talking about hundreds of large markets around the US when we look at the aggregate, average price indices that the Big Media uses to describe monthly price change in the American real estate market.
If we look at some of the data from RealtyTrac (http://www.realtytrac.com/), however, and go down to the local level, the importance of the changes in spread between distressed and normal sales seemingly takes on greater importance. For example, in Phoenix, non-distressed properties saw prices rise 22%, while REO sales prices were up 30%. Atlanta was an even better example: non-distressed properties had a 16% annual increase compared to 34% for REOs. It's not too much of a stretch to submit that the non-distressed properties might not have seen as much HPA without the REO inventory prices soaring. We can't exactly prove that yet, but it's equally hard to disprove.
If you look at the agency data in 2010-2011, the spread between sales of comparable distressed and normal homes was between 15-20%. Much of that price spread disappeared in 2012, a year when 40% of all home sale transactions were for cash. At the end of the year, however, institutional buyers were taking distressed and “flipped” properties near retail valuations. Memo to Dan: Watch those net returns from late arrivals to the REIT rent trade later this year.
But the question remains: was the apparent rise in home prices in 2012 the result of economic resurgence or the convergence between voluntary and distressed sale transactions? Now if you worked for the largest buyer of non-performing loans in the country and also one of the largest private property managers, distressed servicers and real estate brokerage firms in the US, you could claim to have a view of the residential property market. All of the analysts and data aggregators looking at the proverbial elephant have a valid perspective. But with employment down and consumer income also under relentless pressure from inflation (the inflation that does not exists officially), the bull case for housing is missing a couple of essential legs. Just go onto trulia.com, play with some of the fascinating local data sets and notice the wide dispersion in how the prices for different neighborhoods in different cities and different price points have performed.
The point, of course, is to get an accurate read on what is actually happening in the housing market, both from an investment perspective and in terms of risk management. The fact that the market is up is great, but when you look at the traditional fundamentals in housing, the picture is unusual to say the least. As I noted in a recent post for The National Interest, lending volumes and agency sales by banks for 1-4 family houses are falling. Much of the refinance volume of the last several years was driven by subsidies from Washington. Now we are headed to the new normal, something below $1 trillion in new loan originations annually. Send you thank you notes to Chris Dodd and Barney Frank.
The new normal includes at least a temporary disappearance of seasonality from housing, something that ought to concern long time participants in this market. We all know that double digit inflation in HPA is not a good thing for the long term recovery of the housing market. But because of the rarefied and extraordinary times in which we still live, some markets are growing 3-4x employment and consumer income. Indeed, the base of employed Americans continues to shrink. One could foresee a scenario where we see a down month or two for HPA in the second half of 2013, even with the seasonal adjustment factored in. The logic of indices and averages can work against you as well.
The only way that the Federal Open Market can claim that QE is working to boost housing is to pretend that credit is growing instead of shrinking, that tenants are becoming home buyers, and the continued, indeed rising flow of NPLs into the secondary market is all part of a normal economic recovery. We all know that none of these things are true. But such is the big lie coming from the confidence peddlers at the Federal Reserve Board. (Thanks to Rick Sharga for insights on RealtyTrac data)