1) “Peak Housing”: The “Return to Normal”
The take-away from last month’s housing data was that “the market was returning to normal”, which despite the persevering weakness, was viewed as a “great thing”. This overly-simplistic and flawed assumption was made, as the all-cash cohort demand dramatically cooled and distressed supply and sales plunged YoY.
What people are suffering from is a lack of a medium-term memory, as what’s happening today happened in 2007/08; “Peak Housing”.
- Back in 2007, the speculators (every ma and pa in America) driven by exotic credit stimulus without a “mortgage loan house price governor” — that drove prices over years of tremendous incremental and pulled-forward latitudinous demand — went away over a short period of time leaving the heavy lifting to weak, end-user fundamentals.
- Today the unorthodox, new-era buy to rent/flip speculators driven by Fed stimulus without a “mortgage loan house price governor” — that drove prices through years of tremendous incremental and pulled-forward narrow demand — are going away quickly leaving the heavy lifting to weak, end-user fundamentals.
It was the stimulus-driven, unorthodox “things” that drove the “V” bottom in demand and prices yet again, not coincidentally from exactly the time in 2011 that Twist was first announced and yields plunged. Moreover, a rush of incremental and pulled forward end-user demand caused by the nuclear monetary policy that followed, forced end-users to chase spec-vestors. Before you knew it, spec-vestors and end-users were tripping all over themselves piled 30 deep bidding on houses. Prices surged, as the “mortgage loan house price governor” was removed just like from 2003 to 2007.
Although 2003-07 and 2011-13 were basically the same in nature, a big difference is that this stimulus-cycle was much greater in stimulus input over a shorter period of time than from 2003 to 2007. If stimulus “hangovers” are proportional to the amount of stimulus that preceded them, then this one could be a doozy.
Bottom line: a “Return to Normal” is “Peak Housing” this time around too; a huge headwind — just like the “return to normal in 2007/08″ on the loss of exotic credit — to the consensus estimates of 10% to 20% sales volume gains and 5% to 10% price gains in perpetuity. In fact, organic house prices are already on the down — lagging the persevering demand slump — and likely to drop by 10% to 20% over the next 2 years, down more at the high-end.
Remember, house demand and prices didn’t crash at Peak-Housing 2007, they simply re-attached to what end-user employment, income, and mortgage credit could support when all of the exotic credit went away. The same thing is happening at this Peak Housing event, as new-era all-cash spec-vestors and foreigners go away.
History is littered with instances of investors and first-timers leaving the market over a very short period of time. And we know, judging by how rough single-family new-home permits, starts & sales have had it, end-user demand is structurally weak and unable to carry this market on it’s shoulders.
Housing sits in a precarious position. There is no shortage of houses “in which to live”. Just the opposite, in fact. My research shows that in the past six-years houses were over produced by three million units — SHADOW CONSTRUCTION — while household formation remained weak. Moreover, house prices are too expensive. That is, on a monthly payment basis using the popular loan programs of each era monthly payments for the average house are 35% higher today than in 2006 despite prices being moderately lower.
Without foreclosures, short-sales, and spec-vestors house price gains since 2012 would have been notably less. The proof is clear. For example, in CA when stripping out distressed transactions house prices are already flat to lower, YoY. Further, last month NAR announced that the Northeast was the first region to see house prices go red YoY for this stimulus “hangover”. This is important because this is the region with the highest percentage of end-user buyers/least distressed supply, transactions and all-cash spec-vestors. This is an important observation, as demand quickly shifts back atop the shoulders of the end-user buyers from coast to coast.
Bottom line: Without another, larger (than Twist and QE) spec-vestor and end-user stimulus catalyst, this 3rd serious stimulus hangover in 7-years will get worse, while record amounts of multi family and single-family for rent supply hit the market, not a good thing.
2) [Past] Peak Housing Data
This stimulus hangover cycle looks a lot like the other two…
When ex-ing out distressed this stimulus hangover is in full-effect
NAR shows 2.5 year price gains similar to the 4-year price gains from 2003 to 2007, but without meaningful end-user demand, sales volume, credit easing or wage gains.
If volume precedes price this time around as well, prices are already red YoY, they just haven’t printed yet
It’s obvious the impact that all-cash spec-vestors had on the housing market…”up 45% in 2.5 years” and “house prices” should never be in the same sentence unless in a bubble
Obvious demand trend-changes abound…
End-user, owner-occupant demand at historically low levels
On an apples-to-apples monthly payment basis using the popular loan programs of each era it costs 35% more per month today to buying the averaged price house than it did in 2006.
A real risk to prices going forward is spec-vestor liquidations, which we are seeing in all the top momo regions coast to coast
That’s because vacant rentals are abundant, see So Phoenix for example.
Remember, “for sale” and “for rent” have never been more fungible. As such, when looking at “housing supply” one must include both single-family for sale and rent. When doing so, “month’s supply” is much greater than people think.
And there is no shortage of houses in which to live of lack of construction. In fact, by my math we over built by 3 million units in the past 6 years.