Mark Hanson Is In "Full-Blown, Black-Swan Lookout Mode" For Housing Bubble 2.0

Submitted by Mark Hanson via mhanson.com,

Speechless: The Kardashian’s are now house flippers

“No more neighbors, friends whose past Real Estate experience is renting an apartment or buying a starter house, or stay-at-home moms flipping houses locally;  young, flamboyant Realtors on reality, cable TV shows selling multi-million dollar trophy properties to those from abroad with briefcases of cash that until this year bought a lot relative to the ‘weak’ US dollar;  20-something Silicon-kids paying $2,000/sq ft for a house they could buy 20 miles away for $500;  large, institutional private equity firms buying 10s of thousands of single-family houses for rental purposes — sight unseens using computer programs —  thinking a 3% yield is acceptable long-term and somehow, someday economies of scale will emerge;  or individual / “family-style” speculators committing lending fraud at a pace that rivals 2006 chasing their share of the “easy money” in Real Estate, are needed to prove to me that Bubble 2.0 is not just a monster, greater in intensity and energy than Bubble 1.0, but will end the very same way…”

This week on the Kardashians, Scott Disick, the baby daddy of the oldest sister, revealed he was a new entrant to the house flipping scene with the purchase of a $3.7 million Beverly Hills “fixer-upper”.

When his interior designer flaked out on the job, he asked his Kardashian sister for help. He said he wants to “buy as many houses as he can”.

To his credit, he showed genuine concern when she started suggesting uber-high-end remodel ideas saying (loosely translated) “I am a concerned. The object is to make money”.  And then he outright fired her, opting to hire somebody that he had control over.

Seeing common sense prevail in such a way, perhaps if he doesn’t get in over his ski’s with projects, doesn’t fall in love with his houses, and sells quickly to ready buyers when the time comes he has a shot of ‘not’ becoming a famous bag holder.  But, with big, longer-term house projects come big liquidity risks that Scott is simply too young to ever have experienced, as he was in his early 20s during Bubble 1.0.  Good luck LD.  Don’t get greedy, listen to your gut, and always be a seller.

 

Bag-Holder population is exploding

Real Estate is a highly “illiquid” asset class ‘most of the time’.  It always has been and always will be.  However, some times, such as now — and from 2003 to 2007 as a prime example — when liquidity is flowing like water, Real Estate’s illiquidity is masked.  Speculators can do no wrong.  Simply having access to short-term or mortgage capital to purchase Real Estate guaranties a double-digit return.  This continues until one day, suddenly, it doesn’t.  When capital markets tighten up a bit, or a lot, due to one reason, another, or another, the snap-back to the true, historical illiquid nature of the Real Estate sector happens suddenly and is amplified at first. This creates a snowball effect from which both house supply and illiquidity surge at the same time.

Price then becomes the liquidity fulcrum and will drop, relentlessly ripping speculators faces off, until capital begins to view the asset class as a relative value once again.

In periods of mania, most don’t recognize when Real Estate has once again lost its levitation juice and keep buying even as liquidity conditions turn downright bearish. Some buy all the way down comparing the lower prices with peak, liquidity bubble prices a couple of quarters back thinking they are getting a “great deal”.   Quickly, they are underwater, or sinking rehab capital into a depreciating asset.

Then, what seems like “all of a sudden”, a wave of fear engulfs the sector.  Supply ratchets higher, as pricing power continues to weaken.  Before most realize what’s happening, “month’s supply” of houses is ‘through the roof’, Realtors are telling sellers that their ‘expectations are a bit high’, and Real Estate’s true color — illiquidity — has taken control of the entire sector stranding owners and speculators from their invested capital.  This is event horizon.

These “correction” cycles can be tame, moderate, or extreme like from 2003 to 2007.  In my opinion the severity of the correction is directly related to the amount energy that preceded it, meaning given the “all-in” global Central Bank monetary and Gov’t debt policies of the past 6-years, the next “correction” has the potential to make 2007 to 2010 look moderate.

 

Focus is no longer “if”, but “when” and “how much”

My job is no longer to prove a new mega-house price bubble has blown under everybody’s noses, but to time it’s ultimate top and inevitable retracement. I need look no further for evidence of Bubble 2.0 mania nationally, across all price levels. The past several quarters of wild anecdotes piling up on each other serve as icing that caps a couple of years of solid and compelling data collection and analysis all pointing conclusively in the same direction.

No more neighbors, friends whose past Real Estate experience is renting an apartment or buying a starter house, or stay-at-home moms flipping houses locally;  young, flamboyant Realtors on reality, cable TV shows selling multi-million dollar trophy properties to those from abroad with briefcases of cash that until this year bought a lot relative to the ‘weak’ US dollar;  20-something Silicon kids paying $2,000/sq ft for a house they could buy 20 miles away for $500;  large, institutional private equity firms buying 10s of thousands of single-family houses for rental purposes — sight unseens using computer programs —  thinking a 3% yield is acceptable long-term and somehow, someday economies of scale will emerge;  or individual / “family-style” speculators committing lending fraud at a pace that rivals 2006 chasing their share of the “easy money” in Real Estate, are needed to prove to me that Bubble 2.0 is not just a monster, greater in intensity and energy than Bubble 1.0, but will end the very same way, as the similarities and drivers to Bubble 1.0 are not just all present, but far outnumber yesteryear in egregiousness.

I am now more convinced than ever before (even in 2006 when I was literally giving lunatic fringe seminars to the mortgage sector on what I believed was an impending mortgage and housing crash) and convicted to my “far out” analysis that US housing — locally, regionally, and nationally — is at the end stages of an epic bubble blow just looking for prick. And as the bubble has blown to epic proportions, armies of pricks have come out of the woodwork.

It simply isn’t different this time around. I am in full-blown, black-swan look-out mode over here. And Bubble 2.0 could end up being a lot more volatile than from 2008-10 due to the sheer amount of capital and liquidity in the sector that blew the bubble in addition to:

  • Muscle memory; the second house price “correction” in 7-years will be taken more seriously, sooner, than the last time around causing inventory to rise substantially, earlier in the downturn.
  • The record pace of “unorthodox demand with unorthodox capital” by a small slice of the population suddenly going to the “sidelines”, or rather “getting sidelined”, will hit demand much quicker than millions of end-users all changing sentiment over time like at the end of Bubble 1.0.
  • The Fed and Gov’t have far fewer rates, stimulus, and modification tools at their disposal this time around.
  • An entirely new generation of low-down payment, underwater homeowners created from all of the low-down FHA, Fannie and Freddie purchases done with over-inflated appraisals over the past few years.
  • The record supply of non-owner occupied single and multi-fam “investment” props – and fraudulent loans for “vacation houses” that are really flips or rentals — owned by a small slice of the population will hit the supply chain much quicker than millions of foreclosures did from a wide base of the population in Bubble 1.0.
  • The Gov’t won’t be able to stop the private house for-sale supply flood like they did last time around vis a’ vi bank and servicer mortgage mods and foreclosure moratoria.
  • New, large-scale, well-capitalized demand cohorts rising from the ashes — like institutional and private foreclosure buy-to-renters & flippers and foreigners with cheap relative dollars did post Bubble 1.0 explosion — will be tough to find.

My proprietary Bubble 2.0 analysis of the contemporary housing data are compelling.

  • Houses cost far more to the incremental, end-user, owner occupant buyer using the popular mortgage loan of this era versus 2003 to 2007 (SEE 5/3 NOTE COPIED BELOW).
  • Hard-core speculation is back – some 40% of all transactions according to my calcs — complete with occupancy and appraisal fraud, process incompetence, willful blindness, and relationship-driven dissonance in lending, just like 2003 to 2007.
  • All cash transactions in this era have replaced exotic loans of Bubble 1.0 in bypassing the “mortgage-loan house-price governor”.
  • Demand has been extremely weak relative to Bubble 1.0 – end-user, owner-occupied demand more/less flat since 2008 — yet price gains have been far more powerful; a divergence that cannot persist for any great length of time.
  • Demand for primarily owner-occupied builder houses has remained far more depressed than resales, which attract a substantial percentage of speculators.
  • “Stale listings”, another term for “houses priced too high to sell”, at record highs and a serious house price headwind.
  • This end-user, owner-occupied “demandless” house price bubble proves something other than traditional, end-user, owner-occupant fundamentals are driving prices.

Bottom line: This all is big, potential trouble because for prices to remain in a positive trajectory, a wide base of fundamental and permanent demand is always needed and flippers, buy-to-renters, foreigners with volatile capital, high-tech kids, and lending fraud is not a foundation a true ”housing recovery” with “escape velocity” can be built upon.

 

Note, I have ZERO clue what happens next with housing. Maybe house prices double or triple. Maybe prices get cut in half.  Everything here is a derivative of my research and my opinion only.  I have been wrong for the past year calling a top but I believe very right about this being a bubble. Note, I was very wrong calling a mega-bubble in 2005/06 as well…for about 18 months.

 

Excerpt from my 5/3 note… Housing Affordability Far Worse than Bubble 1.0 Peak;  Apples to apples comparison of Bubble 1.0 and Bubble 2.0

If 2006 was a bubble, then higher prices, greater monthly mortgage payments, flat income, and a higher unemployment rate today must be as well.

“All-cash”, historic low rates each year, lending fraud etc acting on house prices just like exotic loan did in Bubble 1.0; “mortgage loan house price governor” removed allowing prices to unhitch from end-user fundamentals.

Data used for this bubble 2.0 analysis and comparison is from the most recent month’s housing data….

Bottom line: If versus 2007, it costs the incremental, “end-user, owner-occupant” buyer 13% to 35% more on a monthly payment basis and they must earn 41% to 72% more to obtain a mortgage, then how can houses not be back in a bubble?

House prices are too expensive for the typical end-user, owner-occupant buyer. This is the reason substantial volume has never returned to the US housing market, other than during transitory periods immediately following stimulus events or Fed-induced rate plunges, which create “some” incremental and “a lot” of pulled-forward demand, but never any “durable” demand.

The most recent demand “uptick” following the rate plunge in Q4’14 is simply another “transitory” period of increased demand. And ultimately, it will lead to significant disappointment in Q3/Q4 (sooner if rates continue to increase at the past week’s pace) when everybody realizes that once again this demand spurt did not reach “escape velocity” and was not “durable”. Same movie, different rate plunge.

Bubble 1.0 vs 2.0.

Question: How can house prices be so detached from end-user, owner-occupied fundamentals yet again, especially with mortgage lending so “tight”?

Answer: In this bubble cycle, unorthodox demand with unorthodox capital and occupancy fraud in lending have replaced exotic loans as the instruments that suppressed the “Mortgage loan house-price governor”, allowing house prices to reach levels not supported by local, end-user, owner-occupied fundamentals.

Apples to apples “affordability” 2004 and 2007 vs 2015 “affordability”.

1) Builder house prices in 2015 are up 13% from 2006, yet the total payment is 35% higher and income needed to qualify is 72% greater using the popular loan programs of this era. Thus, the chronically weak demand for builder houses.

RESALE AFFORD APR 2015

2) Resale house prices in 2015 are down 9% from 2006, yet the total payment is 13% higher and income needed to qualify is 41% greater using the popular loan programs of this era.

Resale affordability metrics are measurable better than in the builder segment, but still blown-out relative to 2004 and 2007, which accounts for resale volume performing better than builder volume, but nowhere close to 2004 to 2007.

BUILDER AFFORD APR 2015

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