'Worst Is Yet To Come' Says Housing Bear Who Nailed 2008 Crash, 2018 Slowdown

Montana money manager James Stack - who predicted both the 2008 real estate crash and last year's housing slowdown, now says that 2019 may not be so great for housing bulls according to Bloomberg

"Housing could be heading for its worst year since the last housing crash," said the 67-year-old Stack, who manages $1.3 billion for high net worth clients. "Expect home sales to continue on a downward trend in the next 12-plus months. And there’s a significant downside risk to housing prices if a recession takes hold."

Last January, Stack was practically alone when he warned rising mortgage rates would expose housing’s affordability problem and “the risk that today’s highly inflated housing market will again end badly.” The day after Bloomberg published his comments on Jan. 22, homebuilder shares began a 10-day slide, and ended the year down by more than a third.

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Stack, who manages $1.3 billion for people with a high net worth from his office in Whitefish, Montana, studies his fireproof files of newspaper articles on bear markets dating back to 1929. He predicted the housing crash in 2005, just before prices reached their peak. Last year’s warning came after Stack noticed that his "Housing Bubble Bellwether Barometer" of homebuilder and mortgage stocks was up 80 percent in a year, a sign that investors once again had gotten too "exuberant." -Bloomberg

And nearly a year after Stack's accurate 2018 call, property markets - along with the broad economy, are flashing signs of distress. According to a National Association of Realtors index, home purchase contracts in the US fell 7.7% in November, while consumer confidence dropped in December. 

Meanwhile as we reported last week, the Institute for Supply Management (ISM) - a gauge of US manufacturing, plunged from 59.3 to 54.1, the lowest print in the Mfg ISM series since November 2016, and the biggest one-month drop since October 2008.

And in November, pending home sales plunged 7.7% y/y - the biggest drop in four years. 

As Bloomberg noted at the time, the results underscore the challenges as elevated prices and rising mortgage rates are keeping more Americans on the sidelines of the housing market. Economists consider pending-home sales a leading indicator because they track contract signings; purchases of existing homes are tabulated when a deal closes, typically a month or two later.

The recent rise in mortgage rates has “reduced the pool of eligible homebuyers,” Lawrence Yun, NAR’s chief economist, said in a statement. 

While the job market looks strong, making long-term prospects look solid, “we just have to get through this short-term period of uncertainty.” -Bloomberg

Pending sales fell in three of four regions, led by a an 8.9 percent slump in the West as the Midwest and South also declined. Signings in the Northeast rose 0.7 percent.

Stack admits that it's still too early to know if housing is in another bubble - noting that it will depend on what happens with the broad economy. "Unfortunately, bubbles are only recognized with 100 percent certainty in 20/20 hindsight," he notes. 

To be sure, economic strength should be playing to housing’s benefit. While rates for 30-year mortgages peaked at 4.94 percent in November, climbing a percentage point since the start of 2018, they’ve since fallen to 4.51 percent. And the U.S. unemployment rate is near a five-decade low, with employers in December adding the most workers in 10 months. -Bloomberg

"Even if mortgage rates level off or ease slightly in 2019, we are unlikely to see the psychology turnaround," says Stack. "Homebuyers have woken up to the fact that affordability is a major issue. Can they afford the home?