Is Housing Really Recovering?

KugsCheese
By KugsCheese on Mon, Jan 28, 2013 - 11:23am

Shiller in NYT over the weekend (http://www.nytimes.com/2013/01/27/business/housing-markets-future-still-has-many-clouds.html ) stated the housing sector is out of the woods discussing the purchase increase but saying other numbers do not support why housing is doing better.  Nowhere did he follow the money to see that hedge funds are buying up houses in bulk sight unseen and renting them.  This requires maintenance work like painting etc and new appliance purchases but is it a true market upswing when they are overpaying for houses IMHO (and many houses are now multi-tenant)?

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15 Comments

Adam Taggart's picture
Adam Taggart
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They're certainly trying to convince us of it

Talk of a housing recovery is pervasive in the media these days. A quick Google News search on "housing recovery" yields 59,600 headlines published this month, from major outlets like the Wall Street Journal, the New York Times, CNBC and the Chicago Tribune.

There are definitely "green shoots" data out there showing upward momentum in many housing-related sectors after the multi-year declines we've been experiencing. For example, here's a piece from today's Wall Street Journal:

From Power Tools to Carpets, Housing Recovery Signs Mount

The U.S. housing recovery is starting to show up in corporate results.

Companies that sell power tools, air conditioners, carpet fibers, furniture and cement mixers are reporting stronger sales for the fourth quarter, providing further evidence that a turnaround in the housing market is taking hold.

The results add to data on home construction and pricing that indicate a bottom may have been reached after the sector's long slide. While the incoming data continue to be mixed, evidence that Americans are spending more to build and refurbish homes is raising executives' confidence that the housing market will continue to improve and help fuel the broader economy.

The key question, which you're asking, is: how sustainable is this 'recovery'?

I have not conducted enough analysis to weigh in on this in an informed manner. But I like the data and argument put forth in this article from Lance Roberts:

The housing recovery is ultimately a story of the "real" unemployment situation which still shows that roughly a quarter of the home buying cohort are unemployed and living at home with their parents.  The remaining members of the home buying, household formation, contingent are employed but at lower ends of the pay scale and are choosing to rent due to budgetary considerations.  Also, we should not discount the psychology of home ownership has dramatically changed since the crash as many of the "millennials" saw the financial damage their parents suffered and are opting out of taking such a perceived risk.  

As I stated recently the optimism over the housing recovery has gotten well ahead of the underlying fundamentals.  The overarching problem is that the housing market that is almost exclusively dependent on the continued push to artificially suppress interest rates combined with massive amounts of direct stimulus, and incentives, to bailout current homeowners and banks.  This intervention is causing an artificial supply suppression which is likely to create a backlash in the future as the current supply/demand conditions are unsustainable.

While the belief was that the Government, and Fed's, interventions would ignite the housing market creating an self-perpetuating recovery in the economy - it did not turn out that way.  Today, these repeated intrusions are having a diminished rate of return and the risk now is that interest rates rise shutting potential homebuyers out of the market.  It is likely that in 2013 housing will begin to stabilize at historically low levels and the economic contribution will remain fairly weak.  The downside risk to that view is the impact of higher taxes, stagnant wage growth, re-defaults of the 6-million modifications and workouts, elevated defaults of underwater homeowners and a slowdown of speculative investment due to reduced profit margins.  While many hopes have been pinned on the 2012 stimulus fueled, China investing, and supply deprived housing recovery as "the" driver of economic growth in 2013 - the data suggest that may be quite a bit of wishful thinking.

On the other hand, I've been surprised to see such a data-driven and (I've thought) impartial analyst as Bill McBride from CalculatedRISK turn optimistic on housing. 

From his interview with BusinessInsider:

I’m not a roaring bull, but looking forward, this is the best shape we’ve been in since ’97.

And further from his own blog:

Obviously the economy is still sluggish, and the unemployment rate is very high at 7.9%, but I was looking forward. I mentioned the downside risks from Europe and US policymakers (the fiscal slope), but I think the next few years could see a pickup in growth.

In the article I highlighted two of the reasons I expect a pickup in growth that I've mentioned before on the blog; a further increase in residential investment, and the end of the drag from state and local government cutbacks.

Bill's sanguine outlook troubles me, because it feels different than what I believe should be the case. To me, there are too many economic risks to the downside to merit a rebound in housing prices of any substance. I certainly haven't seen any wage or savings increase data that would indicate the average American can suddenly afford to pay more for a house.

Lastly, anecdotally, I see two stories from where I live in Northern California. 

In my new, more working class town, many homeowners are still underwater. Despite that, many of those who want to buy a house are having a difficult time because prices are still higher than they can afford. And inventory is very low. But prices have started slowly increasing again for the first time since the 2007 bust.

Back in Silicon Valley, it's like 1999 on steroids. There's a ton of money chasing little inventory. A single-family starter home that isn't a tear-down starts around $1mil. Multiple bids are back with a vengeance. Average rent for a no-frills 3bd/2ba home is around $5k/mo. As I have done for years, I wonder When they heck will they run out of people who can afford to pay these prices? In my bones, I don't believe this is sustainable, but the housing market action there has run counter to my intuition for nearly two decades.

Neither of these two stories provides me with a rationale that housing should re-enter a boom time.

But nothing goes up or down in a straight line, and the housing industry (on average of course, because local markets have wide variation) has been depressed for years now. Some modest growth (or "recovery") could be in store if no major economic shoes drop over the next year or two (a big "if").

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Adam, while it stands to reason that housing...

...must be near its bottom I just don't believe it. Homes that went for $280 to $300 thousand in my neck of the woods can't catch a bid at $159,000 and there is NO traffic or counters. Our economy isn't all that bad really it's just people are still very wary of committing.

In addition, and I can count 5 people I know personally have lived in their homes for at least 3 years, and have paid no principle, interest, taxes or anything with relations to their home. A couple have been notified of Sheriff sale and it has been cancelled without any further correspondence, So that means that if/when a Sheriff's sale is finished on their home they will still have 6 months before they have to vacate the home.

All have second mortgages that they have stopped paying on as the second will get no moneys from the sale.

All have bankrupted and buried a huge load of debt.

They all had the means to make these payments by cashing in their retirement funds but I told them very early to NEVER give this any consideration.

Now, they have taken care of business, are prepared to buy a home with funds set aside for non-payment of 1st an 2nd mortgage, plus the terrific debt savings they had destroyed. 

Now that housing is so cheap they can nearly pay outright the cost of a similar styled home if they so chose. I imagine they will downsize and probably a condo, and that, they can pay cash for, for sure. Some beautiful condos, 1200 to 1400 sq.ft  can be picked up in the low $80 grand number, and they were $160 to $180 not long ago. 

The game is properly being played in my opinion.

So NO, I don't believe the Banks, mortgage companies or any well respected anyone if they are telling me housing has for a fact bottomed. I don't think anything has bottomed frankly and cynic I am with regards to any government stated numbers. I still believe we are in a Recession and the other shoe has not yet dropped.

If the banks mark to market then I'll believe those scum bags. Even then I just have no faith in those...

I put carpeting in my home, bought some new appliances, and did some weatherization projects. That must mean housing has recovered. When I was in the trades there were two different economies. Those who had to stay so fixed things up until the market recovered, and then when (economy recovered) that happened people were able to move about, and that meant building homes or fixing up the homes just purchased. My family are in the trades and painting is doing well, sundries too, but no major projects are yet up on the board. Besides, most those in the trades who built used a line of credit to keep things going between draws and that isn't there for them. I know I wouldn't front any real cash any longer for any project. Cash up front, draws as needed and never but the last payment would I risk. Everything up to that point took care of costs and wages, I would be willing to sacrifice my wage only in any dealings now. Final payment would be mine and the homeowner would be happy, she/he cut the check after all.

Respectfully Given

BOB

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Roll the DIce

Silicon Valley is tied to the hip with D.C. now so I would exclude it from analysis.  It is really a crap shoot when the bank decides to repossess.   I know someone who was making the minimum morgage payment but since the house was underwater the bank foreclosed a few months ago.   I guess a hedge fund called up the bank to ask to buy a bunch of houses in a decent living area for better price than the regular market indicated.  

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Housing: A "Warped and Distorted" Market

Numerian has a good post over at The Agonist in which he discusses the apparent real estate recovery as being restricted to just a few people, namely those with considerable wealth.  With other factors in play, he characterizes the housing as a warped and distorted market which is a mini- or full bubble, depending on how it'll develop.  His analysis concurs with your observations, Adam.  The entire post, 2013 Financial Overview: The Endgame is Closer than Ever, is worth a read.  http://agonist.org/2013-financial-overview-the-endgame-is-closer-than-ev...

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Housing - Key to unemployment

I think the Powers That Be would like to see housing take off to take pressure from unemployment. If housing were to ignite again, it would employ both skilled and unskilled in construction as well as raise demand in fixtures, furniture, etc., to support home formation.  

Since manufacturing is never again likely to employee a significant slice of people, housing maybe the only game in town. Hence the effort to keep mortgages low and make people think they're going to be left behind if they don't take the plunge NOW.  

I agree with previous analyses that the fundamentals of wages and employment make it difficult to  picture more than just stumbling along.

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The fundamentals

Instead of anxiously peering at the latest squiggles of data, let’s look at the fundamentals.  The amount people can afford to pay determines the demand for housing, and along with supply sets the price.  So where are we now?

Personal mortgage debt divided by personal disposable income.

From 1960 to the mid 1980s total mortgage debt was about 40% of total disposable income.
From about 1985 to 1992 this ratio climbed from 40% to 60% of income.  The ratio increased by 50%.
From about 1992 to 1999 the ratio was stable.
From 1999 to 2007 it climbed from 60% to 100% of income.  The ratio increased again by 67%.
The current ratio is over 80%.
That is less than half way back to the last stable ratio of 60%.

The demand for houses far exceeded anything that could be sustained by income.  This excess will take a lot more time to work off.  Even with artificially low interest rates, demand is reduced due to falling and unstable incomes, and current homeowners locked into underwater mortgages.  Young people have massive student loans, and particularly poor income prospects.  Supply grew to meet the boom demand, and that housing stock is still standing.  It will all be available eventually, so there is no shortage of supply.  I think prices have to fall much further to balance this equation and stimulate home sales.

Markets are driven by people, who are motivated by psychology, not logic.  So markets can be irrational for long periods.  But in aggregate, the capacity to buy is just not there compared to the past.  I don’t see how there can be any real increase in demand until the mortgage-to-income ratio gets back to 60%.  And that figure was based on a growing economy and a surge of buying by Baby Boomers.

Travlin

RJE's picture
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Travlin,

...you are correct and I didn't read this in your thread but the banks are holding so many more homes off the market than is known (shadow inventory) propping home prices higher than they should. They probably understand more than we do that they would never lend to the lower middle class or most of the middle class anyways because of risk. They know all to well the economy is NOT as advertised with the data. Besides, they don't carry any risks, that is still the private sectors responsibilities.

BOB

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You got it Bob

RJE wrote:

I didn't read this in your thread but the banks are holding so many more homes off the market than is known (shadow inventory) propping home prices higher than they should.

Travlin wrote:

Supply grew to meet the boom demand, and that housing stock is still standing.  It will all be available eventually, so there is no shortage of supply.  I think prices have to fall much further to balance this equation and stimulate home sales.

Hi Bob

You are correct.  I didn’t want to add another issue to my post, but it was there between the lines.  I agree that banks are withholding inventory to maintain prices, and also to avoid admitting losses.  This will tend to drag out the correction long enough for them to get out with their skins.  That’s another reason no real upturn in home buying is likely for many years.

Travlin

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Who's buying?

I agree that banks are holding back to suppress losses, or waiting for the right buyer who has cash on the sidelines. The real estate market may be in an uptick, but who is buying? It appears large investors are, in particular hedgefunds and foreign investors. I don't think I have to spell out the ramifications of this, but thought it may add something to the conversation. I enjoy reading all your posts.

Thank You

Adam Taggart's picture
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Case-Shiller 20-city index posts 2nd-consecutive monthly decline

From Zero Hedge this morning, showing that the latest Case-Shiller housing index data "certainly does not fit with all the other economic data released by the government":

the unadjusted Case Shiller data that showed that in November, the 20 City Composite index posted its second consecutive monthly price decline in a row. Yes: on a year over year basis home prices did rise some 5.5%, but on the other hand, "average home prices across the United States are back to their autumn 2003 levels for both the 10-City and 20-City Composites." And while the price decline into the year end is somewhat seasonal, it certainly does not fit with all the other economic data released by the government showing a housing picture so bright not even the tiniest drops in prices were allowed.

Case%20Shiller%20NSA%20November%20Compos

 
 

And in what is the biggest paradox for homebuyers in New York, Case Shiller reported that of the 20 cities tracked, home prices rose everywhere... except New York, yet oddly enough it is in NY that the uber-wealthy from China and Russia come to park their money and buy any $50 million + available duplex, triplex and quadruplex regardless of price, and where the bubble at the ultra expensive end of the market is raging like never before (not to mention the record December Hamptons real estate prices).

Perhaps just as importantly, the bubble is back in the west:

 
 

In the 12 months ended in November, prices rose in 19 of the 20 cities and fell in New York. In 19 cities prices rose faster in the 12 months to November than in the 12 months to October; Cleveland prices rose at the same pace in both time periods. Phoenix led with the fastest price rise – up 22.8% in 12 months as it posted its seventh consecutive month of double-digit annual returns.

Keeping it real, Vegas - the biggest housing bubble pop in history, saw home prices rise 10% Y/Y, while Detroit was up 11.9%. One word (Un)sustainable.

Doug's picture
Doug
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without comment

Sorry Adam, trying to post the same article at the same time as you did.

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Pending Home Sales Fall

I know that people desperately want homes to again become "wealth creating machines." despite every bit of common sense indicating that they are instead depreciating assets that generate zero positive cash flow if you happen to live in one, but the data is just not there yet.

Well, except in places like Phoenix where the bubble ran rampant and people are quite ready to give that wheel one more spin.  Never mind that Phoenix is facing some very serious long-term water challenges that will rear their head well before the houses they are buying will come to the end of their serviceable life, the people in Phoenix want to party again.

Okay.  Best of luck to them, or perhaps I should say better luck this time.

In the meantime, here's another fly in the housing recovery ointment:

Pending Home Sales Fell in December

January 28, 2013

The number of U.S. home buyers signing contracts to purchase previously owned properties fell in December but remained well above last year, as the housing market continued to boost the weak economic recovery.

The National Association of Realtors said Monday its seasonally adjusted index for pending sales of existing homes fell 4.3% in December from November to a reading of 101.7. It was the third consecutive month the figure has been over 100, which is equal to the average level of activity in 2001.

The index came in below expectations. Economists surveyed by Dow Jones Newswires had predicted pending home sales would rise 1.0% from November’s previously reported figures. November’s index was revised downward slightly to 106.3.

Sales of new homes in the fell 7.3% in December but ended 2012 well above a year earlier, the Commerce Department said Friday. Lawrence Yun, NAR chief economist, blamed the December decline chiefly on a tightening market.

“The supply limitation appears to be the main factor holding back contract signings in the past month. Still, contract activity has risen for 20 straight months on a year-over-year basis,” he said in a statement.

Supply limitations?  Digging a bit deeper we find that what Mr Yun was referring to is that all of the inventory of housing at or below the $100k mark is pretty well exhausted, not that there's some general shortage of homes for sale.

That is, affordable housing is still in short supply.

With bank lending standards at very tight levels (better have 20% down and a FICO of 750 or better) and real incomes down, where exactly is the fuel for unaffordable housing to take off once again?

Well, it's nowhere and that's why you have charts like this one of New Home Sales:

(source)

Tragically, in many parts of the country homes are still not affordable by the average working family earning the median income.  Not without stretching things to uncomfortably tight levels in the family budget.

I seriously have no idea how many parts of CA get along where everybody in the trade or working classes are pretty much priced out of the market.  It's a mystery to me.

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California housing market unsustainable

In response to the question asked by CM in the post above--

I just moved away from Santa Cruz, CA to a much less expensive area in central Virginia largely for this very reason.

All of my professional friends in Santa Cruz (earning $100 K+ / yr) who do not already own homes have no plans whatsoever to purchase homes.  They intend to rent and continue working until the day of their death. Even two income professional families similarly cannot save enough for a down payment.  And property taxes on a small suburban 1500 sq foot home are about $7,000 / yr, (which, as ao pointed out, is well over $200,000 over 30 years!!)

In Santa Cruz, CA, only the wealthiest 8% would be able to qualify for a loan to purchase the median priced home!

These type of figures include the costal Santa Cruz area and the SF Bay areas like San Jose.

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joemanc
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Some thoughts...

My town seems to be doing just fine, but the medium sized city next door is still hurting...lots of foreclosures, short sales, you name it.

Travlin posted the affordability chart above - but I've gotta imagine the super low interest rates have been a boost to the market...I'm currently refinancing to a 15 year @ 2.875%...incredible.

As for tight bank lending - uhm, not necessarily...my friend somehow got a 2% down loan on a 300K+ home in my town. I have no idea how he pulled that off...and if he did, I'm sure there are others.

I was talking to a branch manager of a Wells Fargo last week - I was joking about how Wells Fargo did not sell my current mortgage this time, even though in the past, they immediately sold mine twice. He said that Wells Fargo is trying to own over 40% of the mortgages...It makes no sense to me...why not exchange that debt for cash to issue more debt in the form of loans?

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KugsCheese
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gillbilly wrote: I agree that

gillbilly wrote:

I agree that banks are holding back to suppress losses, or waiting for the right buyer who has cash on the sidelines. The real estate market may be in an uptick, but who is buying? It appears large investors are, in particular hedgefunds and foreign investors. I don't think I have to spell out the ramifications of this, but thought it may add something to the conversation. I enjoy reading all your posts.

Thank You

There are plenty of dark houses and condos where I live.  I walk around a lot in the morning, day and night so I get a good picture of which homes are lived in (near a great lake shore so no a bad neigborhood).  Bloomberg states that lastest hosuing dip was due to lack of supply; what a joke!    The hedge funds are also selling CDO-like rental steams to mom/pop so I guess it will be another form of housing bubble.  The fools will jump in this spring so good time sell then if you want to get mobile.  Personally I don't need the local government turning the crank on me taxwise so I am selling my home soon.

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