The article has a number of problems with it, and I detail these below. But first, I want to get to a meta-journalistic error, and explain the fatal flaw of the article before it even begins: Using the same author who has made multiple Housing turnaround calls before — all too early, all wrong.
The mistake in doing that is the analysis begins with a chip on its shoulder: The writer is not looking objectively at the data, but rather, has something to prove. Human nature is such that we all want to be vindicated, to be proven right — hence, all objectivity is lost. This is clearly reflected in the errors and omissions within the article.
Thus, not only was the July 14, 2008 Barron’s cover story by the same writer — Bottom’s Up: This Real-Estate Rout May Be Short-Lived — terribly wrong, but it sets up the flaws in the following two pieces. Beyond the basics of Human psychology, we see this revealed by the latest article’s headline: “Happy at Last.”
Beyond the author’s desire to be right (rather than accurate), this latest article has three major flaws/omissions:
1) Foreclosure abatements have ended (never mentioned);
2) The impact of Zero percent Fed interest rates on mortgage rates (also omitted);
3) Home Builders stock prices are confused with home prices.
Also omitted from this list are several other factors: Weak job creation, flat wages, low household formation. But let’s just discuss these three for today. The article begins with a discussion of home prices, but leaves out the actual, causes (items 1 and 2 above), along with the seasonal elements. Let’s get into the details of these.
Barron’s mentions the drop in distressed home sales as a percentage of total units sold, but astonishingly, leaves out the reason for this: The voluntary foreclosure abatements that took place during the robosigning settlement discussions. The foreclosure machinery was idled for over a year while the resolution of this mass Banking felony was worked out. Its not that the RRE market has improved, rather, its that foreclosures were frozen due to government action. With that now resolved, foreclosures have begun moving higher again. They still appear lower on a year-over-year basis, but only if you ignore the context. The timing of this process is imprecise, but it is not unreasonable to expect significantly more distressed sales showing up before year’s end.
The current result of the abatements is simple: There are 25% less distressed sales than usual. They sell at 20-30% less than an identical home down the block. Distressed sales fell from 38% to 28% of existing home sales. The missing distressed sales account for a significant percentage of home price increases. To discuss distressed home sale and omit this context is, IMO, simply inexcusable.
Noticeably omitted from this discussion is the single most important element driving home sales: Zero percent interest rates, and their impact on Mortgage costs/purchasing power. It is even more astonishing that an article about a home price recovery can omit any mention of the Fed and Ben Bernanke. Mark Hanson has looked at this, and he notes that the Fed’s QE/Twist programs have driven mortgage rates appreciably lower, now down to 3.625% from over 5.0% when the Fed started theirshort term bond purchases. Anyone who uses a mortgage — ~70% of all buyers — have been gifted a 15% increase in purchasing power for a house on the same monthly payment. Despite this huge increase in buying power, home prices are up less than half of this. (Incidentally, I think Hanson is too bearish).
ZIRP and nearly free money are unsustainable conditions, and while we have been told rates will remain low til 2013, they cannot stay at zero forever. What happens to home prices when rates eventually start to rise? I imagine a short term spurt as some buyers rush to take advantage of rates before they increase. After that, the free lunch is over. The support that the Fed has been affording housing (and the banks still festooned with dubious mortgages) flips from a tail wind to a major headwind.
Finally, the Home builder’s issue. The elements that drive their stock prices are very different than what drives home prices. The builders have written-downs over-priced land purchases; They have already taken their lumps on their foolish funding of bad buyers. And, they have moved aggressively into the construction of multi-family and rental units — perhaps the hottest sector in residential real estate. We saw the same erroneous logic during the initial phase of the RE crash, from 2006-09 — every uptick in Homebuilder was met with a cheer from the Housing turnaround crew. They were wrong then, and they are most likely wrong now.
I could speak to the decline in inventory, but let me point out what Jonathan Miller of Miller Samuel has explained: A big part of the reason for the inventory decline is low home equity. “Sellers are buyers after they sell, but if they don’t have enough equity for the next purchase, then they sit.” Hence, the decrease in inventory is due to a negative factor — suck sellers. It is not the positive that it appears to be.
One last aside, I have to mention this astounding WTF line in the article: “Some keen observers of the real-estate market, such as Moody’s Analytics’ Mark Zandi . . .” Really? Zandi is a very nice guy, but with no disrespect, I do not think there is a single US economist who has been less right about Housing than Zandi. His annual housing bottom calls placed him in our pantheon of PWBC — they have been nothing short of horrific. Anyone who thinks Zandi is a keen observer of real estate is, well, likely to have called a bottom in Real Estate 2008. And 2009, and again in 2012.
The nicest thing I can say about Housing is that after an enormous amount of government & Fed action, it has stabilized. The rate of decline has fallen, but it is driven not by market forces, but unnatural ones.
As the expression goes, a broken clock is right twice a day. If Barron’s keeps putting articles on its cover calling for a recovery in Housing, they will eventually get it right.
Just not this week . . .
Happy at Last
JONATHAN R. LAING
Barron’s September 8, 2012