It has long been our view that Real Estate is the prime driver of this economy, and its eventual cooling will be a major crimp in GDP, durable goods, and consumer spending.
4 Charts from Northern Trust are worth looking at to show how far along that process actually is:
Median Home Sale Price
Mortgages Apps
New Home Inventory
Single Family Home Sales
Here’s each chart with my annotations:
Median Home Sale Price: Putting aside for the moment the issue of "median" (it gets skewed when too many high end or entry level houses are the dominant movers) the chart shows rapid decelleration of price gains. I expect to see more of this over the next few quarters, as Sellers and Buyers engage in a stare down, as Sellers continue to gradually lose pricing power.
New Home Inventory: What can you say about this? Builders have created huge inventory. Its no surprise that the enormo increase in Supply has impacted prices (Demand). On this 45 year chart, the recent rise (since 2003) is historic!
Single Family Home Sales: The long uptrend in Sales has broken; I do not know how far it retraces, but I imagine it will continue to do so as mortgage rates tick higher or the economy cools (or both).
Mortgages Apps: Another long uptrend broken; Same story as above: Higher rates mean less sales and refinacing. The one mortgage bright spot I see is the refinancing of ARMs into fixed rate loans.
All charts courtesy of Northern Trust
>
Sources:
Housing Market Is Cooling Down, No Doubts About It
Asha Bangalore
Northern Trust, May 25, 2006
http://web-xp2a-pws.ntrs.com/content//media/attachment/data/
econ_research/0605/document/dd052506.pdf
New Home Sales – Headline Is Deceptive, Momentum Is Weak
Asha Bangalore
Northern Trust, May 24, 2006
http://web-xp2a-pws.ntrs.com/content//media/attachment/data/
econ_research/0605/document/dd052406.pdf
We’re still not back to 2003 levels in terms of mortgage activity, and that’s the leading indicator of the above. The draining of excess stimulus here has much further to go, just like other markets. I’ll repeat my mantra: nothing matters but liquidity.
How many ARM refinances will there be able to be when the primary reason for the ARM @ 4.5% was because they couldn’t afford the fixed payments at 5.25%. So how will they now refinance at 6.5-7.0%. I realize their ARM payment will go even higher but how can you do a refi when it increases your payment by 50% and you can barely make the one you have?
I’ve got some questions.
1) how far are house prices going to fall and what will happen to stop the fall ? What is going to keep the fall going ?
2) what effect is the fall going to have on the macro situation and specifically the demand for and price of oil ?
ndk,
Obviously liquidity matters………..till it doesn’t matter. Liquidity and its proper management mattered more when the global central bankers quickly lowered rates to 1% to stave off deflation. When the economy starting growing again, they should have more quickly taken away the excesses to stop the impending imbalances that were predictable. But, did liquidity matter in the 1930s? In 2001? In Japan in 1987? Is it going to save the global housing market right now? There is a point of impending outcome to human behavior that all of the stimulus in the world won’t fix.
Liquidity is important to re-ignite the business cycle and fuel its expansion. But, there is some precedence that liquidity does not always find a home at a point in the cycle. You can stimulate the economy, the consumer, whatever, all you want and that doesn’t mean anyone is going to take it. Have you never been stimulated and didn’t want it or accept it? lol. If there was always a home for stimulus, we’d never have a slow down or a recession.
So, when does this cycle break? When dumbasses have driven commodity prices so high there are no takers for the underlying asset? When home prices have been driven so high globally that there are no buyers at the prevailing price? When global equity prices have been driven so high that buying pressure evaporates? 100% historical precedence Mister Market and Mother Nature always win regardless of liqudity.
Ultimately, there is another option. Much of this liquidity will self destruct and there will be tremendous loss of wealth. Again, Mother Nature and Mister Market usually find a way to fix all imbalances. Sometimes it isn’t to our liking but they usually go about there own business in the long haul regardless of what we wish for, hope for or want. It is not our Manifest Destiny to have hedge funds located beside every 7-11 plowing commodity prices or equity manias. This locust-like feeding frenzy for never ending returns will ultimately lead to their self destruction. So, this mania too will pass as a cleansing of the excesses takes place at some point. Today, next year, next decade? Who knows but I tend to think their mania will die with the purging that started in 2000 across all nearly financial markets.
If you believe we need to keep mopping up all liquidity, we will surely have a slow down of unimaginable consequences. Market forces do work sometimes regardless of the amount of liquidity. It is time for the Fed to pause and look at coincident data.
This ties in well with the previous Blame the Fed thread. Barry mentions there are multiple factors affecting the economy and markets.. but this latest bull market has been driven much more from the housing boom than a more traditional domestic US manufacturing boom. Given out sourcing and competition from China/India it is unlikely that an increase in manufacturing will compensate for a housing slow down. A housing boom is more consumption oriented than an investment oriented manufacturing boom, therefore I think Barry’s comment about the US economy being multifaceted and resilient and capable of quick bounce back may not be as accurate an assessment of today’s economy as has been in the past.
However the housing decline data highlights the importance to the Fed in promoting a low long bond interest rate environment .. escalating interest rates will put even more preasure on house prices.This may be another reason the Fed may eventually lean more towards over tightening…
As Barry said high inflation expectations reflected in the bond market can get quite ugly.
Funny how this focus on housing is not the one that the new improved and more transparent Fed has.
No, as close as they come is ‘the data’ which they hope will be understood to mean the entire Universe, the housing data being only part and perhaps a minor part given the amount of attention –the peculiar fixation on ex-housing.
Better to say nothing about a precarious position than upsetting it by mentioning it maybe –like the Doctor is not about to break the news to you that your heart condition is so fragile that the slightest shock will kill you.
Yo B,
Oh, I think it always matters; “nothing matters but liquidity” cuts in both directions. Liquidity contraction could become the only thing that matters at some point too.
The only way the OECD can pay for the outsized promises it’s made to its people and the world is to induce serious inflation. But, well, how? Bill Gross made the point awhile back that there’s very little powder left dry at this point when it comes to stimulus. I don’t know who’s left wanting or able to borrow more at this point. Labor’s dead, and while inducing spending via debt creation works for awhile — apparently a really long while — the pattern of how that ends is clear.
Was the Great Depression less about the gold standard and more about the mechanics of money?
I’m sorry, but I can’t get too worked up about a decrease in the rate of GROWTH in housing prices. Show me an actual decrease, and we’ll talk…
(Not that I disagree with the basic thesis, but that first chart really doesn’t help your case).
I’m sorry, but I can’t get too worked up about a decrease in the rate of GROWTH in housing prices. Show me an actual decrease, and we’ll talk…
(Not that I disagree with the basic thesis, but that first chart really doesn’t help your case).
Huh?
What does that off topic rambling have to do with my response to your initial statement of “The draining of excess stimulus here has much further to go, just like other markets.” and my response to that statement?
Nothing as I can see.
Interesting. . ..
if you add total us population to the chart you get some more clarity.
The # of people per house for sale is around 571. In the early 60’s it was around 800.
the low was in 1974 when we got to about 1 house (for sale) per every 500 people.
(all numbers approximated based on the chart).
so. . . .though the peak looks really high right now, its actually not that bad – adjusting for population.
and, in 1974, it didn’t take a long time to work off the inventory (or so it seems).
donv, about a week ago the government reported that the median new home price was up .9 % from a year ago. I believe inflation is much higher than what government statistics show. But I don’t think anyone thinks inflation was only .9%. So is not the median new home price declining in real terms?
According to the NAR the median price of previously owned homes went up 4.9% from a year ago. For this number, if we trust the NAR and government inflation stats, then the median existing home price is still up a very small percent.
critical: so your US population is 300 mil or 320 mil including illegals..that is about 10% differential…in any case, your reasoning is suspect as at 70% ownership today and 20-30% poverty rates (most renters?), and new household formation at 1 mil household/yr (max) will give u a better picture.
Trying to agree in too-few-words that we need the liquidity and the inflation to avoid an unwelcome further disinflation, for the reasons you cite. Mine isn’t a belief that we need to drain more liquidity from the system, but one that we’ll be pushing on a string with people unwilling to borrow soon. This debt deflation would come while total debt is over $30 trillion.
Sorry for the confusion.
could a RSI be calculated for home sales?
Can’t help thinking people here are missing the forest for the trees: Inventory… all else follows. It’s not just that inventory is so high (perhaps by some historical standards it’s not); it’s that inventory is as high as it is and accelerating with so many factors pointing to continued increase (declining sales, near-record rates of ongoing construction, the speculator owned property waiting in the wings, and the possibility of inventory from foreclosures and distressed owners).
Apologies for the hyperbole, but the inventory numbers look like they’re on their way out of the stratosphere and beyond the solar system.
As prices drop in response to declining sales chances, the liquidity in the lending industry loses it’s driving force (speculative high-dollar high-volume loans) plus employment and consumer spending decline, and so on.
Everything else is non-essential unless it mitigates inventory.
Interesting graphs for housing activity in the U.S.
The Feds are about to shoot our collective foot
After the release of FOMC minutes yesterday the bond market priced in the 60% chance of rate increase in June. They were worrying about inflation, overheating economy and possible 50 point rate increase.
Dont be fooled by inflation fueled by borro…
I think you have only seen the tip of the iceberg. People forget what the baby boomers will do to the home equation as they swap out of their ranches and colonials and into condos and nursing homes. It would be interesting to see the breakdown between condos and single family homes in the above charts. I think the value of single family homes is going to fall 10-20%.
As an interested reader from the UK ive got a few points id like to add to the debate. The UK housing market over the last 6 or 7 years has grown a lot more markedly than the US housing market. Affordability is much more of an issue over here than I would imagine it is in the US with the average house price around £160k or about $300k. The UK market had its strongest period of growth around 2003/2004 and at that point it was looking like the bubble was going to burst. Many were calling for UK house prices to crash as interest rates began to rise. Much of the recent boom in prices had been fueled by a big increase in the buy to let market and much of this had been targetted towards condos in city centres. The theory was that it was very hard to earn an economic return above financing costs with rental yields of around 4-5% and borrowing costs around 5-6%. The rental yield is also a little illusory because voids were very high. All this led to a belief a sharp fall in prices would ensue as all these buy to let investors who were losing money month on month would eventually be forced to sell up and these properties would end up reposessed. This would trigger a sharp downturn in the economy as a whole because it was assumed that the consumer, via large equity withdrawals on their rising house prices, had been spending way above their means.
Im sure all this sounds very familiar to where the US is now. What eventually happened was that consumer spending did indeed slow down very sharply. House price growth also slowed sharply. The condos purchased by buy to let investors fell sharply in value in that they are now selling for 20-25% less than when they were purchased in 2003/2004. However, house prices as a whole did not fall across the country. Sure there were regional variations, but as an average they were up 5% or so in 2005. Since then after a cut in base rates to 4.5% from 4.75% house price inflation has picked up sharply and is up around 8% over the last 6months or so. I wouldnt imagine the US market is going to fare any different than we have.
All the headlines about sharp falls in florida condos etc is no different to the massive slumps in UK condo sales prices over the last 2-3 years. It made no difference to housing overall. In fact in some regions prices have doubled during that period. Interest rates have pretty much peaked in the US and once that becomes apparent house prices will rebound and the theory about the US housing bubble will dissipate quietly in the same way that it has over here.
The graphs are excellent. They explain a lot. One factor to reduce house prices is an economic slowdown. People have ask themselves the question, is future economic growth possible with oil at $70? Is the declining world oil supply going to raise the prices even higher. What about hurricanes this season? Sorry to say, future economic growth is not possible. You cannot grow an economy without growth in energy consuption, like electicity and oil. Expect recession after recession and radical changes in the economic structuring.
Americans love their commutes. Sometimes traveling 60-90 minutes each way to their jobs. In 2000, a commuter might have had a monthly gas bill of $250. In 2006 that same monthly gas bill is now $750. Now the family budget hasn’t changed. If anything, wages have stagnated or even gone down a bit.
Increases in the price of gas will create a long economic slowdown. Expect house prices to sharply decline over the next 10 years or more. Before they reach a bottom and start to increase, if there ever is a rebound in house prices.
Foolish !!!!!!!!!!!!!!!!
All I know is that within the last month there has been a gigantic number of homes for sale here in Las Vegas, up and down the streets everwhere homes are for sale, on every corner there are “Open Houses”, and signs which read, “House For Sale, Free Down Payment” etc.
I’ve never seen anything like this before, and I think its just getting started too, its only been about one month now that all of this started happening. To me it looks like an epidemic.
Forget housing to make money, its over, this is the best way I’ve ever found to make money, try it for yourself and see for yourself. The place is called Forex Daily Signals, here is their website:
http://www.forexdailysignals.com/
I want to give buyers something to talk about by investing their resources into getting their home into its best condition. This is time and money well spent but you’ll need to concentrate on the areas that will bring you the most return.
Focus on the areas that buyers notice and value – bathrooms, kitchens, and curb appeal. Make sure your rooms are spotlessly clean and free of clutter. A fresh coat of paint in a neutral color is one of the least costly investments that can go a long way towards making a good impression. De-personalize your rooms by packing away your nick-knacks and dust catchers. If possible. put extra furniture or belongings into storage so that your home appears open and spacious. Clean your windows so they sparkle – and don’t forget the window sills.
Trim your trees and hedges and keep the lawn mowed. Plant some colorful flowers in the garden. Drive by your home and try to look at it from an objective viewpoint. What’s the first thing you notice? Does your front door say, “Welcome”? If not, maybe a fresh coat of paint – or perhaps even a new front door – and some potted plants could help.
The way your house looks should not be your only concern. Is there a pet odor or other potentially offensive smell in the air? Be sure any odor producing agents are removed or controlled to keep your home fresh smelling at all times. When you live in a home you can become used to certain odors and they are easy to overlook. Be sure to ask others if your home passes the “sniff” test.
Be aware that certain investments you made for the personal enjoyment of your home will not necessarily raise the value of your home to prospective buyers. Don’t expect to add on to the price of your home all the money you paid to improve it.
In fact, some things, like swimming pools, can frequently be viewed as a liability. Generally, painting and improving your kitchen and bathrooms will be a good investment. The kitchen is viewed as the heart of a home – most family activities take place here so improving your kitchen can facilitate the sale of your home. Adding a bathroom usually generates a good return as well as adding decking outside.
The best return for your home improvement dollar comes from bathroom remodeling (80%), bathroom addition (81%), minor kitchen remodeling (87%), major kitchen remodeling (80%), and a second storyaddition (83%). The least profitable investments are a home office (54%), reroofing (60%), a sun room (60%), replacing windows (68%), and refinishing your basement (69%). In a slower market, it’s essential to pay attention to the presentation of your home. With so many homes on the market to choose from, you want to be sure you outshine the competition. You may even want to consider hiring a professional home stager to help you.
One book that was interesting to watch play out on this whole cycle of the economy, but especially the housing market is “The Oil Factor” by Stephen Leeb. In it he talks about many macroeconomic subjects including housing. The book was written before the first big spike in oil in 2004, and it’s been right on the money with several events and trends (like this one).
Earth, a fixed environment with LIMITED resources.
To the bozo’s with their heads still in the sand. Get it, Limited, as in fixed amount, never to expand. If we can find more, it’ll just hold off the inevitable. Kuntsler is right, however, current exporters, have already started exporting LESS. When this “Peak Oil thing” becomes part of the general lexicon, growth goes into the shitter, the economics of growth will be replaced with the economics of sustainability, and all the grief that goes with it.
Nuff said?(Naw, theres never nuff said to ostriches…hard to hear with your head in the sand of “Progress and Technology”.)
Earth, a fixed environment with LIMITED resources.
To the bozo’s with their heads still in the sand. Get it, Limited, as in fixed amount, never to expand. If we can find more, it’ll just hold off the inevitable. Kuntsler is right, however, current exporters, have already started exporting LESS. When this “Peak Oil thing” becomes part of the general lexicon, growth goes into the shitter, the economics of growth will be replaced with the economics of sustainability, and all the grief that goes with it.
Nuff said?(Naw, theres never nuff said to ostriches…hard to hear with your head in the sand of “Progress and Technology”.)
Greed gone wild,is the only way i can describe this real estate mess.Builders ,lenders,etc. built too much, lent too much,inflated the values too much,overcharged us too much,and too easily, with the errors they put on our credit!which then forced us into hi risk loans,and i dont know who got these teaser rates, on these A.R.M.`s ,but i never saw any,and now we have a catch 22,the only ones that can sell homes now are the banks and lenders foreclosed props.that they can afford to lower the prices on ,and the builders that have also lowered their prices to move inventory.Thats great if you can buy now, but how if you cant sell now, because they have lowered the values so much.Then they further trap and destroy us and the r.e. market by not letting us refi.,why ?again cause they have lowered the values so much, we are upside down now.THESE CRIMINALS CANT GET ANYMORE INCOMPETENT OR GREEDY THAN THIS AND SHOULD NOT BE IN BUSINESS, WHEN THEIR IGNORANCE CAN CREATE THIS MUCH PAIN AND SUFFERING AND DESTRUCTION TO OUR COUNTRY !
What can I say about your writing but “wow” – you really know your subject and put your points across well. I can’t wait for your next post. I’ve found a guy who is good to read too will pass the details on when I find them.
I found your post really interesting and it has really improved my knowledge on the matter. You’ve assisted my understanding on law of attraction which is usually a hard to tackle subject, and not a lot of people can do this with the ease that you seem to. Thank you!
Great Post! It helped me to make sense of some of the issues with the subject. I find your style very informative and can’t wait to read more. There is another good blog on the subject that I was going through some time back.
Check out what is going on in Orlando more up to date forecasts http://www.housingrisk.com
Gabe is right in some aspects,but builders being criminal?or the banks? How about the buyers being ignorant, for the most part people in the US think they Deserve things instead of earn things. Well now its time for the smart taxpayers to bail out the ignorant ones and the banks. THE AMERICAN WAY!