On Saturday, I posted this chart and wondered why “Some people were calling for a housing bottom.” That generated a ton of emails asking about for further clarification.
The people I referred to were the usual happy talk TV suspects (i.e., Cramer) who have been perpetually wrong about Housing for nigh on 3 years. I not only disagree with them, but don’t respect their opinion — essentially headline reading gut instinct big-money-losers. No thanks.
Then there were the slew of MSM who insist each month on reporting that 3% (+/- 11%) is a positive integer. We disposed of that silliness on Friday.
But the crux of the email was over this post. There are a handful of people whom I disagree with, but nonetheless have a great deal of respect for their methodology and process. Over the past year, these have included Doug Kass and Lakshman Achuthan and Bill of Calculated Risk. We may reach different conclusions about a given issue, or disagree on timing, but these are the folks whose opinions force me to sharpen my own.
When I tossed up that chart yesterday, I had not yet seen Bill’s comments on the subject (McCartney!) but he is one of those people I can respectfully disagree with. We simply have reached different conclusions about the timing and shape of the eventual Housing lows.
There are a plethora of reasons why I believe we are nowhere near a bottom in Housing prices or activity. Here are a few:
• Prices: By just about every measure, Home prices on a national basis remain elevated. They are now far off their highs, but are still remain about ~15% above their historic metrics. I expect prices will continue lower for the next 2-4 quarters, if not longer, and won’t see widespread Real increases for many years after that; Indeed, I don’t expect to see nominal increases for anytime soon;
• Mean Reversion: As prices revert back towards historical means, there is the very high probability that they will careen past the median. This is the pattern we see after extended periods of mispricing. Nearly all overpriced asset classes revert not merely to their historic trend line, but typically collapse far below them. I have no reason to believe Housing will be any different;
• Employment & Wages: The rate of Unemployment is very likely to continue to rise for the next 4-8 quarters, if not longer. This removes an increasing number of people from the total pool of potential home buyers. There is another issue — Wages, and they have been flat for the past decade (negative in Real terms), crimping the potential for families to trade up to larger houses — a big source of Real Estate activity. Plus, more unemployment means more . . .
• Foreclosures: We likely have not seen the peak in defaults, delinquencies and foreclosures. Many more foreclosures — which are healthy in the long run but wrenching during the process of dislocation — are very likely. These will pressure prices yet lower. And Loan Mods are not working — they are redefaulting in less than a year between 50-80%, depending upon the mod conditions themselves.
• Inventory: There is a substantial supply of “Shadow Inventory” out there which will postpone a recovery in Home prices for a significant period of time. These are the flippers, speculators, builders and financers that are sitting with properties that they do not want to bring back to market yet. Given the extent of the speculative activity during the boom years (2002-06), and the number of foreclosures so far, my back of the envelope estimates are there are anywhere from 1.5 million to as many as 3 million additional homes that could come to market if prices were more advantageous.
• Psychology: The investing and home owning public are shell shocked following the twin market crashes and the Housing collapse. First the dot com collapse (2000-03) saw the Nasdaq drop about 80%, then the Credit Crisis of 2008 saw the unprecedented near halving of the market in about a year. Last, Homes nationally have lost about a third of their value since the 2005-06 peak. Total losses to the family balance sheet of these three events are about $25 trillion dollars. These losses not only crimp the ability to make bigger purchases, it dramatically curtails the willingness to take on more debt and leverage. Speaking of which . ..
• Debt Service/Down Payment: Far too many Americans do not have 20% to put down on a home, have poor credit scores, and way too much debt. All of these things act as an impediment to buying a home. At the same time, to get approved for a mortgage, banks are tightening standards, including 1) requiring higher Loan to Values for purchases; 2) better credit scores to get approved for a mortgages; 3) Lower levels of overall debt servicing relative to income for applicants. Yes, the NAR Home Affordability Index shows houses as “more affordable,” but it conveniently ignores these real world factors.
Deleveraging: For the first time in decades, the American consumer is in the process of saving money and deleveraging their balance sheets. After a 40 year credit binge, its long overdue. The process is likely to go on for years, as a new generation is losing confidence in the stock market, Corporate America and their government. Think back to the post-Depression generation that were big savers, modest consumers, who eschewed credit and borrowing. The damage is going to take a while to repair.
There are more reasons I expect the Real Estate market to remain punk for many years, but these are a good place to start when considering the question.
The Housing Boom & Bust, and the 2002-07 credit bubble created massive excesses. More than anything, it is going to take time to resolve them.
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Update: July 20, 2009 1:30 pm
One last element that is so obvious I forgot to include it: Zero % Interest Rates.
As many of you have written, when rates are this low, they only have one direction to go: Up.
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See also:
Housing Starts: Is this the Bottom?
CalculatedRisk, 3/17/2009
http://www.calculatedriskblog.com/2009/03/housing-starts-is-this-bottom.html
Ritholtz: “Why are people calling a bottom for Real Estate?”
CalculatedRisk, 7/18/2009
http://www.calculatedriskblog.com/2009/07/ritholtz-why-are-people-calling-bottom.html
Housing Starts: A Little Bit of Good News
CalculatedRisk, 7/18/2009
http://www.calculatedriskblog.com/2009/07/housing-starts-little-bit-of-good-news.html
The Jalopy Economy
Jeffrey Gundlach
TCW, 06/15/2009
http://www.tcw.com/cmRoot/Funds/CIOLetters/JGLetter_061509.pdf
Previously:
NAR Housing Affordability Index is Worthless (August 13th, 2008)
http://www.ritholtz.com/blog/2008/08/nar-housing-affordability-index-is-worthless/
New Home Starts (July 18 2009)
http://www.ritholtz.com/blog/2009/07/new-home-starts-2/
Housing Starts Fall 46% (July 17, 2009)
http://www.ritholtz.com/blog/2009/07/housing-starts-fall-46/
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