Housing Bubble: The Sequel

We’ll be seeing another short lived housing bubble from the further government sponsorship of home ownership.

Isn’t it enough that the government already gives a tax benefit to homeowners by giving deductions for home interest and property taxes, and essentially opening the deductions door to this group? (I am part of this group for this exact reason).

Home ownership levels skyrocketed to astronomic levels at 65% home ownership rates back in 2007, and with recent foreclosures has likely dropped some. The new legislation - giving a $7,500 loan for first time home buyer purchases in most of 2008, and now a $8,000 credit for those purchased in most of 2009, is going to give even more HUGE incentive for people to buy homes who haven’t owned in the last 3 years.

This will create a short term bubble, and will probably last through early 2010. This will recede however, unless the economy has ‘recovered’ by then. The whole concept of the economy ‘recovering’ is flawed because the economy was a shadow economy, only based on consumer debt and speculation in the housing market creating wealth that was not real. This influx of trillions in value from the increase in home value felt like real GDP growth, but was really like an adrenaline high that leaves you weak and drained afterwards.

So, how will you capitalize on this?

If you are a seller: Wait until you feel that this bubbling has occurred, and that the home prices have increased significantly in a short period of time. Sell your house and rent.

If you are a buyer: buy now and hold for 2 years to get the tax exclusion, and sell it then.

If you are a trader: Buy the IYR now and hold it for ~2 years.

In ~ 2 years short the hell out of the IYR it with SRS.

I know both of these alternatives are a hassle but I am giving the best case scenario here and showing how to take advantage of what is going to be another shadow economy. Welcome to Paradise!

Disclosure: No positions

Comments

[Sean in CA:]

?????

Feb 23 08:02 AM

[Rocknbob:]

Two year rise in real estate values ?? Are you kidding? this "bubble" will last for a week , if that. I say stay in SRS, ride it out, and you'll benefit in the coming weeks/months...

Feb 23 08:58 AM

[nym:]

I see this as a version of the 'greater fool' assumption, buying on the assumption that some fool will be available to sell to. However, to be a buyer of a house, the fool will have to have a job: will he?

Seattle goes through the cycle repeatedly. If Boeing is laying off, house prices go down, and conversely.

Feb 23 10:11 AM

[Fred Voetsch:]

I understand your reasoning but history shows that once a great unwind of leverage begins it is virtually impossible to stop.

The government could offer zero percent mortgages and people would not be interested. They have to worry about their lack of savings and their credit card balances and their auto payments all while hoping they don't lose their job.

We are in the "4th turning" and there is no turning back.

Feb 23 12:57 PM

[scotty1560:]

Sean.. don't count on any housing bubble for the next 10-15 years..
These government packages won't greatly alter the big picture.

Expect another 2+ years to a bottom with slow growth for years.
Ditto with the equities markets.
Resources and taxation will hamper our generation in the coming
years as well.

Feb 23 01:26 PM

[REITBull:]

I'm not sure that IYR and SRS will give you the desired results as they track commercial real estate. A better alternative may be to short the XHB on any short term rally.

Feb 23 01:28 PM

[SAD:]

With the free flow of cash going on these days to fix all things wrong with business today, why not just give each Builder say a billion dollars to discount their homes or write off/write down the land they control. Hey wait! The Big Builders already have a billion plus dollars. By way of example, if a company like PHM adjusted their 29,000 developed lots and took a 1 billion charge it could reduce each of those lots by over 34,000 bucks in cost. Pass that though to the buyer and you reduce the house costs the same. HMMMMM. Sure its not that simple, but you get the point. Taxpayers need not foot the bill when many of these Big Builders have the cash reserves to fix their own problems. By the way, that would leave PHM with close to another Billion in cash to play with. They have more more than most banks!

Feb 23 01:58 PM

[David in D:]

Sean, there will be no 2nd housing bubble. $8K is nothing in terms of what has been lost. Only in very price depressed areas (with homes selling at $80 to $120 K) will you see this help.

Feb 23 02:27 PM

[Sean Privitera:]

I agree that the economy is still screwed overall, it takes a job to get a house, etc. I say those same things when referring to the economy coming back. I am only claiming a short term bubble and I am definitely agreeing with all of you that this will not be REAL growth at all. It will still be more of the same shadow growth. It will be short lived, and will look like the bear market rally in the market we had after the late November low, which was followed by an even lower low.

Reitbull - Nice point, but real estate has seemed to be tied together so either way you go you'll probably get some of that effect.

I am not necessarily saying to buy IYR right now, it likely will experience more downside first while being dragged down by the overall market and maybe even leading the downside as we're seeing today.

Feb 23 03:48 PM

[MGA_1:]

1 to 1.5 trillion in Alt -A & Option resets starting late '09 & lasting through '11? I'm not very optimistic about housing prices for a long time. Sure, there may be a short term upswing... I doubt it will last.

Feb 23 07:06 PM

[Mr. Ed, Jr.:]

The programs you cite are just not big enough to cause a bubble. And they may soon be overwhelmed by the deteriorating housing situation. A new wave of ARM resets is coming, unemployment looks to be rising-- The programs will likely have little impact

And it will probably be a while before a significant number of Americans are ready to jump back into a market that has burned them. (People tend to remember the last thing that happened. It is just a behavioral pattern)

If I buy the IYR now and hold it for 2 years....in 2 years I will not be able to remember why I bought it in the first place.

Feb 24 12:20 AM

[Moon Kil Woong:]

The housing deterioration from here on is caused by the above poster's reasons. That being loss of jobs and income.

Tax brakes are just essentially government's version of deflation. It does absolutely nothing to change the current housing picture unless they are substantial and last for decades.

So no good housing news or bumps for any foreseeable future. Worry about your job not property flipping or you'll be flipping burgers if you are lucky.

Feb 24 01:11 AM

[Mad Hedge F...:]

Here is a novel plan put forth by a hedge fund in Florida, Derivatives Bridge, LLC. Securities backing performing mortgages worth 100% are being sold for 20% because there is no market for these securities. Have the government buy these securities for 60%, rescuing the banks, and then sell them back to the original homeowner. The homeowner then is able to refinance his home, see his mortgage principal drop by 40%, restoring his net worth, and purchasing power. The cost to the taxpayer is zero. This is already possible in some countries like Denmark. If someone offered me a deal like this I’d take it in a heartbeat, even if I had to clean out the sofa cushions and raid my kids’ piggy banks. They say necessity is the mother of invention.

Feb 26 08:20 AM

[driftwood2:]

I don't see how a mere $8000 can induce another bubble to happen. At most, it will slow down the decline in prices a little bit.

Mar 02 01:01 AM

[TFNOON:]

The peak in home ownership was 73%+/-.
The 50-year norm is in the 55-58% range.
Each percent is equal to about 1.2 million housing units.

This 17%+/- overage in homeownership levels is, therefore, equal to about 20 MILLION homes in the hands of people who historically cannot afford to own one.....in a normal economy. In an economy of recessionary norms, homeownership falls to 52-54%.

Mar 02 01:56 AM