The Housing Market -- Worse Than Some Realize

From Raymond James strategist Jeffrey Saut's latest essay:

Bear market or not, we think when the Israeli/Lebanon conflict is resolved the markets’ focus will revert to the problems evident before the “Israeli war.” The most troubling of those problems, in our opinion, is what is occurring in the real estate markets and the concurrent negative “wealth effect.” Indeed, according to Raymond James’ real estate team, $2.7 trillion worth of adjustable rate mortgages will reset at higher interest rates over the next few years, depressing disposable incomes. They further noted in their recent real estate report:

“Examining the fundamental environment for housing, the current situation appears somewhat more tenuous, in our view, than some observers may realize, particularly when compared to the cycle of the late 1980s. The primary driver of housing is affordability, in our view, and from that standpoint we are facing lower levels today than at the peak of the late 1980s cycle, in spite of the fact that mortgage rates remain some 300+ basis points lower today. Additionally, during the late 1980s, affordability trends were more favorable, meaning that affordability was improving following an extended period of unaffordable conditions during the late 1970s and early 1980s, whereas today conditions are deteriorating following an unprecedented period of very high levels of affordability.”

They go on to state:

“From an inventory perspective, today also appears more challenging than during the late 1980s based on absolute levels of inventory (565,000 today vs. 358,000) as well as months’ supply (5.8 months today vs. 5.0 months). Some pundits have prophesized that inventory levels should moderate, based on many investor cancellations having already been dealt with; thus, cancellation rates should slow in the back half. While we do not disagree with the thesis that investor cancellations may be moderating, we believe that, based on discussions with our contacts, most cancellations today are legitimate buyers who are walking away from earnest money deposits out of fear of declines in home prices. Furthermore, we expect inventory levels to build even further in the back half.”

“Another aspect of inventory that we consider is the “hidden inventory” that we have written about extensively. This is inventory that is not currently captured in the traditional single-family inventory data because these are homes that are for rent, and show up in the rental stock data. Over the past several years, single-family vacancy rates have spiked, we believe as a result of a surge in investment by individuals in single-family real estate. In summary, given the high inventory levels in the various supply channels, there are more vacant houses in the U.S. today than at any time in history. We estimate that there are currently six million vacant housing units comprised of vacant for sale units, vacant rental units (including condos, duplexes, and apartments), and unsold homes in the new construction pipeline. We believe selling these inventory levels down to more normalized levels will take two to four years, similar in timeframe to the 1987-1991 housing correction.”