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The latest report from the Census Department reinforces my judgment that the housing market has bottomed and will be a significant contributor to economic growth over the next few years, beginning in the third quarter of 2009.
From a low of 329,000 new homes sales at an annual rate in January, sales have increased to 384,000 in June. That 's a rise of 16.7% in less than half a year, a sizeable rebound.
Even more striking is the behavior of housing inventories, which are often misread by observors. June was the 28th consecutive month in which new home inventories declined. Unsold new home inventories peaked at almost 600,000 units. Now, they are just 281,000 units, which is about as low as they have been in the last 40 years. Since the U.S. population has grown by about 50% over that period, the level of unsold inventories is now very low relative to the size of the population. Much is made over the stubbornly high level of inventories as measured by the month's supply. Sales were falling during much of the last two years, so the month's supply, which is inventories divided by the selling rate, remained quite elevated. But it only takes a small rise in sales at a time inventories are falling to make a huge impact in the month's supply. That occurred very visibly this month. With sales higher and inventory down, the month's supply fell from 10.2 to 8.8 in a single month! That's a major reduction in the gap towards the 6 month level that is considered normal.
Keep in mind that the unsold inventory is not evenly distributed across the United States. We know that there are significant unsold supplies of housing in four areas: the Inland Empire region of California, southern Florida, Las Vegas and Phoenix. With overall inventories now so low, it is a safe bet that inventories are very lean in much of the rest of the country. So, expect prices to rebound in much of the country in the coming months. And population growth will continue to absorb what supplies of housing remain in the market. Therefore, new home construction should continue to rise and even accelerate once growth resumes in the coming months.
Disclosures: We own various housing and building oriented equities in client portfolios and our personal accounts, including HD, LOW, USG, MLI, and NVR.
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This article has 32 comments:
There is a secondary consequence that will not work in our favor: if we get great volumes at low prices, we hurt the asset quality of the existing homeowner's and lenders not involved in the new sales. At some point, we will hurt consumption further through a destruction of perceived equity.
This miniscule reduction in inventory of new houses is hardly an indication of any bottom in the market if all relevant market data is taken into account.
The bottom will be when inventory reaches 6 months and an equilibrium price is found at that level. We will see then how far prices have fallen. We will also see how much inventory is added at that equilibrium price and if inventory constraints and demand bid the price toward a rising trend (in real dollars). Nobody knows at what value the median will become stable or how fast or how far it may rise off the bottom. We may know that by Q2 of 2010. We may revisit the bottom concept in Q1 2010 when and if inventory hits 6 months.
Based upon your long positions (?) in housing, when a balanced analysis--one which explores arguments for and against bottoming--is absent from article, it degrades the article's value. Clearly you have advanced knowledge of housing, but restating content available in Reuters or AP is not entirely beneficial. Are banks manipulating inventory? I'd like to know. How do the price declines impact those not wanting to sell: those who see their value plunge ever downward?
A worry is the significant decline in New House prices though. To the extent these indicate declining values in same house sales one would think they point to dangers in equity values for more households and, combined with increasing unemployment, a potentially increasing foreclosure rate - indicating a likelyhood of the downward spiral continuing.
The housing industry is a major driver of the economy, and the type of "recovery" that is required to start economic activity is a clearing of the housing inventory overhang and an increase in the number of transactions. These will allow lenders to lend, builders to build, etc. It isn't important that we see beachfront condos selling for $1M+ before we have an economic recovery.
Higher housing prices are probably in the cards over the mid term anyway due to inflation.
Second, the "housing market" right now is not a market at all. A market implies a free exchange where supply equals demand. Today, the “market” is a place where misinformed people confuse shelter with investment, and the government and banks (same thing these days) artificially limit supply on the low end… and then take the resulting statistical phenomena out of context by applying it to the whole universe of data… while ignoring the tsunami of even greater problems that have not yet started.
And as a friendly reminder… there is also effectively no market for high-end real estate mortgages… which means the high-end real estate market has effectively been reduced to an all cash economic exchange.
The problems we have collectively (mis)labeled as “subprime” are not even close to being contained. There are hundreds of thousands of homes that should be on the market that are not due to moratoriums, bank agendas, negative equity, etc. The problem people will start to (mis)label as the “prime” problem… will make the “subprime” problem pale in comparison.
Claiming a housing bottom at this point is optimistic at best, irresponsible at worst.
1. In some local markets they never went up much from there, so there's not much correcting to do.
2. In some markets foreclosures have driven the necessary liquidity to correct the market, so these markets may be near "bottom" in the sense that they only have a little more bleeding to do, which will happen slowly over a number of years.
3. Some markets still have a DEADLY combination: a huge run-up combined with only slightly dropped prices.
The midwest is often an example of #1.
Places like (low-end) Florida and the Inland Empire are an example of #2.
Places like the Bay Area (high-end), Manhattan, and other higher-end markets are an example of #3.
The high-end in general is set for a huge crash. Just like the Bubble allowed you-want-fries-with-that incomes to get into doctor/lawyer homes, doctors and lawyers leveraged themselves into multi-millionaire homes. As has been documented here and many other places, the wave of foreclosures for THIS part of the market is coming soon. When it does finally correct there will be no buyers: FLIPPING was the primary way buyers afforded the high-end, and all of those buyers are deep under water and have no down payment.
When it somehow does move watch for the MEDIUM selling prices to skyrocket. The mansions will be selling for 50-60% below peak, which may finally move them, but it will make the market LOOK much better since the only houses getting any traction will be the high-end.
Yet another reason to not bet your life savings on a few soundbites.
OP
David Ristau
President, The Oxen Group
theoxengroup.com
overall confidence amongst the many with jobs and money (that no one here wants to acknowledge) and low prices have provided a bottom that could not be quantified or predicted...just like nothing else about this has been quantified or predicted.(except by Schiller)
It's like a cold front impacting a warm front early in the seasonal change, there are a lot of storms but there are many things offset...so often it's not so bad.
The economy is coming back. The impact of the Alt-a's and shadow inventory will bleed into it and have an affect but not the catastrophic one it would have had when it added burden to an un propped economy.
If you're in Phoenix and you bought at the top of the market mand are paying your mtg, you're effed for a good while. If you're in Dallas, not so bad.
During the 80's oil bust I bought a condo that bottomed at less than one third of it's value. I rented, held and took a loss on it for 20 years until I could sell it for 2/3 of what I bought it for which was breakeven on the mtg at that point.
Cal values will come back faster but it's gonna be a while. But overall the sun is beginning to shine.
Don't tinkle on everybody's tennis shoes.
Don't forget 11 is a lucky number which could fortell a true bottom.
I am closing my eyes and clicking my heels and implore you all to join me.............
"Just three more bottom calls, just three more bottom calls."
Just imagine if you will, fellow SAers, when the guy who's called the bottom 19 times actually gets it right.
All his/her subsequent articles would routinely begin, "Since I correctly predicted the floor in housing back in early 2011, real GDP......................
The foreclosure problem has not been addressed. Rather it is gaining momentum. And it is about to increase at an even faster rate as the neg-am, alt-A, and “prime” 5yr ARM’s begin to re-set.
The idea of the Midwest leading the pack is nice, but these conservative values didn’t buoy us during the liquidity crunch, etc, and it is not going to stem the tide of the pressures that are mounting now.
Midwestern values may well serve as an exemplary place for us to return. But I’m afraid we have a lot more falling down before we can pick ourselves up, brush ourselves off, and get back on the road that will take us there.
On Jul 27 05:00 PM Alan Young wrote:
> I'm surprised that only one comment has mentioned the seasonality. Okay, home sales are up from January, hurrah. But home sales ALWAYS peak in summer and dip in winter, so that indicates nothing..
++++++++++++++++++++++...
For my money, that would define all economists.
If some of yall want it to be so bad, please don't move to Texas.
Yes, housing is VERY local and yes, the bid-up process popularized following the ruling elite's reduction of interest rates to absurd levels in 2003-4 has and will prompt a relative tidal wave of disasters among the 600k-1.2mm house price crowd who don't have the cash to cover their situations and by virtue of economic requirements must change. My final rant is that I used to believe and use fundamentals to determine values. Now, I just watch the ruling elite.
Or hit a ledge.
On Jul 27 05:10 PM Houston wrote:
> For a few months all you chicken littles have decried the end is
> nigh and the barbarians are still closing towards the gates...the
> alt-a's, the shadow foreclosures...yet the news keeps improving.
> Maybe because
> overall confidence amongst the many with jobs and money (that no
> one here wants to acknowledge) and low prices have provided a bottom
> that could not be quantified or predicted...just like nothing else
> about this has been quantified or predicted.(except by Schiller)
>
>
> It's like a cold front impacting a warm front early in the seasonal
> change, there are a lot of storms but there are many things offset...so
> often it's not so bad.
>
> The economy is coming back. The impact of the Alt-a's and shadow
> inventory will bleed into it and have an affect but not the catastrophic
> one it would have had when it added burden to an un propped economy.
>
>
> If you're in Phoenix and you bought at the top of the market mand
> are paying your mtg, you're effed for a good while. If you're in
> Dallas, not so bad.
>
> During the 80's oil bust I bought a condo that bottomed at less than
> one third of it's value. I rented, held and took a loss on it for
> 20 years until I could sell it for 2/3 of what I bought it for which
> was breakeven on the mtg at that point.
>
> Cal values will come back faster but it's gonna be a while. But overall
> the sun is beginning to shine.
>
> Don't tinkle on everybody's tennis shoes.
> I'm in agreement with those that view real estate should be measured locally. There are some markets that have bottomed, at least for now. Some markets where I am have actually gone up over the past year.
You're dead on with that one JPD. Real estate has to be measured not just locally, but also by price category. In the sub $150K range home prices have stabilized, but there are still substantial inventories of unsold homes in the $400K+ range. Also specific types of real estate are proving more popular with an aging empty-nester population: specifically very small homes that are laid out on a single floor and with very reasonable monthly utility costs. I've even heard some speculate that one of the hot areas in real estate over the course of the next 10 to 15 years will be in selective gentrification of inner-suburban Post-WWII neighborhoods: those are areas that tend to be just outside of city centers with street after street of 800sf to 1000sf single story homes which were built between 1945 and 1950. (I add the term "selective" because one has to be very knowledgeable of the geographical area they are investing in with this type of real estate deal. You can't buy a house because it's a certain type of house without knowing the neighborhood it's in.)
The comments section clearly identifies the majority of people will not hear anything remotely positive. Luckily their sentiment is a lagging indicator only.
www.ritholtz.com/blog/.../
IN Ft. Worth, prices moving up. An open house at a $300k plus house was swamped with interested buyers. Problems with appraisals, getting loans, but the demand is there.
There are four items in place that are tricking people into calling a bottom, when in fact three of these items are temporary. The result is an artificial restriction of supply and artificial pumping of demand.
1) It’s the seasonally strongest buying season
2) There’s a foreclosure moratorium about to end
3) Federal tax credits offered for 1st time homebuyers
4) Historically low mortgage rates (this may or may not change soon)
Check out : www.housingnewslive.co...
As a real estate broker whose income is derived in direct proportion to a recovery, I would be extremely happy if I thought these bottom calls amounted to anything more than wishful thinking and distorted statistics.
I agree there is a misconception about Arm resets, and that some of what Bondtrdr says about resets is true. And I will go out on a limb and assume that instead of saying “Alt-A and Hybrid” Bondtrdr meant to say Alt-A and Prime (because Hybrid = Option Arms… and by definition these are a serious problem for anyone other than sophisticated investors)… so we’ll just go with the implied intent rather than dissect the semantics.
Now, yes, with the 6 mo libor at 1%, its true monthly payments will stay low, but even at 3.5% the loans that re-set to 25yr amortized principal and interest (roughly half of all re-sets), actually increase in monthly payment. Bondtrdr’s bro is stoked because he apparently falls into the category of folks who get the 5 extra year reprieve.
But how long can Libor be expected to stay this low? It would be a mistake to view these short term low rate as a foundation for stability.
Even when the Libor gets to 3%... still very low by historic context… the fully indexed rate that folks like Bondtr’s brother will pay on their mortgage will be around 5.5%. This is pretty equivalent to what they had as a teaser.
But here’s the thing… there are two types of 5yr Arm loans:
-Loans that adjust to variable rate after 5yrs, and extend the interest-only period out another 5yrs (and then switch to principal and interest over a 20yr amortization).
-Loans that adjust to variable rate after 5yrs, and immediately switch to principal and interest over a 25yr amortization.
This is where the misconception comes in… there is an idea that folks in the higher pricing tiers can afford the P&I payment. It does not matter than some, or many, or even most folks can afford the resulting payment shock. What matters is that some folks (many) are making less money than they were 5 years ago, and when their $800k loan at 5.5% switches to P&I… at 5.5%... their payment increases by $1,247 per month.
Even at 3.5% their payment actually increases by $340 per month.
We have the blueprint of how this rolls out from here. If at first you can’t afford, try to refi. If the refi guy says no dice, try to short sale. If only 15% of short sales close, then walk away.
Also, if people are currently walking away from homes they CAN afford because they’re upside down by $100k… is it unrealistic to expect folks to walk away when they’re upside down by $200k? If not, then how about $300k?
There is a further misconception that the lower priced tiers were all made up of subprime borrowers. Many of these buyers had great fico’s and bought with 5yr Arm’s. In fact, there were many more 5yr arms executed than there were 2yr arms. Where does the stability of this market segment go when they experience this kind of pressure?
There is a further misconception that the subprime problems are behind us. Not true. What is behind us is the rate resets. But the fall out is not behind us. We have had to lower rates to unprecedented levels and we are absolutely stuck here. There are pressures mounting to raise rates, but doing so would be catastrophic.
We have dealt with the problem thus far by changing mark to market guidelines and imposing foreclosure moratoriums. To say this problem has been contained is not accurate. I think I was reading Peter Schiff the other day, who made a more accurate assessment… referring to these actions as more of a quarantine than a containment.
From an intrinsic value standpoint and an affordability perspective, the bottom has been in for sometime in the 300k pricing tier… but who cares if the people who want to sell cannot sell and the people who want to buy cannot buy? The low end segment is completely out of whack because there is nothing free about the market. The high end market is extremely overbought and will take a huge correction to set things straight.
But to say the “real estate market” has bottomed at this point, with all these problems under the run, and yet to come, is just not accurate by any true standard.
Inner city locations are preferred but regardless it's a good thing builders remain on the sidelines. Stagnant lots are only helping fuel the demand.
On Jul 28 02:25 PM Bigman16 wrote:
> What difference does it make if Phoenix has a 3 month supply? It
> is completely irrelevant when you have 50,000 finished lots waiting
> for builders to mysteriously appear and build on. When you have no
> barriers to entry and a huge back log of stagnant lots, home prices
> will stay flat for long term. That may explain why builders are not
> lining up to start homes (and thus the 3 month supply).