What Housing Recovery?

All of this information about a housing recovery is just plain false. The biggest perpetrator of the housing recovery myth is CNBC and they actually ran this story Friday, showing it is the lower priced homes moving, all other homes are just not moving, period.

There is simply no recovery in housing at this time and if this chart tells us anything, it is that the market will, at best, be flat for some time to come. However, I am of the mind, as indicated in numerous other pieces I have written, that we still have a long way to go on the downside before things begin to level out. This means that banks, 81 YTD, are going to continue closing because they are losing money on these mortgages as people just walk away from homes that they cannot sell and are underwater in.

A full one third of all sales in July were of foreclosed properties, and as more foreclosures hit the market, you can only expect more downward pressure on prices. Foreclosures are only increasing, as we saw from Thursday’s Mortgage Bankers Association report, and that will mean more inventory.

I think that is proof enough that things are just not that good. I may have missed out on a couple of percentage points over the past week, but the market is going to come crashing down in the near future. Why, because all of the data supporting a bull run is over hyped and inaccurate at best. Housing is one of the data points supporting the bull’s case, but look at the data point and tell me that there is a recovery taking place.

Take a look:

U.S. Existing Home Sales Yr/Yr

$0 – $100,000	Up 38.8%
100,000 – $250,000	Up 8.7%
$250,000 – $500,000	Down 6.2%
$500,000 – $750,000	Down 8.9%
$750,000 – $1,000,000	Down 10.6%
$1,000,000 – $2,000,000	Down 23.3%
$2,000,000 +	Down 32.4%

Source: National Association of Realtors

As I have said numerous times before, burying and hiding problems through bogus accounting will only make the problem worse long-term. Enron tried it, MCI tried it, now we have the banks trying it through lax mark-to-market regulations. The FASB enacted the mark-to-market because it made sense, if you had to sell a security today you cannot just wait for a nonexistent price to come along, which is what the new regulations let banks do for accounting purposes.

One last point about this, ever since mark-to-market went away bank earnings have all been good. Do you see the problem? Frankly, real estate is still their biggest problem and the above information supports that theory.

Comments

[a. palmer jr.:]

From the chart it looks like people are moving out of their mansions into regular homes. That coincides with an article I just read about the rich, for the first time in a long time, actually getting poorer. There's really no one around to buy up the multi-hundred thousand dollar homes; all the institutions are broke and the people who still have a little money are afraid to spend that much.

Aug 23 08:56 AM

[prudentinve...:]

High-end homes, at least in New England, had been selling at an illusory price based on inflated value of land. If you take a house, multiply the square footage by a reasonable construction cost per sq.ft. (say $250/sq.ft. for high-end), you would have found that selling prices at the bubble peak were triple that figure, implying that the a suburban lot was worth double the costs of building the house on it.

By contrast, after the collapse of the 1980's housing bubble, houses were selling for less than their construction cost, implying a negative value for the lot.

We may not see negative values for land this time, given ZIRP/QE, but I expect prices for the high-end still have a long way to fall, at least until land is worth no more than half the construction costs. This drop is likely to be slow and protracted, and thus will nag at bank balance sheets for many years to come.

Aug 23 10:13 AM

[Summer Sea:]

Wouldn't it make more sense to allow people owning homes in the $750 + range to stay in the homes? The banks are going to "eat" a big loss anyway after forclosure or a short sale; so why not reduce all these principles bringing them in line with the market and move on.
Learn the lesson and make sure new loans are good ones.

Aug 23 10:25 AM

[ccollins:]

You're funny.... Have to laugh at this big mess...


On Aug 23 08:31 AM j-dub wrote:

> Ya gotta love the schills on tv!!!
> Every month is a bottom and every sputter is a ROAR
>
> You wanna see a housing recovery, do ya?
>
> Consume some magic mushrooms, wait an hour and start looking at some
> housing charts. I mean, REALLY LOOK AT THEM DEEPLY..................
>
>
> and......................
>
> Bingo!!!!
> THERE'S YOUR RECOVERY

Aug 23 11:04 AM

[Richard Wak...:]

Can you tell me where in the Natl Board of Realtors did you find sale prices by various price category? I cannot come up with that data. I believe, as you do, there is no real housing recovery.

As an analyst, I am trying to track thru existing sales the same way one can analyze new home sales.

Thanks

Aug 23 12:10 PM

[User 353732:]

1.As housing prices fall, volume for the cheapest properties will ,of course, increase since that is way markets adjust. This means however, that the aggregate value of all housing stock will keep falling. Rising low end sales volume is no indicator of the value of housing stock.
As the aggregate value of houses decline and debt service burdens increase, millions more households will see their home equity shrivel to almost nothing or go to zero.
The social, political and financial consequences of such a mass evaporation in home equity so quickly have yet to be manifested, particularly for people over 65, who have also seen their retirement stock portfolios shrink by 35 to 40 % . In fact, the stock based retirement accounts of a majority of middle class American households are now worth substantially less than 10 years ago despite a decade of dividend reinvestment and capital contributions.

Nothing good can come of scores of millions of households suddenly finding they have negliible or no net worth even as the political and media bosses tout a non-existent real estate "recovery".

2. Rental property that caters to the lower -middle class may do well in the right zip codes(if bought at the proper price, of course: perhaps 10 to 12 times gross annual rent)as millions of middle class households become renters(having lost their homes) until they can rebuild their cash positions and savings so they can again become homeowners (in 3 to 10 years) or as downward mobility forces more middle- middle class households into the lower middle class ranks: not destitute enough to qualify for housing assistance but too cash/credit poor to quailfy for a home loan.

Aug 23 12:21 PM

[Jack Worgan:]

This reminds me of the Great (or not so great ) Depression. In Pennsylvania, banks started to foreclose like mad. Then, OOPS. they realized that they were going to have to maintain and protect these homes. A problem almost bigger than getting their money.

They solved this problem by leaving people in their homes if they agreed to protect and maintain them. An inspector would come around every three or four months to check. As WWII started in Europe and jobs materialized, everyone restarted their payments again. It was a win / win situation.


On Aug 23 10:25 AM Summer Sea wrote:

> Wouldn't it make more sense to allow people owning homes in the $750
> + range to stay in the homes? The banks are going to "eat" a big
> loss anyway after forclosure or a short sale; so why not reduce all
> these principles bringing them in line with the market and move on.
>
> Learn the lesson and make sure new loans are good ones.

Aug 23 12:35 PM

[The Geoffster:]

Principal reduction is a taxable event unless there is an exemption. I don't know how my neighbors would feel knowing they had just gifted me a principal reduction on my mortgage. You don't think the banks are eating these losses do you? Moral hazard is real. The more bailouts, the less trust.


On Aug 23 10:25 AM Summer Sea wrote:

> Wouldn't it make more sense to allow people owning homes in the $750
> + range to stay in the homes? The banks are going to "eat" a big
> loss anyway after forclosure or a short sale; so why not reduce all
> these principles bringing them in line with the market and move on.
>
> Learn the lesson and make sure new loans are good ones.

Aug 23 12:50 PM

[manya05:]

As someone much smarter than me said: there are lies, there are damn lies, and then there are statistics. Watch how the statistics are reported, now they are trumpeting monthly increases (July is up form June!). This of course happens on a seasonal basis. Once we go late in the Summer/Fall and the seasonal numbers start decreasing month-over-month, they will start reporting year-over-year (as long as they are positive).

No turd will be left unturned to find a green shoot underneath.

Aug 23 01:09 PM

[Steven R. S...:]

Well said, and about time. In my Region, the Inland Empire area of So. Cal. the bulk of the new sales are to FHA Buyers who do not have a down payment.

I have seen new homes sell for $225,000 this year, that have had Seller paid Concessions that were the key to the transaction, in the amounts of $10,000 in Buy Down Interest Rate costs, $10,000 in Seller Paid Closing costs and $10,000 in Upgrades given to the Buyer by the Seller; for a Net or Cash Equivalent Price of $195,000.

Only the $225,000 gets reported into the statistics. The reality, in terms of Market Value as defined by USPAP, FIRREA, HUD or FNMA; is closer to $195,000 if not lower.

NAR will always publish anything that helps their members sell more homes, helps bring buyers back to the market. None of their members who sell homes for a living ever have to deal with the issue of Market Value, only Sales Price. And to them, it does not matter what is packed into the Sales Prices, which are propped up by the Stilts of Concessions.

Aug 23 01:31 PM

[Robert Gosney:]

How can anyone "move-up" to the higher price tiers until there is stabilization and appreciation at the lower and entry level price tiers? It seems to me that the recovery will take place at the entry level first.

You touched on the phenomenon of voluntary defaults. People walking away from houses not because they can't afford them but because they don't like their negative equity position. I don't know what portion of home foreclosures are voluntary and what are involuntary, but I do know that it's a significant proportion. That skews the numbers so as not to reflect (to some degree) the true economic realities. Putting more foreclosures on the market and driving prices artificially lower.

I agree that real estate has not stopped deflating. But, my guess is that it has the potential to "break-out" once it turns.

Aug 23 01:40 PM

[sod:]

As a natural Bear, I'm inclined to skepticism whenever government puts out optimistic figures. While the housing bull market may be over, the data supplied by the author does not indicate a crashing housing market in the median priced homes. The fact is, at the lower end to, 0 to 100,000 and then to the average range, of 100,00 to 250,000, these home sales shows a positive of 47.5%. What we need to know is what percentage the sales make up the total housing sales. I would guess the majority, by far.

Aug 23 01:41 PM

[Hexan:]

The prices of homes will drop over an extended period, even without any forclosures.

It's simple demographics. Echo Boomers have kids going off to college (2nd spouses). During the next few years, the trend towards downsizing the home will only grow. Sellers will want to liquidate their primary asset (home ownership still represents on of the primary sources of American wealth) to purchase low risk, income producing assets to shift into retirement.

Buyers on the other hand, are few and far between. Outside of the growing group of illegal immigrants, there is a much smaller group of younger people in the housing market. Demographics also make this group less likely to purchase. Younger people are loaded with debt, both from college loans (at new higher non-government rates) and from consumer credit. In an environment of tightened underwriting, very few young people have the down payment banks require.

Second, and more important, this group of young people are getting married at much lower rates. Those that do marry are having fewer children at a later age, if they have children at all. The primary market for homes consists of 3-4 bedroom homes, designed for two parent/two child families. Higher divorce rates also have create more 1-3 person households.

This means an eager group of asset-rich, income-poor sellers trying to move larger houses to a much smaller group of buyers, who are indebted, single/divorced, childless or willing to wait to purchase.

Aug 23 02:25 PM

[Mark Bern:]

There is also the issue of the shadow inventory of foreclosed homes being held off the market by banks in an attempt to allow listed inventory drop. This number of months of inventory is a very closely watched metric and the banks are trying to manage this number down to a more favorable level to create market confidence.

In theory, if market confidence returns, housing prices will stabilize and more people will start buying houses again. With the increased demand, the hope is that prices will again start climbing so that banks can get better prices for their homes.

Add to this, a report by (I forgot the organization name) an organization that tracks mortgages, delinquencies and foreclosure. The report predicted that, based upon the trends in delinquencies, we will have another 13 million foreclosure over the next five years. At the time of the report, we had experienced only 1.5 million foreclosures since the beginning of the recession. This would indicate, once again, that we can expect increased numbers of foreclosures coming to the market going forward and inventory (unless it is managed by the banks) will begin to increase again and stay high for years.

I don't think that the banks can afford to keep putting off foreclosures or hold foreclosed inventory off the market in numbers great enough to stabilize prices. I am not a perennial pessimist trying to talk down prices. I currently hold over 100 investment properties, so I would like to see prices rise. I just don't see it happening any time soon.

Aug 23 02:59 PM

[TCK:]

Another consideration ?

How does an increasing unemployment rate and a housing recovery coexist ?

Aug 23 03:50 PM

[Nathaniel C:]

The only problem with the housing market is that prices are still too high compated to the historical inflaton adjusted average. If we would just let prices fall to the average level buyers would come back in and the market would stabilize. Keeping people in their house who cannot afford the house is not a long term solution. Call me old fashioned but if you cany afford a house you should not be able to keep the house. I know this sounds radical but it is the truth.

Aug 23 04:05 PM

[Ray:]

The data was, surprisingly, on CNBC.com The Real Estate Blog.


On Aug 23 12:10 PM Richard Wakefield wrote:

> Can you tell me where in the Natl Board of Realtors did you find
> sale prices by various price category? I cannot come up with that
> data. I believe, as you do, there is no real housing recovery.<br/>
>
> As an analyst, I am trying to track thru existing sales the same
> way one can analyze new home sales.
>
> Thanks
>

Aug 23 04:46 PM

[58robbo:]

the banks shouldn't be bailed out. period! without bailing them out they are forced to compromise with homeowners. a very good example of this is the way the new zealand govt dealt with banks when farm subsidies were removed


On Aug 23 10:25 AM Summer Sea wrote:

> Wouldn't it make more sense to allow people owning homes in the $750
> + range to stay in the homes? The banks are going to "eat" a big
> loss anyway after forclosure or a short sale; so why not reduce all
> these principles bringing them in line with the market and move on.
>
> Learn the lesson and make sure new loans are good ones.

Aug 23 05:33 PM

[If Then:]

You made a good point on seasonal adjustment made on the sales number. I noticed that without the adjustment, the sales number actually went down.

Any idea what formula NAR uses for seasonal adjustments? Appreciate if you can point me to the source. Thank you


On Aug 23 01:09 PM manya05 wrote:

> As someone much smarter than me said: there are lies, there are damn
> lies, and then there are statistics. Watch how the statistics are
> reported, now they are trumpeting monthly increases (July is up form
> June!). This of course happens on a seasonal basis. Once we go late
> in the Summer/Fall and the seasonal numbers start decreasing month-over-month,
> they will start reporting year-over-year (as long as they are positive).
>
>
> No turd will be left unturned to find a green shoot underneath.

Aug 24 01:47 AM

[Russ Wetherill:]

What constitutes a "median priced home" depends on where you live. In many parts of California, New Jersey, Connecticut, New York, etc. a median priced home can be in the 500k to 750k range - this buys you a 3/2 built in 1950 on a postage stamp lot in SoCal.

Currently, the median sales price is much lower than the median value of the homes in many of these markets for the simple reason that higher priced homes (>300k) aren't selling.

So we may both be right when we say that median sales volumes are increasing or decreasing. Although it is pretty clear that above a certain dollar amount (250k) the sales volume decreases.


On Aug 23 01:41 PM sod wrote:

> As a natural Bear, I'm inclined to skepticism whenever government
> puts out optimistic figures. While the housing bull market may be
> over, the data supplied by the author does not indicate a crashing
> housing market in the median priced homes. The fact is, at the lower
> end to, 0 to 100,000 and then to the average range, of 100,00 to
> 250,000, these home sales shows a positive of 47.5%. What we need
> to know is what percentage the sales make up the total housing sales.
> I would guess the majority, by far.

Aug 24 01:54 PM