Housing: Strong Recovery Ahead

Many investors still fear that housing has another leg down, with prices falling for a year or two, despite recent data suggesting an upturn. It is our judgment that housing has already bottomed and that a strong rebound lies ahead.

Housing will be a contributor to economic expansion this year, probably as soon as the third quarter, with this rebound already baked into the cake. Once job growth resumes, even slightly, housing activity will rise sharply.

Pessimists on the housing market point to the high rate of defaults, foreclosures, and mortgage resets that they expect to depress housing demand and prices for an extended period into the future.

Much of this data they cite is backward looking. Year-over-year declines in home prices include the historical collapse in housing that occurred in the fourth quarter of 2008, which is now old news and that data won’t wash out of the year-over-year comparisons until late this year.

In the meantime, every monthly measure of home prices shows a rise in values over the past six months. This week’s Case-Shiller index should fit this pattern, down somewhat less year-over-year, but likely up for the latest month.

Defaults and repossessions are running at high levels, but home sales are also picking up, as households and investors seek to take advantage of the bargains. Significantly, there’s been something of a change in the nature of defaults. A large fraction of the defaults in 2007 and early 2008 resulted from badly underwritten sub-prime and Alt-A mortgages.

More recently, mortgage defaults reflect the recessionary economy. So any economic recovery should also curtail the influx of defaulted homes into the market. Indeed, with housing values rising over the past six months, fewer households will be upside down in their mortgages and so are less likely to default.

Even with the influx of defaulted homes into the marketplace, housing inventories have come down, most notably for new construction. As of June 2009, unsold inventories have declined for 27 consecutive months to 281,000 units -- one of the lowest levels in 40 years! This decline in inventories is in sharp contrast with the growth in population that is now about 50% larger, suggesting that inventories are now very lean.

July data on inventories will be released this week on August 26 and is very likely to show yet another decline. Existing home inventories are down to 4.09 million as of July 2009, roughly 11% below its peak a year ago. When considering the impact on GDP, only new construction is material, so the fact that second quarter starts are about 2.5% higher than in the first quarter ensures that residential construction will be a positive in GDP no later than the fourth quarter.

In the second quarter, housing declined at a nearly 30% annual rate, contributing to weakness in GDP. Its impact this quarter should be minor, which is a dramatic turnaround within such a short time period.

The full potential for housing to contribute to growth is still being restrained by the recession, since a weak economy tends to reduce household formation. Longer-term household formation trends suggest a need for about 1.5 million units of new construction annually, nearly three times the current rate of construction. Actual household formation is likely running below 1 million, more than enough to continue absorbing housing inventory.

But once an economic recovery starts and young people find work, they will move out of their parent’s homes as quickly as they can afford to do so, adding incrementally to housing demand and meaningfully to the existing imbalance between new construction and demographic housing needs.

So, rather than expecting a weak housing market for the next few years, we anticipate that housing will rise quite sharply, even accelerating over the next year or two, and becoming a strong contributor to GDP and job growth over the visible horizon.

Comments

[concrete guy:]

Charles wrote : "Why else would a builder ever put up another new home when he can't unload older construction, except at a loss? No builder would ever do that. The very simple fact that new construction activity has already picked up for several months is a powerful piece of data. "

Builders are building to suit the limited pre-sold traffic they have (they are building for ready buyers), not because there is a speculative market they can build into. The banks won't currently lend for spec homes.

Hardwood is exactly right....until the banks are underwriting jumbos, the upper tier market is dead in the water. This problem must be addressed before a broad market recovery occurs.

Aug 24 08:09 PM

[Robert Gosney:]

We obviously overshot the top. Are you taking into consideration the possibility of an undershoot at the bottom? Would you call the rise in securities a dead cat bounce?


On Aug 24 02:37 PM Think-About-It wrote:

> Are you serious?
>
> "Housing will rise quite sharply, even accelerating over the next
> year or two..."
>
> For this guessing game I would use history as my guide. The history
> of bubbles popping suggest that they do no reflate "quite sharply."
> Occationally there is a dead cat bounce but that's all it is. I
> would look to a different asset class than the one that just imploded
> when searching for the next wave of accelerating growth.

Aug 24 08:18 PM

[roflmfao:]

too many things to comment on why this is way too optimistic. all i'm going to say is talk to me a year after the government stops interfering. end of story.

Aug 24 09:54 PM

[johngonole:]

Author is correct that with such a low build rate there will be plenty of construction capacity to jump back online when ready. From lots to labor supply is ready.

His thesis of a build up of demand is weak however. In Florida we've heard and seen that many of the illegals have left to go back home. In fact I think the recession has been longer than most people know. The unemployment rate lagged reality because it failed to reflect the fact that many of the first laid off employees were illegal. Especially the contraction that occured in the construction and hospitality industries.

Shadow inventory will suppress what demand there is. Prices can't be expected to rise too much. If home prices begin to rise that is when you will see the homebuilding explode. Why buy old when you can buy new. The only case against this thesis of mine is if commodity prices explode due to recovering economies elsewhere or another lending explosion.

The other thing I would argue is that home prices are still out of reach for a lot of people (and obviously in areas where unemployment is high) compared to their income. Rental rates are dropping in many places which also indicates spare capacity.

I think think housing, bankin, and the stock market in general will head lower till say November or December. The plunge protection team can't keep buying forever. Fundemetals will eventually rule

Aug 25 01:18 AM

[PainfullyAware:]

"Why else would a builder ever put up another new home when he can't unload older construction, except at a loss? No builder would ever do that." - Charles Lieberman

Many "Builders" Have "Deadlines" Built Into Their Agreements With The Cities They Get Approved To Build In.

Build It Out Or Your "Plat" Expires. (Lots Of Money Involved In Getting To Final Plat)

Aug 25 03:01 AM

[Michael Clark:]

Actually, UNLESS we continue the practice of giving mortgages to people who can't afford them (and the banks seem afraid to do that) -- and give morgages to the unemployed -- where will the demand come from?

We have millions of empty houses at the moment. Salaries and wages are going down. Lending is tighter than it has been for a decade. Demographics indicate that the need for new housing will decline. Illegal immigrants have left the country. We are experiencing an "L" shaped recovery. Are the speculators going to pull their profits out of the stock market and throw them into housing again? And get stuck in another false rally?

Aug 25 04:01 AM

[perceptions...:]

Charles,
You are still ignoring trends, including, an aging population demographic, Peak Oil now passing into history, a lowering of leverage in the financial sector and a new housing slump that is set to continue!


On Aug 24 05:37 PM Charles Lieberman wrote:

> The housing market got into trouble because builders ignored population
> trends and vastly overbuilt. The incompetent mortgage lending compounded
> a problem that would have caused a major decline in housing anyway.
> It was not possible for our economy to absorb new construction at
> a 2.2 million annual rate when household formation required about
> 1.5 million new units. The terrible mortgage underwriting just made
> the problem worse.
>
> Now, the imbalance described above has reversed. New construction
> is severely depressed and household formation exceeds housing starts
> by a considerable margin. Moreover, inventories are down sharply.
> Therefore, sooner rather than later, there will be a sharp uptick
> in new housing construction. In fact, this imbalance is already causing
> the housing market to recover. Why else would a builder ever put
> up another new home when he can't unload older construction, except
> at a loss? No builder would ever do that. The very simple fact that
> new construction activity has already picked up for several months
> is a powerful piece of data. It suggests that the widespread thesis
> that housing has room for significant further declines must be false.
> A fuller, detailed analysis is available in a piece published in
> some months ago on Seeking Alpha that takes readers through the details.
>
>
> seekingalpha.com/artic...

Aug 25 08:23 AM

[Alphameister:]

I just can't imagine any sector booming in the economic recovery I foresee other than those that deal with the downside of a bubble bust. I suspect much of any recent strength in housing prices is seasonal and aided by artificial stimulus and very low rates.

Aug 25 08:55 AM

[Brent Forsland:]

Maybe housing numbers are backward looking but unemployment numbers and foreclosure aren't and they are reaching new highs almost every month; Not to mention interest rates are artifically low right now due to heavy buying from the Fed. They have already started to wind this down and will continue to further meaning rates will rise. I'm not sure how you can look at these 3 factors and see any chance for a recovery in home prices in the near term

Aug 25 08:56 AM

[thiazole:]

The response to this article reminds me of the response to articles in March calling a bottom to the stock market. Is this the bottom? I don't know - but I won't blindly follow the advice of the same masses who were predicting the Dow would be below 5000 by now.

The biggest reason people were calling for another leg down starting this fall was the fact that many loans were set to start resetting. I actually have 2 friends who had loans reset within the last month. One was a HELOC loan and the other was a risky interest only loan. Are they in serious trouble now that their loans reset? Nope - both saw their interest payments drop dramatically (more than 50%).

Aug 25 10:28 AM

[HardwoodFlo...:]

This whole thing got me doing a little diggin on past housing crashes:

From August 1974-June 1975 (10 months) starts fell below a million. The low was 709,000. This housing crisis saw only three months below 800,000. From June 1981 to June 1982 (12 months) starts fell below a million. The low was 731,000. Only four months below 800,000. From Sept 1990 to October 1991 (11 months) Starts fell below a million. The low was 786,000. Only one month below 800,000. Since the peak in 2005 starts have been falling and then going off the cliff December of 2006. They have been under a million since March of 2008 (16 months). However, what is important is that they have been at an unbelievable low number (sub 600,000 since Dec of 2008) for a much longer time than ever experienced before (10 months below 800,000 and 7 months below 600,000) with a low of 490,000 (the lowest number on record- ever).

Importantly we have 22% more population in this country since the 1990 housing fall, we have 33% more population since the housing recession of the 1980s and 40% more population since the housing recession of the 1970s.

What is also really interesting is when you put the housing inventory numbers in perspective with overall population numbers. What you find is that we went into this "housing crash" with inventory that was only 7,000 homes per million (people). Why is that important b/c in the 72 housing crash there were 12,000 homes per million, then around 10,000 homes per million just prior to all the other crashes. What's the point, well we went into this thing with actually lower inventory per million people than in other cases. Now, of course this has all been exasperated by the credit crisis and the rest but it is an interesting statistic b/c today the inventory number is only at 1,800 units per million and that is the lowest level in history.

Still, it like OP said it's all local. To homogenize real estate into on monolithic thing is stupid.

Aug 25 11:36 AM

[b. shelton:]

I sure HOPE there isnt a sharp uptick in new home construction because then we are back in the same mess, only worse. The houses being bought right now are mainly first time home buyers and investors. Those in homes cannot move because they lost all their equity. The new home builder inventory may be down but its only a reaction to the tax incentive, just like new car inventory is down. Now everyone will produce like mad expecting the same levels of buying and now that the stimulus incentives are going away the buyers will likely do the same.
As long as there are no jobs were in trouble.
On Aug 24 05:37 PM Charles Lieberman wrote:

> The housing market got into trouble because builders ignored population
> trends and vastly overbuilt. The incompetent mortgage lending compounded
> a problem that would have caused a major decline in housing anyway.
> It was not possible for our economy to absorb new construction at
> a 2.2 million annual rate when household formation required about
> 1.5 million new units. The terrible mortgage underwriting just made
> the problem worse.
>
> Now, the imbalance described above has reversed. New construction
> is severely depressed and household formation exceeds housing starts
> by a considerable margin. Moreover, inventories are down sharply.
> Therefore, sooner rather than later, there will be a sharp uptick
> in new housing construction. In fact, this imbalance is already causing
> the housing market to recover. Why else would a builder ever put
> up another new home when he can't unload older construction, except
> at a loss? No builder would ever do that. The very simple fact that
> new construction activity has already picked up for several months
> is a powerful piece of data. It suggests that the widespread thesis
> that housing has room for significant further declines must be false.
> A fuller, detailed analysis is available in a piece published in
> some months ago on Seeking Alpha that takes readers through the details.
>
>
> seekingalpha.com/artic...

Aug 25 12:16 PM

[concrete guy:]

Hardwood...great set of stats. I knew the relative current inventory number was low, but didn't think it was that low. Yet another arguement for a strong recovery once the major catalists (consumer confidence and normal lending) are in place.

Aug 25 12:54 PM

[Troyhector:]

I think before any meaningful recovery in real estate prices can take root, we need to overcome three major obstacles

"Rebound Obstacle #1: Inventory Glut. Nearly 10% of all homes built this decade are sitting vacant, compared to a historical average of 2.2%. In total, we’re sitting on almost 10 months worth of inventory versus a historical average of four months. If we factor in the “shadow inventory” – the roughly 600,000 homes that banks are withholding from the market – the problem worsens. Excess supply always erodes prices.

Rebound Obstacle #2: Loan Resets. Forget subprime. We’ve already worked through 80% of those resets and written down $1.47 trillion in the process. Now we’re facing a $2.5 trillion mountain of Alt-A loan resets. The first big wave hits mid-2011, with the peak expected to come in early 2013. So we’ve still got time, but the early stats hardly instill confidence. More than 20% of Alt-A loans are already 60-plus days late, up from an average of about 3% for the last decade. If interest rates creep up even modestly in the next two years – a near cinch given the likelihood of inflation – payments will increase notably. In turn, so too will default rates.
Bottom line, another wave of massive writedowns looms on the horizon.

Rebound Obstacle #3: Foreclosures. One in four homeowners are now underwater. If we break it out by loan type the picture gets worse – 25% of prime loans, 45% of Alt-A loans, 50% of subprime loans are severely underwater. Add in the 6.5 million Americans out of work since the recession began and it doesn’t take an Einstein to predict where foreclosures are heading. Credit Suisse estimates that we’re in store for a total of 6.5 million by 2012.Even the Mortgage Bankers Association (MBA) concedes the obvious in its first quarter update, saying, “Looking forward, it does not appear the level of mortgage defaults will begin to fall until after the employment situation begins to improve.” Since the rosiest prediction doesn’t expect unemployment to peak until early 2010, as the MBA acknowledges, “…It is unlikely we will see much of an improvement [in foreclosure rates] until after that.”
The fact that the social stigma attached with “walking away” has been severely (and sadly) diminished over the past decade only adds to the foreclosure heap. And more foreclosures will inevitably push prices lower."

Read More: www.housingnewslive.co...

Aug 25 06:34 PM

[thiazole:]

Great post! It is unusual to see people thinking outside the box here on SA. I know that demand and prices have both rebounded quite sharply in many cities here in Colorado. My house had dropped in value by about $80,000 from the high, but has since then has recovered $60,000 back (and it is verified by the prices being paid for houses near mine). I've wondered if this was a bizzare local thing or if we might see something similar (although I'm sure it wouldn't be quite so dramatic) in other parts of the country as well.


On Aug 25 11:36 AM HardwoodFlooring wrote:

> This whole thing got me doing a little diggin on past housing crashes:
>
>
> From August 1974-June 1975 (10 months) starts fell below a million.
> The low was 709,000. This housing crisis saw only three months below
> 800,000. From June 1981 to June 1982 (12 months) starts fell below
> a million. The low was 731,000. Only four months below 800,000. From
> Sept 1990 to October 1991 (11 months) Starts fell below a million.
> The low was 786,000. Only one month below 800,000. Since the peak
> in 2005 starts have been falling and then going off the cliff December
> of 2006. They have been under a million since March of 2008 (16 months).
> However, what is important is that they have been at an unbelievable
> low number (sub 600,000 since Dec of 2008) for a much longer time
> than ever experienced before (10 months below 800,000 and 7 months
> below 600,000) with a low of 490,000 (the lowest number on record-
> ever).
>
> Importantly we have 22% more population in this country since the
> 1990 housing fall, we have 33% more population since the housing
> recession of the 1980s and 40% more population since the housing
> recession of the 1970s.
>
> What is also really interesting is when you put the housing inventory
> numbers in perspective with overall population numbers. What you
> find is that we went into this "housing crash" with inventory that
> was only 7,000 homes per million (people). Why is that important
> b/c in the 72 housing crash there were 12,000 homes per million,
> then around 10,000 homes per million just prior to all the other
> crashes. What's the point, well we went into this thing with actually
> lower inventory per million people than in other cases. Now, of course
> this has all been exasperated by the credit crisis and the rest but
> it is an interesting statistic b/c today the inventory number is
> only at 1,800 units per million and that is the lowest level in history.
>
>
> Still, it like OP said it's all local. To homogenize real estate
> into on monolithic thing is stupid.

Aug 26 11:57 AM

[Charles Lie...:]

I first started forecasting a rebound in housing early this year and wrote a lengthy piece in March after reviewing the inventory data, which I thought made a compelling case for a recovery within 3 to 6 months. I also thought economic conditions were falling into place for a recovery, which was a necessary part and parcel of a recovery in housing. It was hard to see one without the other.

I find it really interesting how much flak is generated in response to each post on the developing housing recovery. For each person who thinks I am providing some insight, there are at least one or two who think I must be from another planet. For example, this piece from two days ago generated mostly negative comments, with very little commentary on the arguments I presented.

Here we are two days later and: Robert Shiller admits to being surprised by the rise in housing prices measured by his index (but still thinks housing has further to decline) and housing "might" be turning around, while Karl Case, the other member of that team thinks housing is already in recovery. The latest new homes sales data reinforces my analysis. Today it was reported that sales continue rising, while inventories continue falling. At 281,000 units, new housing inventory is at the lowest level of the past 18 years. Month's supply has plunged by more than two months from 9.7 months to 7.5 months in just two months. (How is this possible? Answer: inventories fell at the same time sales rose, so the ratio improved from both sides.) Those readers who insist on focusing only on foreclosures, futures resets, and such data are clearly missing the turnaround in housing, which I believe is already clearly underway for the reasons provided. As suggested above, it is already locked into place that housing will contribute to growth in GDP no later than Q4.

Disclosure: We remain long various housing and housing related stocks like HD, LOW, NVR, and others.

Aug 26 03:17 PM

[HardwoodFlo...:]

Charles- I wasn't trying to throw water on your article but I believe for a healthy recovery- again it could be fierce considering we are at new housing inventory levels not seen since 1993- in order for that to happen we need: 1) employment 2)JUMBO financing. Do I believe that a recovery in housing could jack the employment picture- yes but that is a chicken and egg proposition. So, what then does it all come down to- JUMBOs. Banks have to be willing to underwrite 'em.

Aug 26 03:41 PM

[HardwoodFlo...:]

You're also not going to get the last word here...So, while housing might be a bit uncertain that is a fact.

Aug 26 03:42 PM

[concrete guy:]

Keep calling it as you see it Charles. Most people are so entrenched in their belief that housing will continue to be a train wreck that they meet contradictary opinions with extreme skeptcism, and often outright hostility. I for one have been enjoying your analyses.


On Aug 26 03:17 PM Charles Lieberman wrote:

> I first started forecasting a rebound in housing early this year
> and wrote a lengthy piece in March after reviewing the inventory
> data, which I thought made a compelling case for a recovery within
> 3 to 6 months. I also thought economic conditions were falling into
> place for a recovery, which was a necessary part and parcel of a
> recovery in housing. It was hard to see one without the other.<br/>
>
> I find it really interesting how much flak is generated in response
> to each post on the developing housing recovery. For each person
> who thinks I am providing some insight, there are at least one or
> two who think I must be from another planet. For example, this piece
> from two days ago generated mostly negative comments, with very little
> commentary on the arguments I presented.
>
> Here we are two days later and: Robert Shiller admits to being surprised
> by the rise in housing prices measured by his index (but still thinks
> housing has further to decline) and housing "might" be turning around,
> while Karl Case, the other member of that team thinks housing is
> already in recovery. The latest new homes sales data reinforces my
> analysis. Today it was reported that sales continue rising, while
> inventories continue falling. At 281,000 units, new housing inventory
> is at the lowest level of the past 18 years. Month's supply has plunged
> by more than two months from 9.7 months to 7.5 months in just two
> months. (How is this possible? Answer: inventories fell at the same
> time sales rose, so the ratio improved from both sides.) Those readers
> who insist on focusing only on foreclosures, futures resets, and
> such data are clearly missing the turnaround in housing, which I
> believe is already clearly underway for the reasons provided. As
> suggested above, it is already locked into place that housing will
> contribute to growth in GDP no later than Q4.
>
> Disclosure: We remain long various housing and housing related stocks
> like HD, LOW, NVR, and others.

Aug 26 04:40 PM

[BuyABizInFl...:]

The capital market is still locked up.

This article highlights the “disconnect” between Academia and Main Street. What jobs await young people? Community organizers? It would appear that the Government (et al) is where the jobs are being filled. Question, how many folks working for the TSA can afford their own houses? … as an example.

Where are the manufacturing jobs? Where are the good paying union jobs? I am to understand that Indiana is a basket case in the area of unemployment, 11+%? In Wall Street Parlance, this recent activity might equate to a “dead cat” bounce.

Understand that for the first time since the end of WWII, it is being reported that Florida has a net LOSS of residents.

Aug 27 03:20 AM