U.S. Housing Market Has Likely Bottomed 19 comments
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Recently, Professor Roubini predicted that the US housing market is still going to head down, notwithstanding recent recovery in prices and in turnover. Whitney Tilson, founder of T2 Partners agreed, saying that he was "confident this is the mother of all head fakes."
Tilson points to the following reasons for the sudden upturn in housing.
- Low Interest rates
- First Time Home Buyer Tax Credit
- Falling Prices
- Seasonality
These are all important factors because they improved affordability. But more fundamental is a revival in confidence. Pessimists point to the still significant numbers of foreclosures, and the pending foreclosures that may be in the pipeline. However, return of confidence plus affordability at levels not seen in years combine to provide very strong support to this market. The chances are that the housing market has indeed bottomed. Some analysts forget that there is such a thing as reservation demand. When confidence comes back, potential sellers withhold their units from the market. With that attitude, it is unlikely that home prices will fall another 10%, as some predict.
Demographics is yet another factor favorable to a rebounding housing market. The "echo" of the postwar baby boom is now in their fertility years. Family formation will likely help revive demand for up to 10 years.
I have also suggested that the labor market is likely to show job growth earlier than many analysts expect. (Australia and Canada already turned up job gains when market predicted job losses.) This is going to lend further support to the housing market. Of course, those who believe otherwise will say that labor market development is a drag on the housing market. Data to be released over the next two months will show a clearer picture.
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This article has 19 comments:
I also maintain that until recent market gains translate into increased hiring by universities, hospitals and other endowment backed non-profit organizations-significant employment centers in the current economy-we aren't likely to see a significant improvement in the job market, ergo bankruptcies and foreclosures will continue to drag on the economy.
anyway, you cannot be serious. reservation demand? you must be kidding. the grand daddy of this flawed argument is demographics favoring the upside! this is blind optimism on heroin!
the reality is that baby boomers are retiring and therefore downsizing and unemployment is getting worse. there are also millions of people who are upside down. as it becomes more socially acceptable to walk, millions more will! i do however agree with you that housing has bottomed. in nominal terms at least, but not for any of the reasons you state. i stated as much in my instablog. housing has bottomed because of monumental withdrawal of supply. this in the form of banks delaying foreclosure proceedings and witholding foreclosed homes from the market!
Please recommend this post if you, as an SA reader, feel the two words housing and bottom should not be allowed together in the same title until, oooooooooooooohhhh, let's say September 2010.
(maybe by then the market won't be fully subsidized)
I too hope that things will get rosy again soon but it's not happening yet. Despite what the government says, people are still hurting from this so-called "jobless recovery". There won't be a housing bottom until the job market improves and the credit is flowing again.
Like someone else said, I would expect this from Lawrence Yun.
"Some analysts forget that there is such a thing as reservation demand."
Some optimists forget that there is such a thing as reserve supply. Foreclosure moratoriums, mod re-defaults, and home owners waiting to get out of their overpriced homes are all part of this reserve of supply that will be flooding the market for the next couple of years. Add in the Option ARM collapse and BOOM! Bye bye bottom.
This housing market is only being supported by two things right now:
1. Federal and state government tax credits for home buyers.
2. The FHA's mission to put as many risky loans on the taxpayer's balance sheet as possible to maintain bubble prices.
The only way housing has bottomed is if that truly absurd $15k tax credit for everyone is passed. In that case, the low-to-mid end of the market will have likely come close to a bottom.
You can reduce the entire US economy to 2 metrics:
1) credit to small and medium sized US business
2) unemployment
Until such time as you see an improvement in both metrics, then the economy and housing has bottomed. We are not there. Sorry.
And if there was ever a time when there was pressure on the FED to raise rates in support of a currency that's desperately in need of at least a parachute... it's now. So with only higher rates in the foreseeable future, people out of work and with banks holding literally millions of foreclosed homes they don't want, and an economy in shambles....
...yup, I guess that all adds up to a bright rosy picture and home prices must have bottomed. I guess 2+2 does equal 17 after all.
Hahaha!!! What a laugh! Demographics are precisely NOT in favor of a housing bubble reinflation!! Boomers are heading into retirement and will be downsizing. Their "echo" (also known as children, by the way -- a little more personal and less objectifying term) will not have the inheritance from mom & dad that previous generations have had. They will instead be helping pay for their parents' retirement years! We will see home ownership rates decline until pricing reaches TRULY affordable levels -- something we have not seen in a couple decades. We've been inflating this bubble far longer than 6 or 7 years, via the very existence of the FHA, Fannie, and Freddie!!!
I, for one, am not willing to pay more than the 2 1/2 times my income (a recommendation I remember hearing from my high school econ teacher)...and we are nowhere near that yet. Perhaps a better measure is 1/4 of take-home. Problem is, with the existence of confiscatory taxation in this country, it is very possible for take-home pay to drop rather noticeably as taxes are hiked in coming years!! The founders would NOT have put up with that, either, btw. I think it was Madison who talked of taxation, saying that consumptive ones are the least objectionable, as they allow the earner to decide when and if he could afford to buy and therefore to pay the tax. I'm a BIG proponent of killing the IRS and *all* confiscatory taxation due to these principles!
And let's not forget property taxes! (Yes, another confiscatory tax!) Do they ever really go down? It has now reached the point (at least in my area) where fully 1/4 of a monthly mortgage payment is for property taxes!
We're going to see more renters in coming years, as boomers retire. We're going to see higher property taxes on the remaining property owners. Those who own large amounts of real estate will become richer and richer, while fewer middle class families will be able to afford their own home.
The only way out of this spiral is DRASTIC cuts to government, to get its spending not only under control, but cut to the core! And then DRASTIC tax cuts -- so that earners get to keep the vast bulk of their earnings! This debt crisis is caused by rampant socialism and the accompanying growth of government and taxation.
On Oct 13 08:47 PM Can'tSpotABubble? wrote:
> I saw the headline and thought Mark Perry was the likely author.
> I forgot about his Asian twin.
The people who don't need to leave their homes will not be doing so for the next few years, so that move-up demand is not really going to be there to prop up prices as it was during the bubble.
If this were a normal market and prices were just questionable, then I'd agree with you. This, however, isn't a normal market due to the crazy default rates and high unemployment. Despite what our government seems to believe, those without income and cash reserves cannot afford to pay a mortgage.
On Oct 14 09:42 AM Lok Sang Ho wrote:
> Reservation demand refers to owners not willing to part with their
> homes unless the price is at their expected levels. If they regain
> confidence, then they may not be willing to sell their homes at the
> going price, and they are prepared to hold on to them. Some of the
> commentators refer to banks keeping their foreclosed homes from the
> market. That indeed is reservation demand, to the extent that they
> are optimistic about the housing market and do not want to sell at
> the going prices.
Other commenters cite "fundmentals" as a driving force for housing prices. Fundamentals such as excess foreclosures, and low employment point to continued housing weakness. Others cite that the "fundamentals" show that housing is not back in correct price/affordability ratio.
Who was obeying the "fundamentals" when the housing market was booming? Experts were saying housing prices were not supported by the fundamentals, yet people kept buying.
Fundamentals only partially drive the housing market - speculative forces also play a big role. When housing rises 10% YOY, then the great rush will come, and everyone and his brother will want to buy houses (even those they can ill afford)
And while only time will tell which force will tip the scales (fundamentals or hype-confidence)... one thing I want to make clear... Mr. Ho attempted to present a fundamental argument for a housing rebound. The items he mentioned are definitively not fundamental in nature. For example, he writes, "But more fundamental is a revival in confidence"... umm... market confidence is about as whimsical as the wind.
This sort of unfounded optimism is somewhat irresponsible, and mostly just weird.
Will the banks not have to add supply (foreclosures) to the market at some point? I realize the administration and Congress have said it's ok to lie and evade (the mark-to-market inconvenience) but what do they get out of letting house rot for ever, rather than selling them. I understand they want to limit supply to try to arrest further price depreciation -- when does this logic evaporate in the face of further economic weakness?
I'm on record as saying we have deflation until 2019. Can the banks wait that long?
On Oct 13 04:09 PM 58robbo wrote:
> any relation to lawrence yun?
>
> anyway, you cannot be serious. reservation demand? you must be
> kidding. the grand daddy of this flawed argument is demographics
> favoring the upside! this is blind optimism on heroin!
>
> the reality is that baby boomers are retiring and therefore downsizing
> and unemployment is getting worse. there are also millions of people
> who are upside down. as it becomes more socially acceptable to walk,
> millions more will! i do however agree with you that housing has
> bottomed. in nominal terms at least, but not for any of the reasons
> you state. i stated as much in my instablog. housing has bottomed
> because of monumental withdrawal of supply. this in the form of
> banks delaying foreclosure proceedings and witholding foreclosed
> homes from the market!
Not dismayed by their failure with Fannie and Freddie, Uncle Sam has tasked other Federal Agencies to keep the mortgage money coming. In 2005, the Federal Housing Administration (FHA) guaranteed about 2% of all new US mortgages. In 2009, FHA guaranteed 25% of new mortgages.
If the Govt wants housing prices to rise, it can achieve that goal with rebates and lower interest rates. Govt policy is the big wildcard.
the big problem they have is how to make all this credit available to joe public. bush/greenspan used fannie/freddie, the cra and loosening of credit standards. obama is trying to do this but at the same time he is trying to curb the subprimes/alt-a's etc. this cannot work. you can't encourage banks to lend while at the same time tightening lending standards. that's like having a fist fight against.......... yourself!
a big part in all this is how does the administration bring down the supply of real estate while at the same time drive demand? for a start, a good portion of homes will be destroyed. they're already doing this in parts of michigan instead of trying to understand why the jobs and people left. many democrats i speak to think this is a wonderful idea. the thought of knocking down houses so that people can be employed to re build them makes sense to many people, i'm just not one of them.
another way is to get money into the hands of all those unemployed people so they may afford to buy. i think they'll extend the homebuyer tax credit, open it up to all buyers not just first timers and they'll double or triple its size. they have tried stimulus checks to the people but this was too small an amount and it was also a big 'up yours' in the face of anyone with exposure to the greenback namely china. i still however believe that it is possible we'll get another round only next time it might have another zero or two attached to it.
the big way they'll get cash into the hands of the people is through monumental government spending. this is where healthcare reform comes into play. i do love this song and dance they're making about it, but it's as good as passed! i believe that the jobs they create through this will also be very well paid (printed money of course)
another way to make money available is to give the financial innovators a say. last time we got 'no money down' this time we'll get 50 year mortgages. although this time around you can be rest assured that the bankruptcy laws will be tightened heavily. there won't be any of this 'strategic defaulting'!
when all else fails, they'll take us to war.
the answer to your question: the banks can/will hold on for as long as it takes. they are so heavily intermingled with the fed and the treasury there is no way they'll be allowed to fall!
On Oct 16 03:24 AM Michael Clark wrote:
> Lawrence Yun disregarded; I understand your logic.
>
> Will the banks not have to add supply (foreclosures) to the market
> at some point? I realize the administration and Congress have said
> it's ok to lie and evade (the mark-to-market inconvenience) but what
> do they get out of letting house rot for ever, rather than selling
> them. I understand they want to limit supply to try to arrest further
> price depreciation -- when does this logic evaporate in the face
> of further economic weakness?
>
> I'm on record as saying we have deflation until 2019. Can the banks
> wait that long?