A few months ago, we published the first in what will be a series of reports backed by our proprietary survey of residential real estate brokers across the country, “A View from the Frontlines of Housing“. At that time we argued that the results of our survey suggested that lead flow and transaction activity for residential real estate brokers had fallen off precipitously in the weeks following the expiration of the housing tax credit and that the housing market was potentially on the cusp off another slowdown. It turns out our survey results proved prescient and the summer selling season in US residential real estate can be best characterized as a grinding slowdown.
As we have discussed in the past, we are ardent supporters of Edward Leamer’s thesis that “Housing is the Business Cycle“. The housing market continues to be the prism through which we view the economic cycle. It colors every investment idea we pursue and how we position the PAA Research SMid Cap Portfolio. Over the past several weeks we have conducted a survey of approximately 500 residential real estate brokers across the country to gain a better understanding of the housing market on a local, state, and regional basis. If housing truly is the business cycle, than the feedback from our most recent survey suggests that the sustainability of the US economic recovery remains extraordinarily questionable. The key findings from our survey include the following:
- Stabilization in the housing market remains a moving target. At several points in the past year it appeared that some sort of floor in the housing market had formed. Pricing actually increased in many markets on a YOY basis, existing home and new home sales improved off of low levels, and many pundits argued that the combination of record low rates and price declines resulted in an affordability equation that would not be ignored. However, subsequent to the expiration of the home buyer’s tax credit, the notion that housing is on a slow road to recovery seems increasingly suspect. It appears the greatest impact of the home buyers tax credit was too “pull forward” demand in many markets. While housing assets in many markets have shifted from “weak hands” to “strong hands” over the past 12-18 months, this has yet to yield true price stability in most major markets. Perhaps more alarming is that the velocity of transaction activity in former bubble markets has slowed precipitously in the past few months. While there are some signs of improvement at the local level, the majority of respondents to our survey paint a picture of a housing market characterized by bloated inventory, too many listings, tight credit availability, an uncertain appraisal process, and falling prices. Four years after the bursting of the housing bubble, a floor in the housing market remains an elusive target.
- The number of listings has increased significantly YOY in most local markets and a surprisingly high number of homes listed thus far in 2010 have not yet sold. According to our survey, 58% of respondents have witnessed a YOY increase in listings in their local market at this point in the year compared to 12-months ago. More than 73% of respondents indicated that the average home in their local market had been listed for at least 90-days, which could be problematic for pricing and inventory levels at this point in the calendar year. Looking at it another way, more than 30% of respondents to our survey indicated that more than 40% of homes listed in 2010 in their local market have not yet sold. The overhang of existing home inventory could lead to meaningful price reductions over the next 3-6 months.
- Mortgage availability has not improved meaningfully and in some markets has declined over the past 3-months. We were surprised to learn that more than 40% of residential real estate brokers have witnessed a decline in credit availability, while another 43% have seen no change over the past 3-months. Buyers lament the lack of credit availability and lenders complain about the lack of mortgage demand. Perhaps both parties are to blame, but either way the flow of mortgage funds still appears to be grinding lower despite record low rates and quantitative easing measures from the Fed.
- Outside of former bubble markets in Arizona, California, and Nevada the number of listings that receive multiple bids remains in the sharp minority. Of the brokers we surveyed, 72% indicated that only one bid was submitted on the transaction on which they most recently worked. In light of the absence of meaningful bid activity, it should come as no surprise that 90% of respondents indicated that less than 10% of properties in their local market are sold above the seller’s initial list price. It still remains largely a buyer’s market.
- In many markets, FHA lending serves as “life support”, accounting for more than 50% of transaction financings. In general demand for FHA loans is inherently counter-cyclical and periods of strong volumes have been characterized by tight credit markets. From this perspective, it should not come as a surprise that demand for FHA loans has been strong over the past few years. However, it appears that demand has not ebbed in the past t 3-6 months, which suggests that credit conditions, particularly for low income borrowers remain extraordinarily tight.
- Tight credit + High inventory levels + Absence of bid activity = 5-10% additional decline in home prices. Based on the feedback we have received from real estate brokers and our review of national level housing data it seems natural to conclude that prices could be headed lower following the critical Spring/Summer selling season. There are too many houses staying on the market too long in the absence of credit availability and true buyer demand. More than 50% of the brokers we surveyed expect home prices in their local market to decline over the next 3-months, while another 36% expect prices to remain flat. We think price expectations from real estate brokers are particularly noteworthy given the influence they have on sellers in determining list price and bid levels for potential buyers.
- Jobs trump affordability and credit availability in sparking a housing recovery. Among the real estate brokers we surveyed, 77% indicated that “employment trends” would be the most important factor towards improving and sustaining the health of the housing market. This compares to 61% who identified credit availability and only 44% that indicated lower mortgage rates would be critical elements towards improving the health of the housing market. It appears that tepid job growth is both an outcome and cause of a weak housing market.
You can read our full report which includes a full discussion of trends on a national, regional, and state level and specific comments from real estate brokers by clicking here.
Disclosure: No positions