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Russ Wetherill

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  • Is Housing A Bubble In 2013? [View article]
    ...but the bulls are immune from such theoretical and psychological gymnastics when it supports their world view? Right.

    "There isn;t, there wasn't, and there never will be such a thing as a housing bubble... move along, rabble." -- David Lereah, NAR Chief Economist 2006.

    It matters not what bulls or bears think or even say, it only matters what the fundamentals underlying the housing market are doing and saying. So what are they saying? Inventories are rising, rates are rising, pending applications are falling, and refinancing is cratering. More sellers are listing, but fewer buyers are buying. July data is meaningless. Wait for the August and September numbers to come out where the lower traffic and pending sales data will result in a double digit drop in sales. All this means is that the market is working. We had a sudden restriction in inventory combined with historically low interest rates. Credit cost has risen at the same time as prices have risen. This has a negative effect on purchasing power for mortgaged buyers. Fewer mortgaged buyers mean less competition for cash buyers amidst expanding inventory. At the same time, investors are decreasing their purchases since rents aren't rising along with housing prices. This will all play out over the next few months and prices will stabilize at slightly lower levels commensurate with prevailing interest rates and inventories.
    Aug 21, 2013. 04:49 PM | 1 Like Like |Link to Comment
  • S&P/Case-Shiller: May 2013 [View article]
    Digging further into the data, all is not as rosy as it might appear.

    The Case-Shiller Index is a 3 month rolling average. As one month rolls on, another rolls off. So May's numbers are really a comparison of February sales to May sales, not April's. The April data set includes April, March, and February; while May includes May, April and March. If you remove the common months of April and March, you can see that any change from April to May is due to changes in closed sales in February versus those in May. This is important to keep in mind when drawing conclusions from MOM changes.

    Looking at the Los Angeles area tiered data, it is apparent that the different price levels are behaving differently. The high tier rose 2.21% from April to May after rising 3.5% from March to April. This means that prices more quickly from January to April than they did from February to May. This becomes more interesting when you look at the acceleration or deceleration in the appreciation rate. This is known as the second derivative.

    During the housing bust, much was made about the fact that the housing prices were still falling, but they weren't falling as fast this month as they were last month. Well, now, in the most recent boom, the prices aren't rising as fast this month as they were last month -- at least at the high end. This is not a good sign when the market is slowing down during the middle of the peak selling season. And all indications are that slowing appreciation has only accelerated since the May numbers were generated.

    The low and mid tiers are still appreciating at the same if not higher rate from April to May (3.47/3.39% Low tier and 2.35/2.64% Mid tier). What this means to me is that higher prices and higher rates have caused some sellers to look at lower priced homes, and that cash investors are still active at these pricing points.

    Sales volumes were also 5.2% below year ago levels at 7254. Falling volumes with sharply rising prices hardly presages housing market recovery.
    Jul 30, 2013. 03:15 PM | Likes Like |Link to Comment
  • Weak Housing Starts Don't Signal The End Of The Housing Recovery [View article]
    It's not just the decrease in the cost of credit, but the increase in the leverage of that credit that drove the housing bubble. While the 30FRM rates may have been rising during the bubble, the rates that people were actually using to buy houses were dramatically falling. The ARM share peaked at something like 80% in California in 2006, not to mention NegAm loans, stated income loans, teaser rate loans, etc.

    Loan rates were falling during the collapse, but not fast enough to compensate for the rapid destruction in available credit. So while it's true to say that there is almost no correlation between rates and prices, that is only because you are measuring the wrong thing.

    DTI is much more important than rates. And right now, DTI is being limited to 43% at the same time the rates are rising. Fact is that all prior experience in California is based on increasing DTI as rates rise. We have no experience to fall back on with capped DTI in rising rate environments.
    Jul 26, 2013. 02:13 PM | Likes Like |Link to Comment
  • Housing Outlook Still Positive [View article]
    "I note that housing starts were doing just fine in 2000, when mortgage rates were 8% -- almost twice as high as they are today, and the decline in mortgage rates since then did not prevent a housing market collapse."

    The bubble burst in March 2000. It isn't surprising that housing starts weren't adversely impacted as interest rates rose from 7% to 8.5% from January 1999 to March 2000. The economy was very different back in early 2000 than it is today.

    Rates didn't stay above 8% very long in 2000 either. By the end of the year, rates were close to 7% and were below 6% by early 2003. Show me a chart where housing starts aren't affected by a prolonged rise in rates during a period of less than 2% GDP growth.

    Incomes were growing an average of 5%/yr from 1996 to 1999. Today, they are growing at less than 2%/yr. Taking interest rates from 2000 and comparing them to today, sans context, is just irresponsible, not to mention deceiving.
    Jul 26, 2013. 01:52 PM | 1 Like Like |Link to Comment
  • No Respect For Great Housing Results [View article]
    So you want to turn the urban economic blight into suburban economic blight? Where are all the poor people going to live if you demolish their homes to build inner-city lofts? Suburban McMansions? The reason that urban areas are blighted is because all the people who have jobs, moved out. Who wants to live in a cramped city when you can live in an area with clean air and parks? Stop trying to make people value their own destruction. You're in the minority group of people who value their green ideals above their own happiness.
    Jul 26, 2013. 01:19 PM | 1 Like Like |Link to Comment
  • Word From Lancaster, CA: This Recovery Is For Real [View article]
    The Lancaster/Palmdale area has always lagged the rest of the property market in the greater Los Angeles area. As such, it is a great indicator of the latter part of a housing boom. When more desirable areas become too expensive for your average worker, they move to the desert. Same thing happened in 2006. How did that work out?
    Jul 26, 2013. 01:08 PM | 1 Like Like |Link to Comment
  • Sell On Strength: The Housing Stock Burst Was On Dated Data [View article]
    The latest Case Shiller number for Los Angeles showed a 3.37% gain MOM! This is really bad news for the LA market. We have only seen MOM gains above 3% twice since 1987. One was in the spring of 1988 and one was in the spring of 2004. What happened after these 3+% MOM gains? Well, volumes dropped off within 18 months and prices turned shortly thereafter. The 2004 bubble ran longer thanks to the Option ARM madness, but the result was the same.

    This time around we don't have the more or less stable rates we had in 1988 and 2004. We have just seen a 30% rise in borrowing costs at the same time the prices are rising at a 30% annual rate. Housing volumes will drop dramatically in the next 12-18 months as fewer borrowers are able to qualify at the higher rates and prices. Must-sell equity sellers will need to lower prices to find a market. The upside-down cake is in the oven, it is just a matter of time before it's done.
    Jun 26, 2013. 05:49 PM | Likes Like |Link to Comment
  • This Week In Real Estate: Beware Dated Data [View article]
    The FED doesn't plan to change the mortgage interest rates because the FED doesn't set the mortgage interest rates. What the FED does is purchase Treasuries and MBS. In effect, the FED creates demand for the secondary market of MBS where no demand would otherwise exist. In other words, the FED bids up the price of bonds and mortgage backed securities which drives down their yield, and thus the rate that mortgagees are charged for their purchase loan or refinance.

    Now, what the FED has done is to broadcast their intent to slow the purchase of these instruments and allow prices to fall. Yields will then rise, and the real estate purchased with the mortgages will fall proportionately to the rise in rates.

    But, yes, it is possible that the FED might change their mind and instead of tapering, they may increase their purchases, or they may leave the status quo. In that sense it is speculation that is driving the change in rates, but the change in rates is real nonetheless. Real changes are having real impacts on the purchasing power of buyers in the market, right now. This isn't speculation, it is reality.
    Jun 25, 2013. 04:56 PM | 1 Like Like |Link to Comment
  • S&P/Case-Shiller: April 2013 [View article]
    Case Shiller is archaeology, not breaking news. It's a three-month moving average of closed sales. In this case, April numbers represent sales closed in February, March and April. These contracts were signed in December-March. April's numbers, while impressive, merely represent the trifecta of historically low interest rates, historically low inventory, and Wall-Street investor speculation. When you combine that with foreclosure prevention in the form of HARP 2.0 and the HBR here in California, you get rapidly rising prices to the limits of FED stimulus enabled affordability. No surprise here.

    What Case Shiller doesn't tell you is what conditions are today after mortgage rates have jumped 125 basis points over the last two months. Case Shiller will start to weigh in on that in September. We also have significantly higher inventory than we had in the first quarter. Two to three times as much in many areas of Socal.

    Only a few things can support a quick rise in prices: either a quick fall in rates, a quick rise in household income, or perhaps an increase in speculation. Since we have already lost the support of inventory, and now rates, oh and investors are losing interest at the higher prices, our stool is held up with what exactly? Hot air?
    Jun 25, 2013. 04:25 PM | Likes Like |Link to Comment
  • The Housing Recovery Is Real [View article]
    The housing “recovery” isn’t real, it’s artificial. As you point out toward the end of the article, the rates are at historic lows. Why are they so low? Well, since the Federal Reserve started buying $45B of Treasuries and $40B of MBS each and every month, the prices of Treasuries and MBS has gone up, driving the yield down.

    Homebuilder stocks have risen, in large part, thanks to the falling rates. Let me ask you this: If the homebuilders are doing so well right now, why did Lennar and Toll Bros. stock prices rolled over today, losing over 1%? Maybe because homebuilder profits inversely correlate with rising rates. As mortgage rates rise, buyer purchasing power falls. As buyer purchasing power falls, homebuilder profits fall.

    The 10 yr US treasury is up 47 basis points since the start of May. What does a 47 basis point change do to a $1M jumbo loan in California? It drops buyer purchasing power by about 3.5%. In this situation the homebuilder has one of two choices: reduce prices, or lose sales. Either way, their bottom line is impacted (Lost sales reduce revenue. Fixed costs then take a greater percentage of the remaining revenue to the point where there aren’t enough sales to cover the fixed costs.)

    Any pull-back by the Federal Reserve in a stimulus driven market will drive rates higher and home prices lower. Bad economic news means the rates stay low. Unless we start to see rising personal incomes, the rash of good news is a bad omen for the real estate market.

    Unfortunately for the homebuilders, even helicopter Ben is starting to consider loosening his grip on the throttle, if not actively guarding the brake.
    May 28, 2013. 05:54 PM | 2 Likes Like |Link to Comment
  • Latest Housing Price Data Confirm Housing Bottom Is Underway [View article]
    True. It's hard to argue that prices are going down, when they are rising. But, we've been here before. No too long ago, circa 2010, prices had risen sharply in response to $8k government checks. Once the checks stopped, so did the artificial demand.

    Now we have sub-4% rates. What happens to demand when these rates rise back above 5, 6, 7%? Without '70s style wage/price spiral (stagflation) prices must adjust downward to the new state of affordability. This is the reason for the FEDs late 2014 (soon to be 2015) rate increase timeline.

    What happens if these rates just remain between 3.5-4% for a few years? Eventually, the new rates are priced into the housing, and further increases are dependent on either lower rates or a growing economy.

    While the band is playing right now, eventually the music must stop. Maybe the FED can just keep buying Treasury debt and driving down mortgage rates. But, where is the end game? Aren't higher housing costs bad for the economy? Less discretionary income means less discretionary spending.

    At the end of the day, we are just increasing public debt that must be paid back with interest to make houses unaffordable to the average Joe. The average Joe will have to pay higher taxes to carry the public debt (which drove rates down to make his house more affordable) which then drove up housing prices so that he could tap his Heloc and afford to buy the car, and boat, and second home and investment property which he then rents out to the nice couple down the street. That is until the nice couple loses their jobs because the military base closed from the budget cuts necessitated by the high national debt interest and weren't able to get unemployment benefits due to the horrible state of the federal and state budgets. So they stopped paying the rent.

    The owner can't afford to carry the rent because he also lost his job at the local plant which closed after discretionary spending dried up. He stops paying his mortgage, heloc, car note, and boat loan, since what little money he had saved was lost in the stock market crash, and is forced to vacate. Point is that the economic fundamentals underpinning the capital and real estate markets haven't improved since the bubble popped. So why the sudden optimism?

    But everything is ok, because thiazole made a quick buck in the stock and housing markets. Congratulations... can I have a zero interest loan? I need to buy a $2M studio in BFE.
    Aug 30, 2012. 06:04 PM | 1 Like Like |Link to Comment
  • Latest Housing Price Data Confirm Housing Bottom Is Underway [View article]
    The housing market has stabilized, much like a patient "stabilizes" when the ekg flatlines. "I saved him", the doctor proudly proclaims, strutting out of the operating room and into his waiting golf cart. The family cheers the return to a more predictable future. The patient, however, ... ain't smiling.

    Did anyone notice that inventory growth is asymptotic to zero? Pretty soon there will be only one 2-square-foot house listed on the MLS, for like a gagillion dollars.

    How about sales? Home sales remain half of peak levels in LA, despite record affordability? Is this good?

    The fact of the matter is that housing market supply and demand are being manipulated by the FED and banks to drive up prices. By restricting REO and short-sale listings, refinancing home-debtors (Fannie Mae's refinance-magedon or credit-palooza depending on whether you are a taxpayer or high-rate severely underwater loan-owner), and lowering rates to juice demand, prices are indeed stabilizing. But the question is whether these housing subsidies are sustainable long-term?

    What happens when the powers that be decide high housing prices and low interest rates are no longer in the public's best interest? I really do prefer sugar in my coffee, saccharine is too artificial and a poor substitute for the real thing -- and causes cancer in mice when fed a few pounds per day.
    Aug 28, 2012. 06:02 PM | 2 Likes Like |Link to Comment
  • Government Incentives Do Matter: U.S. Home Ownership [View article]
    Are you saying that high home ownership rates are a good thing? For whom? The banks? Besides driving prices up and increasing the mortgage balances for banks to profit from, high home ownership results in what, exactly? High home ownership rates limits mobility, increases churn in housing sales (which benefits realtors, and mortgage originators), and drives up prices (making housing less affordable, not more).

    That sucking sound you keep hearing is the sound of banks, realtors and mortgage originators siphoning money out of the real economy. Debt begets interest, interest makes the rich richer and the poor poorer.

    Thanks to the high housing prices in California, the only way for a first time buyer to buy a house today is using a 30 year loan (or live at home until 30). This pretty much guarantees that the middle class home debtor will never reach the next rung of the economic ladder. The wealthy know that It is far better to earn interest than it is to pay interest.

    In business, if you are going to pay interest, you better be making more from that borrowed money than you pay to the bank every month. Otherwise, you are better off foregoing the loan.

    Same is true for buying a home. If your finances don't improve dramatically by taking out a 30 yr loan and putting 20% down, then you are a fool to do so. Any government policy with the end result of foolish buyer decision making is misdirected and potentially catastrophic (see: Bubble, Housing).
    Nov 9, 2011. 12:15 PM | Likes Like |Link to Comment
  • Latest Case-Shiller Report Slips In The Word 'Recovery' [View article]
    So we've seen a seasonal uptick as a result of low rates, FHA 3.5% down loans, and distressed inventory "management". The question is how long can these artificial props continue?

    The 3.5% down no longer applies from 625.5-729.75k. The inventory "management" by major banks is starting to end with increases in BofA foreclosures. The rates are about as low as they can go, and it remains to be seen how long public opinion is going to support the FEDs efforts (fixed income savers in the AARP are you listening?).

    Public opinion is already shifting against bank bailouts. Next election cycle may cause massive shifts in power in both houses of congress and the white house. If taxes increase, spending decreases, the mortgage interest deduction is modified or eliminated, there will be continued declines in house prices. And don't forget the shadow inventory!

    I think there is a meteorological term for this: it's called the "eye of the storm." We have merely reached point in time of relative calm. My chief fear is that this period of calm will turn into a protracted era of economic malaise. I wrote a couple years ago, that Bernanke has chosen to trade depth for breadth by transferring private losses to the public balance sheet. Unfortunately, this is proving to be true. Even during the Great Depression, we had double digit income growth from 1934-36 (14,12,13%). Things were really bad during that time, but they got better because all of the debt was wiped out. Housing costs were cheaper than before, so household spending increased.
    Oct 17, 2011. 03:34 PM | Likes Like |Link to Comment
  • It's Time To Admit That House Prices Have Stopped Falling [View article]
    Since when do asking prices have anything to do with sales prices? Are only realistic sellers listing in this market? HAHAHAHAHAAA!

    And, median prices reflect market mix, since, by definition, median represents the midpoint of the data set. Half of the homes will sell above and half below that value. If the bottom half (due to subprime loans) is weak, as it was in 2007-8, then the median price drops farther than it otherwise would. If the upper half of the market is weak and homes sell for 25% off (thanks to expiration of 729k mortgage limit) then more homes sell in the upper half of the market. Thus, median price gains mask distress at the upper half of the market just as median price drops were exacerbated by more homes selling at the bottom of the market at sharp discounts. Counterintuitive, but that's the way the real estate market wants buyers -- stupid, confused and emotional.
    Oct 17, 2011. 01:58 PM | Likes Like |Link to Comment