How A Housing Recovery Is Defined
Readers suggested a topic on the current house buying environment. “How many more FOMC meetings without a QE3 announcement will it take for the QE3 cargo cult to give up their faith that a quantitative easing ‘Third Coming’ is on the way?”
A reply, “It’s like the ‘Age of the Grasshopper’ versus the ‘Age of the Ant.’ We’ve been in the Age of the Grasshopper. An economy that requires growing debt to keep growing or even to stay even is like a junkie who requires more and more drugs.”
“The powers that be are all pointing to growth - reducing debt as a percentage of GDP - as the way out. I think it’s a route fraught with risk. It’s like taking out a too-big mortgage and counting on income growth to eventually make it manageable. Countries add another component - despite all their unmanageable debt, they keep piling on more.”
One said, “The Fed can make it possible for banks to make loans, should a qualified borrower walk in the door. It cannot make more qualified borrowers walk into a bank looking to take out a loan.”
To which was said, “Low interest rates do tend to make more people qualified.”
And another, “Let’s forget having any income and just drop the rate to zero, then EVERYBODY qualifies.”
And finally, “While we are at it, loosen up the length of the loan repayment period to infinity…”
From Reuters. “Highlights from Federal Reserve Chairman Ben Bernanke’s news conference following the Fed’s policy meeting on Wednesday. ‘Housing usually plays a very important role in economic recovery both through construction itself and related industries but also because higher house prices increase consumer wealth and promote consumer spending. Housing does seem to be doing somewhat better. There are some good signs in housing but nevertheless we are not getting the size of the boost, the amount of help in the recovery that would normally get from a housing recovery.’”
“‘Access to credit is a major issue. There’s no question about it. Mortgage access is much tighter than it has been for a long time. Even credit card access is more restricted than it has been in the past.’”
“‘The step we took, the extension of the maturity extension program, I think is a substantive step and it will provide some additional support. Yes, additional asset purchases would be among the things that we would certainly consider if we need to take additional measures to strengthen the economy.’”
“‘There are additional steps that can be taken and we have demonstrated through both communications techniques, guidance about future policy, which is something the Japanese have done as well, by the way - and through asset purchases, also something … Japan has done - that central banks do have some ability to provide financial accommodations to support the recovery even when the short-term interest rates are close to zero.’”
From Reason.com. “Let’s consider the strongest arguments that we are witnessing a housing recovery to see if they stand up to the long-term analysis. Argument #1: With record low interest rates everyone will be looking to get back into homeownership. The Federal government’s goal of lowering long-term rates has been successful. Led by the Federal Reserve’s quantitative easing program and the Treasury’s continued bailouts for Fannie and Freddie, mortgage rates are lower than ever before. Unfortunately, low rates do not always translate into demand.”
“There have actually been ‘record’ low rates for several years now, but the cheapness of a mortgage is only one factor in the home-buying process. Consider while mortgage applications are up with super low rates, nearly four out of five of those have been for refinancing, not home purchases. That is because household debt is still a massive deadweight on the capacity of families to buy a new home. At the same time, household wealth has been crushed over the past few years. Refinancing is not recovery, and low rates are not a sign of a positive future.”
“Outstanding household mortgage debt is still twice the level it was in 2000. And add to that that one in five homes are still worth less than the mortgage that was taken out to buy it. Combined you get very limited amounts of money for buying new homes at this moment.”
“Part of the challenge in this debate is how a recovery is defined. I argue that it will be when foreclosures have been worked out of the system, negative equity is cleared away, and prices have stabilized. By that standard, we still do not have a housing recovery.”
From KPBS. “Real estate agents are struggling to find sellers. One Coldwell Banker broker recently circulated a bold flier in Pacific Beach. It highlighted a $686,000 home that sold at $60,000 above asking price in ’seven days with multiple offers.’”
“Chicago transplants, Maria Minos and her husband, have been looking for a two-bedroom, two-bath home with a yard since January. Like thousands of others in San Diego, the Minos’ routinely compete with up to 15 other would-be buyers on each property. The couple said they’ve begun to over-bid on homes, even if they hadn’t been inside the house. ‘We have started over-bidding. The most I’ve over bid on a house so far is $30,000,’ said Minos.”
“‘What’s really killing this for people like myself who just want to live in the home, is the house flippers. They’re putting down a lot of cash, and it’s being accepted over conventional loans,’ said Minos.”
Future victims that will demand a bailout.
They did not see it coming! No one saw it coming!
The real estate agent lied to me! The appraiser lied to me! The bank lied to me!
——————-
“Chicago transplants, Maria Minos and her husband, have been looking for a two-bedroom, two-bath home with a yard since January. Like thousands of others in San Diego, the Minos’ routinely compete with up to 15 other would-be buyers on each property. The couple said they’ve begun to over-bid on homes, even if they hadn’t been inside the house. ‘We have started over-bidding. The most I’ve over bid on a house so far is $30,000,’ said Minos.”
In the areas I am familiar with, the lower end (under $150k) is experiencing exhaustion of inventory due to speculators, and also exhaustion on the part of the would-be buyers who have been routinely outbid by said speculators. Then there are the odd sales of super expensive homes to the pigmen, as well as international jet-setters. The over $200k market languishes, and the over $300k market is nearly dead. Over $500k is a pipe dream, and the $1m plus market has an infinite number of homes for sale.
Peter Schiff wrote an article a long time ago about speculators. His point was many more are gambling than we realize. One category were people who buy when it’s much cheaper to rent. Otherwise, why would you pay extra unless you expected it to go higher still? These people paying that much for Pacific Beach are betting on appreciation, IMO. And about this lady:
‘What’s really killing this for people like myself who just want to live in the home, is the house flippers. They’re putting down a lot of cash, and it’s being accepted over conventional loan’
I’d bet she would be flipping if she could use a loan to do it, like the old days. She could still do the stationary flip; refinance. Such fake indignation, when she could just rent a place and forget about it.
“His point was many more are gambling than we realize.”
Another key point, as regards reference points for a housing recovery:
A hallmark of the bubble era has been a historically high percentage of home sale transactions due to speculators, versus end users (aka owner-occupants). I expect this to recede to historically normal (low) levels of speculative participation before the bubble era is truly over.
And at that point, I expect lots of greater fools will have relearned the lesson Sir Isaac Newton learned a few centuries ago about the folly of buying into the tailwinds of a speculative bubble. Turns out that genius mathematicians aren’t necessarily the savviest investors.
Respectfully, I think the difference here is that the investors in today’s market are either:
a) arbitragers, where they buy at a discount for cash, speed, and lack of due diligence, and then sell to people who can get financing, do their homework, and have a normal purchase timeframe and thus will pay more;
b) arbitragers of a different type, who believe they can buy privately at a y% yield and then sell on the public market at a lower yield through an IPO; they are also hoping for some appreciation, however, for the most part, if prices go up, it is gravy.
Both of these groups will actually LEAVE the market once prices rise.
The speculators during the bubble were banking on appreciation only, there was no rental yield to speak of.
I have always taken the position that investor purchases of single family homes should be much more restricted through the financing vehicle…Lets say, 40% down to get any government underwritten loan…Minimum 2 year holding period by non-owner occupant to qualify for a government underwritten loan for any prospective buyer..
That would easily put a stop to all the speculation thereby offering more product at likely a lower price…Easily done also…
It is restricted. Supposedly the GSE’s and HUD aren’t doing it. Which brings to mind, how did jingle mail buy all those houses with loans?
I’m aware of some lenders that are lending on homes once they are rented. If you buy with cash, fix up and rent, a lender will come in after the fact and lend you 65-70% of cost (from what I’ve seen). I think it really depends on what banking relationships you have.
The lenders that I’m aware of are all banks, who are generally keeping the loans on their books (according to the banks).
Each individual may obtain up to 4 Fannie/Freddie loans. My wife and I each have 4, plus our last purchase was FHA.
GrizzlyBear said: “the lower end (under $150k) is experiencing exhaustion of inventory due to speculators”
And that was totally planned. Monied speculators + Shadow inventory = False recovery. And by no mean coincidence, you’re seeing this exhaustion in the price points were the beleaguered middle class would buy… forcing them to bid on higher-priced housing.
All this will take many years to play out. Following the model of the First Great Depression, the False Recovery is hitting just about on schedule, 4 years after the “crash”. There will be 18-24 months of this nonsense before the next downslope arrives, and then it will be years and years of collapse after that.
I called the real recovery for sometime in the 2030s. I’m right.
“How a Housing Recovery is Defined”
Here ya go…not.
June 21, 2012, 4:04 PM
McMansion Creep: Homes Rising in Size
By Dawn Wotapka
Big homes are back in style.
That’s the headline from the American Institute of Architects’ first-quarter Home Design Trends Survey set to be released Thursday. Eight percent of the 500 architecture firms responding say square footage of homes increased in the first quarter, up from 5% a year ago. This change, the biggest year-over-year jump since the survey started in 2005, ends a multiyear march toward smaller homes driven by the housing implosion.
“We’ve begun to turn the corner here after a steep downturn,” says Kermit Baker, the Washington, D.C.-based architecture group’s chief economist.
Want more evidence? Trulia’s Chief Economist Jed Kolko wrote this week that 27% of Americans say their ideal home size is over 2,600 square feet, up from 17% in 2011. Those expressing interest in the “super-sized” house category, 3,200 square feet and above, climbed to 11% from 6%.
Earlier this month, we wrote about the big-home trend. According to the Census Bureau, the average size of a newly built home was 2,480 square feet in 2011. That was up 3.7% from 2010 and represented the first annual increase since 2007. Low interest rates are a big driver here. Over the course of 30 years, tacking on an extra room can boost the mortgage by just a few dollars a month.
…
What a disgusting turn. There’s so much about the response to the economic crisis that disgusts me: disgusting leaders, disgusting institutions, disgusting finance, disgusting law, disgusting accounting. Everything was sacrificed, and for what? I guess we like being a greedy people.
I’m not worried about it. Prices are still falling. Foreclosures up. Like the report said above, most activity is refis. Despite the Feds best efforts to reignite the bubble, what we are seeing is a smattering of press accounts of bubble behavior.
What is interesting is it demonstrates the psychology never went away, meaning this is the same mania, not a redux. I think the chances of the US doing another round of full-on mania are very slim, and we’ll be luckier than Australia and China in the end.
What is disgusting is the REIC/media boosterism, so soon after they helped millions of families into ruin. And the Fed’s shameful policy in this episode will go down in history for what it is.
“And the Fed’s shameful policy in this episode will go down in history for what it is.”
There is always a silver lining to every dark cloud.
http://finance.yahoo.com/news/stop-asking-more-help-germany-120904593.html
‘In a separate interview on Sunday published in Der Spiegel news magazine, Schaeuble again ruled out any form of collectivized debt such as euro bonds and defended the German government’s hard line on that.’
‘It’s because you cannot separate the responsibility for decision-making from the liability,’ he said when asked why Germany was so adamantly opposed. ‘That’s true for almost everything but especially when it comes to money.’
Good point.
‘It’s because you cannot separate the responsibility for decision-making from the liability,’
But isn’t that exactly the point of the too-big-to-fail (”privatize profits, socialize losses”) business model which is so pervasive in the U.S. financial system?
Am I the only person in America who has actually vacuumed or cleaned their own home on a regular basis? 2600+ square feet is nearly impossible to maintain unless you hire an illegal or draft your litter of children to help.
On a similar note, this weekend I drove out to the farms for berry picking. The roads were littered with signs for new housing to buy, at bubble pricing. Typical sign: “Craftmark Garage townhomes from $500s,” or “Pulte Single Family Homes on 1 acre homesites.” All of these homes are a half hour drive from the nearest suburban government agency, and an hour (drive and metro) to downtown. And every single home is ugly and McMansiony.
Bigger houses and bidding wars?..After NAR propaganda about buy now or get priced out, coupled with artificially low interest rates and the accompanying poor return on most investments, what is one to do? People are thinking they’ll do better “investing” in housing. The fundamental flaw of course is illiquidity especially if things go pear shaped..In a compressive deflationary contraction what to invest in is indeed a serious concern. How to protect what you have…1% or less interest on savings sure doesn’t cut it.
The way things look, lots of people are biting on the reflation of the bubble idea and I wonder how this will all play out…
“I wonder how this will all play out…”
Prolonged frustration for honest people, and a bigger, worse crash later.
Personally, I think it will result in a partial reflation. The type of financing that was available that allowed it to get SO out of hand before, won’t be available for a long time, which will be a natural limiting factor.
Therefore, if there is another crash later, I don’t think it will be bigger, and if the reflation happens slowly enough, the next crash will be a number of years out.
We have talked how its “again” a how much a month market…Just wondering, if a new buyer with a 3% down loan, paying 3.% interest finds themselves underwater a few years down the road lets say, 20%, but the interest rate environment is 6%, will they walk ?? Will the ultra loan interest rate on a 30 year loan be enough for the owner to just stick it out for the long run ??
Here’s what I see:
1. Driven by the Fed’s monetary policy, institutional funds scrambling for yield allocate increased assets into ‘buy to rent’ investment funds that are promising higher yields.
2. ‘Buy to Rent’rs are scrambling for SFH housing stock that they can convert to rental units. They are striving for scale and need to purchase thousands of houses to generate reasonable returns. They have the cash and have to invest it. Of course it’s all predicated on rents that are high enough to cover the management fees, maintenance, insurance, taxes, cost of capital, occupancy rates, etc. and provide an adequate investment return.
3. Seeing the opportunity, Fannie, Freddie, FHA and banks slowly release stock on the market; they are hoping that the activity of the ‘Buy To Rentr’s’ generates price increases that minimize their loss, and are encouraged to manage the flow to sustain price momentum.
4. High rents are providing an opening for builders of SFH to commence building new units. The cost of purchasing this new construction will need to be lower than the rents to be sustainable. With government/FHA support, lending standards are dropping to encourage sales. (Yes they are! Remember FHA)
5. Demographics haven’t changed. Boomers are waking up to the fact that they are screwed. They will need to downsize. They will not be able to ‘age in place’. Even with no mortgage on the property, in some areas, taxes alone will drive people out of their homes. Young families - either through personal experience or that of their friends - realize that the benefits of home ownership don’t necessarily outweigh the costs. They are no longer drinking the cool aid that says home ownership is the best investment a family could make.
6. Income growth is not outpacing even anemic inflation. This puts a cap on everything.
Implications:
A. this housing stock shortage is a mirage; the US has too much housing stock now, yet will continue to overbuild in the near term due to government policies and programs
B. price increases are not sustainable, but that does not mean there aren’t ‘quick flip’ opportunities to capitalize on the ‘Buy to Rentr’s’ scale up.
C. The institutional funds will be sorely disappointed with the return on their ‘buy to rent’ investments. My bet is that rents will not support above market returns for the ‘But to Rent’ funds. I actually think they will lose money.
If I were in the market today, I would focus on new construction for the greatest value. But no, I’m not in the market.
Great post except for the “new construction” point at the end. Don’t you think the prices are inflated by Fannie, Freddie, and FHA “funny money” lending?
I guess if you believe the 3 F’s are going to keep this up forever, there is no risk in buying a new McMansion for $729,750?
Well thought out JimO.
And I think you’re spot on about focusing on new construction. The difference between a new $200k SFR and a used $200k SFR is truly stunning. Right now, new beats used and not marginally either.
With respect to California:
1. I agree.
2. I agree. The deals I’ve seen DO pencil as rentals, and especially pencil if there is no CFD/Mello Roos. 7%-8% unleveraged yields (even after taking into consideration mgmt and repairs/maintenance).
3. I haven’t seen evidence to the contrary. While the REO held by banks and Fannie has been falling, I would be willing to bet that if they wanted, they could release inventory faster.
4. I disagree. Historically, there have been relatively few timeframes where it is cheaper to own than rent…and that didn’t stop construction. Once people believe prices are rising, they’ll start to factor appreciation into the mix…agree or not with that assumption of appreciation, people will begin to believe again.
5. In CA, Prop 13 makes it very easy for boomers to stay in their homes. Some young families will avoid buying…many others will still buy. These are marginal changes, not wholesale. Fewer buyers does not mean no buyers.
6. I agree.
A. I would say this depends on where you live. Look at the vacancy rates of a market to determine whether there is a shortage. Inner SF Bay Area? Shortage. Greater Pheonix? No shortage.
B. I agree. I think any near term price increases will plateau within a relatively short period of time as new development picks back up.
C. I disagree with this. I think these guys will make a ton of money. but they won’t do it the way you think. I think what they’ll do is buy assets at a 6-7% yield (which I’ve seen), leverage them with 4-5% money (or less), thus generating a 9%-10% return on equity, and then sell that portfolio to the public market at a 5% yield on equity (and in a market where investors are screaming for yield, give investors a 3.5% dividend yield, like other REITs today), nearly doubling their equity investment.
Hey Rental Pimp,
Housing prices are falling.
Don’t harsh his mellow. The dude likes to dream.
New construction? Probably not in DC. As I said earlier, the newest construction is a half hour drive from the nearest suburban government agency. I would say there’s more value in rehabbing shady suburb houses closer in. And there are a LOT that need rehabbing.
I checked the data of the San Diego story just to make sure it was 2012.
Given the San Diego conforming loan limit caps federally-guaranteed loans from Fannie, Freddie or FHA at $729,750, I would guess the market is in perpetual frenzy at lower price points and in permafrost at higher ones.
This admittedly is simply a conjecture…
When I saw that article recently about people writing letters to sellers, I probably checked the date 10 times.
A “housing recovery” is dramatically lower prices by definition.
Sales are at 15 year lows and they are NOT going to reverse course and even more magically rise until prices are dramatically lower.
I spoke with a gentleman last week who has been in the foreclosure buying business in San Diego for the past couple of years. According to him, the discounts at auction have shrunk considerably as Waypoint, Colony, Oaktree and others are pouring cash in to create rental portfolios. He thinks there is enough foreclosures still out in San Diego that once these buyers run through their cash, the discounts will rise again at auction (ie. that the pressure will abate once these groups have deployed the capital they have).
Some of these groups have made it clear that their ultimate goal is to gain critical mass and take the operation public. It would not surprise me one bit if they are already taking preliminary steps to do so. If they access public capital markets sooner then my friend thinks, they may not run out of cash as quickly as he thinks.
In any event, the math my friend notes is correct…based on the math…the amount of cash raised to date by these rental portfolio groups isn’t enough to absorb all the shadow inventory…not even close. The point my friend missed initially is that groups like his have capital that they are recycling, so the same $x is being used over and over again to buy/sell foreclosures. As such, even if the the rental buyers run out of capital (because there money isn’t recycled), the re-sellers will step back in after the discounts are increased back to what they were as recently as late 2011. Which may also translate to pressure coming off of buyers like the woman noted in the article above.
Again to re-iterate however, if the rental pool buyers access public markets sooner, and thus don’t run out of cash, then the current conditions may very well stay through the burn-through of distressed inventory in places like southern California (where there is a density of housing that makes the rental pool strategy more viable).
“…pouring cash in to create rental portfolios. He thinks there is enough foreclosures still out in San Diego that once these buyers run through their cash, the discounts will rise again at auction (ie. that the pressure will abate once these groups have deployed the capital they have).”
This is fantastic news for San Diego renters (like us). Not only are these investors putting together portfolios which will further add to the glut of rental properties, but the lower rents which result from a further increase in the rental glut will put further downward pressure on home prices.
All paths in San Diego lead to lower housing prices (costs), whether for purchase or for rent.
I think, at least for the next few years the rental market is going to remain tight meaning high rents…A lot of people are no longer homeowners and their credit is shot…They did not vaporize, they are still here with us…They are just going to be renters for some time to come…We also have new entrants (people coming of age) entering the market place…
“…the amount of cash raised to date by these rental portfolio groups isn’t enough to absorb all the shadow inventory…not even close.”
Sounds as though San Diego needs more all-cash Chinese or Canadian buyers.
Unfortunately for San Diego, the Chinese and the Canucks are about spent. Their bubbles are imploding, and many will likely find themselves in a cash crunch.
The only upside I can see for these savvy investors is the steady flow of taxpayer money from Fannie, Freddie and the FHA into San Diego homes priced up to $729,750. Some of the same tax dollars that are apparently generating billions and billions of dollars in losses to the U.S. taxpayer are getting scooped up and pocketed by the savvy investors who can capitalize on buyers willing to pay up to $729,750 (or even more in case they make a downpayment) for an overpriced San Diego home.
End the flow of federally-guaranteed mortgages from F, F & F, and these investors will soon loose their shirts.
A couple of thoughts. The housing has too much housing, but of the wrong type and in the wrong places. Phoenix and Vegas are less likely to recover, they just built to much on speculative demand
Some places, SD included are different. Its not that we are all rich here. Its that there is demand at a price and that price has always been high relative to salaries.
Inventory is almost non-existent. This is driving what few potential buyers there are, into a frenzy. Its not that the market is healthy, its not. Its just that nobody that doesn’t have to, is selling. That by itself to me indicates there is no real recovery.
Rates are low enough that even with still inflated prices ownership again pencils out with renting, assuming at least 10% down and in many cases 20%. I know I’ve been actively looking. Anything that fits these metrics goes instantly, especially if its an SFR.
I’ve never been a housing bull, still its not as awful as it was a few years ago. Taxes are going to increase, interest rates I’m not so sure. We are addicted to cheap money at all levels of society. Plus its a back door way to keep credit flowing, to those who can get it.
Different? SD? You’re right. But not in the way you think.
Boomtowns become bust towns and new boomtowns develop. It happens all the time and it’s happening in the boom towns yet nobody sees it happening but it happens… slowly… surely…
“Inventory is almost non-existent.”
It is a lot lower now than it was before the bubble collapsed, especially at price points affordable to middle-class families. Back when I used to pay attention, circa 2005, MLS inventory climbed at points past 20K. By contrast, Redfin currently shows 6,890 homes on the market, including MLS-listed plus for-sale-by-owner and ‘foreclosed homes’ (not sure whether the latter are on the market yet).
On another level, here is the breakdown I came up with on different ranges:
$500K or less = 2,573
Above $500K and $1M or less = 1,787
Above $1M = 2,530
So you can see there are about the same number of homes for sale below $500K (levels most San Diego families could potentially afford) as above $1M, though apparently far fewer prospective buyers in the latter category.
I should add the inventory figures shown above pertain to San Diego County, an area with maybe 300M people and 100M or so households.
Under 7K homes on the market for 100,000K households doesn’t quite cut it for supporting normal housing market turnover, even if not for the all-cash Canuck and Chinese investors.
As a former couple who lived in a rather nice area of Ventura County before we got smart and left California I remember when many of us thought living in San Diego was the pits.
Many of our friends and relatives are still looking to get out of Cal none of them ever express that San Diego is a place in good times or bad they want to move to?
The couple from Chicago trying to buy in SD they ask why a bank or anybody prefers cash to their down payment plus 30 year mortgage.
May I suggest as a former Chicago transplant it must have been those long cold winters what else explains such a statement, cash my friend always wins out?