A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Monday, October 1, 2012

Transcript: 521 This isn't your father's housing market

We promised an episode on housing, and here it is, featuring Bill McBride – formerly known as Calculated Risk, Michael Fader of Radar Logic with some very cogent observations, also Ellen Zentner of Nomura Securities and Robert Eisenbeis formerly of the Atlanta Fed, disagreeing on the effect of Fed policy. We have argued that Fed policy is not targeting housing, but housing securities.
Listen to this episode
Setting this up, and this will be the outline of a chapter in the next Demand Side book, the Evidence,

By the way, be sure to look at Demand Side the book, history, economists, concepts, the whole nine yards that background our approach to economics, with some of the great economists. We don't do enough promotion, but we appreciate your support there, check it out at Demand Side Books dot com.

The housing market has bifurcated, both on the buyers' side and the sellers' side. Ten years ago and probably for the entire period after the New Deal and before the Great Financial Crisis, the housing market was comprised of homeowners selling their homes to homebuyers, to move on, up, out, resize down, or whatever. Because of the collapse of housing, you see now two new major players. The banks who own the houses – REO it's called—and investors looking to buy up housing to rent, the return of the slumlord question mark, or to resell.

So there's a natural match, but there are cross-currents as well.

The traditional home-buyer cannot get the loan he or she could get ten years ago. Downpayments are much higher, and personal and family wealth much lower. Lending standards are more strict. Jobs are scarce. A source for downpayments has dried up, for example, because that source was the sale of the previous home and using the equity. No more equity.

The traditional home-seller is reluctant to sell his or her home at a price that may be well below that paid or that penciled into the retirement plan

The distressed sale has a different dynamic. The home is somewhere in the foreclosure process. As you'll hear, these homes sell at a one-third discount to the others in the neighborhood. We call these distressed, although many homes that are sold that are not called distressed are still transactions made to get out from under big payments or outsized accommodations. The family is gone, etc., etc. One can imagine plantations of McMansions in this category.

It is reported elsewhere that a greater and greater number do not go through the foreclosure process to its end, but involve the bank agreeing to a short sale. Look at this closely. As we've said, with the active conspiracy of the Fed and Treasury, banks are carrying an enormous number of loans on their books at inflated, pre-crisis values. Mark to market accounting would display clearly why banks are hoarding cash. So on a one-by-one basis, as they can, they are accepting the writedown of the loan value through a short sale. Probably as much as they can. They as much as the rest of us, or more, need a recovery in the housing market for solvency's sake.

And in the background of the Fed's action is the fact that it doesn't address the enormous debt burden of homeowners, nor those with outsized mortgages. That burden is left to Darwinian economics, while the socialized activity is directed at the banks and the stock markets. Get your heads on straight FoxNews.

But the point here is, as you'll hear below. Investors have turned away from distressed sales and moved in to buy from the traditional homeseller, who is not underwater, but who is taking a huge hit on his or her pre-crash value. The number of distressed sales is actually lower. Yes lower. Lower than at any time in recent history. This can only be because that huge inventory of distressed properties is not making it to the market. Where is it? It is on the constricting supply side of the attempt to boost home prices.

On the increasing demand side of this attempt to manipulate the market is the Fed and its purchases of Mortgage backed securities. This is, in our opinion, the Bernanke focus. Still seeing the reflation of this popped market as the key, Ben is betting trillions that he can do it. What it does is inflate commodity prices, stock prices, and allow those with enough wealth to afford it to refinance and have more income. These are not the stressed parts of the economy.

But let's go through this with the help of our experts. Leading off with Calculated Risk, Bill McBride, whose view is the superficial view. Kudos to McBride for his Calculated Risk blog, and we recommend it for its wonderful presentation of economic data, and kudos to him for calling the housing collapse as it happened in 2007, but we think he has joined an optimistic consensus both on calling for a housing recovery and a broader economic recovery. Actually he has called a bottom to housing, not a significant recovery, at least we can't find it at airtime. His call for the economy is recovery, though.

Let's give him his due. In February, that is 2012, he wrote:

The Housing Bottom is Here
by Bill McBride on 2/06/2012 12:13:00 PM
There have been some recent articles arguing the “housing bottom is nowhere in sight”. That isn’t my view.

First there are two bottoms for housing. The first is for new home sales, housing starts and residential investment. The second bottom is for prices. Sometimes these bottoms can happen years apart.

For the economy and jobs, the bottom for housing starts and new home sales is more important than the bottom for prices. However individual homeowners and potential home buyers are naturally more interested in prices. So when we discuss a “bottom” for housing, we need to be clear on what we mean.

For new home sales and housing starts, it appears the bottom is in, and I expect an increase in both starts and sales in 2012.

Back in 2009, when I first wrote about the two bottoms, I thought we were close on housing starts and new home sales - but that it was "way too early to try to call the bottom in prices." In real terms, house prices have fallen another 10% to 15% since I wrote that post according to the CoreLogic and Case-Shiller house price indexes.

And it now appears we can look for the bottom in prices. My guess is that nominal house prices, using the national repeat sales indexes and not seasonally adjusted, will bottom in March 2012.

There are several reasons I think that house prices are close to a bottom. First prices are close to normal looking at the price-to-rent ratio and real prices. Second the large decline in listed inventory means less downward pressure on house prices, and third, I think that several policy initiatives will lessen the pressure from distressed sales.

And this doesn't mean prices will increase significantly any time soon. Usually towards the end of a housing bust, nominal prices mostly move sideways for a few years, and real prices (adjusted for inflation) could even decline for another 2 or 3 years.

But most homeowners and home buyers focus on nominal prices and there is reasonable chance that the bottom is here.
Not calling a recovery, and consistent with the Demand Side view that we are bouncing along the bottom. But our view is the bottom is sloped downward, so there is further weakness to come. That seems to be the trend in more recent months.

Again from Calculated Risk, we quote
From the NAR: Pending Home Sales Decline in August
The Pending Home Sales Index, a forward-looking indicator based on contract signings, declined 2.6 percent to 99.2 in August from an upwardly revised 101.9 in July but is 10.7 percent above August 2011 when it was 89.6. The data reflect contracts but not closings.

The PHSI in the Northeast rose 0.9 percent to 78.2 in August and is 19.9 percent above August 2011. In the Midwest the index declined 2.6 percent to 95.0 in August but is also 19.9 percent higher than a year ago. Pending home sales in the South slipped 1.1 percent to an index of 110.4 in August but are 13.2 percent above August 2011. With broad inventory shortages in the West, the index fell 7.2 percent in August to 102.5 and is 4.2 percent below a year ago.

This was below the consensus forecast of a slight increase.

Even though sales are still very low, new home sales have clearly bottomed. New home sales have averaged 362 thousand SAAR over the first 8 months of 2012, after averaging under 300 thousand for the previous 18 months. Most of the recent revisions have been up too.
The data actually show a pickup in home sales in the early part of the year, but that has not taken off, and sales are now trending weaker

So let's call this the monolithic market view. Let's find somebody who sees the bifurcated market. Ah, Here is Michael Feder of Radar Logic.


We're running long today, we'll pick up with Zentner, Eisenbeis and Bernanke later in the week.

1 comment:

  1. David Lazarus writes:

    The figure that really would show a floor in the market is price to income. If you use price to rent that could be higher than necessary because people are still adjusting to the lower incomes and rents might be taking a higher share of income, which does not bode well for recovery. With real wages falling because of people taking much lower paid jobs the sustainability of house prices is even weaker. So while rents may be stable the share of income devoted to rent increases, which weakens the economy overall. It will only be a matter of time before either rents have to fall or those rentals are back on the market.