The housing bulls seem unable to contain themselves. Today, in a prominently featured Bloomberg story, “Sales of New U.S. Homes Exceeded Estimates in March,” experts cheerily discuss a “firming” housing market and call for a bottom this year. Funny how these predictions for a real estate recovery seem to be a moving target. I recall seeing a panel in November last year at a serious mortgage nerd conference, AmeriCatalyst, where the most pessimistic forecast was that housing would be flat in 2012. Everyone else called for home price appreciation.
Even though some distressed markets have seen an upsurge in speculative buying (my Florida locals expect much of current activity in that state to come to tears, given the massive number of foreclosures in the pipeline), the fundamentals are not at all rosy. Nick Timiraos of the Wall Street Journal pointed out, as others have, that the “inventories are tight” picture is misleading. Even though banks have put houses on the market, a lot of private sellers are holding back, still (after 5 years) hoping for a better market. And servicers slowed down new foreclosures and attenuated foreclosures while the mortgage settlement negotiations were on. They have sped up new foreclosures considerably, which will eventually show up in the liquidation of more homes (note we think there’s good reason for banks to be dragging out the foreclosure process: they make more money that way and defer the recognition of losses on related second liens).
A third cause is that investors are picking up properties to rent. We have a sneaking suspicion that this trend will cool off, in that favorable rental market dynamics are a function of a marked shift in homeownership v. renting (due to tighter credit standards and families losing their homes needing a place to rent). But as more formerly owned homes are converted to rentals, the increased supply will lower the landlords’ pricing power. And a continued supply of properties sold out of REO raises the possibility of later landlords with lower priced properties offering rentals at lower prices than the current crop of investor/buyers.
Two experts who foresaw the housing bust see no reason for optimism on US housing. The Case Shiller index release today showed that housing prices fell in 16 of 20 cities in February. Robert Shiller in a Reuters interview said “I worry that we might not see a really major turnaround in our lifetimes.”
A draft presentation by Josh Rosner gives a detailed and persuasive analysis as to why Shiller’s gut feel is warranted. Per Rosner, the forces that helped produce the housing bull market, liberalization of credit, a one-time boost in incomes as more women entered the workforce, and baby-boomers increasing demand by entering their peak earning years, are either no longer operative or have reversed, creating headwinds for the housing market.
I suggest you read this presentation in full. One of the useful parts is on pages 6-9, where he debunks “new household formation means higher housing prices.” This series shows that the age groups with the largest numbers of households among them are in the 35 to 64 year old cohorts. Home ownership is already high in those age groups. And as we have discussed, home buying among the young is constrained by high levels of student debt. Rosner also suggests that financial pressures on new retirees (inadequate pensions and savings, rising health care costs) will lead them to try to sell their homes, either to downsize or to rent, when they would otherwise have remained in their homes.
This isn’t a pretty picture, and it runs contrary to long-standing beliefs that housing is a sound investment and that once the bubble works its way out of the system, the US will be back to a sound housing market. But the middle class has been ground down over the last 30 years, with its fallen standing papered over by access to cheap credit. In the absence of rising worker incomes and favorable demographics, there’s no reason to think housing will be a winner, ex in growing communities with high employment levels.