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Top Experts Diss Housing Market Bullishness, Foresee Protracted Headwinds

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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.

Rosner Housing Market Analysis

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.

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33 comments

  1. Literary Critic

    Sorry to rain on the housing bulls parade but they may not have a roof to stand under:

    1)New Housing Sales data: This is “seasonally adjusted” data !!! Based on a small sample with +-20% error on the percentage gain.

    2) Connerce Dept released housing starts and completions for march a few days ago. Seasonally adjusted March was down from February!

    1. R Foreman

      The euphoria is necessary to reinflate the bubble. They might even be successful for a while, but just make sure you’re using the bank’s money to buy any place you get involved in. :) Reversion to the mean can be a bit ch when it overshoots for a decade.

      1. nonclassical

        ..forecasts I have read over last month call for another 15 QUARTERS of more
        foreclosures-more bankruptcies…

        1. Mark P.

          That’s absolutely plausible.

          Even, conceivably, a conservative — i.e. minimalist — estimate compared to how long it will actually take matters to play out

      2. chris poulos

        I work with a housing rights organization, which has been fighting foreclosure, eviction, and we have also began moving people into vacant housing that banks have foreclosed on. Since the 1% is clearly not solving our problems (in fact, they gain from our misery) and our elected officials are only pursuing the same neoliberal policies that have created the current 1%, we are building people power to demand things change.

        I would appreciate it if people sign and repost the petition below. We are demanding Cook County, Il, start a year long moratorium. We know elected officials have responded in a variety of ways to the foreclosure crisis. Cook County sheriff Tom Dart has done two moratoriums since 2008. We believe a sincere moratorium is long overdue, and, most importantly..possible.

        Moreover, we see it as a way to pressure bank accountability and shake them out of their antisocial and profit-driven mindset

        http://m.ipetitions.com/#petition/cook-county-moratorium-on-foreclosure-evictions

  2. Teacher Dan

    “Top Experts diss housing markets…”

    “Diss”???

    Hell pardner, someone already let that horse out’a the barn. Dem chickens done come home to roost an there ‘ain’t
    nothig you can do about it neither. You gotta grab the bull by the horns an make hay while the sun shines you can cry until the cows come home cause that housing market’s a tough nut to crack and you can catch more flies with honey than vinegar. Too many chiefs and not enough indians in the pay scale. Give ‘em enough rope to hang ‘em selfs.

    I have been pointing out Naked Capitalism as a paragon of high falutin’ prose and intelligent commentary to my students for months now. Seeing words like Diss are a shock.

    1. Hugh

      Would you prefer “deride”? “Deride” I like best for economics is the rollercoaster and for politics the merry go round.

        1. Mr Kotter

          I’m a teacher. I’ve told my students all about restrictive damage levied on expressiveness. “Fuck” or “fuck you” is typically appropriatee, it is the power given to words, without question, that creates problems.

        2. Mr Kotter

          I’m a teacher. I’ve told my students all about restrictive damage levied upon expressiveness. “Fuck” or “fuck you” is typically appropriate, it is the power given to words, without question, that creates problems.

    2. Lambert Strether

      You would prefer that language not evolve, then? Excellent writers often help it do so by adopting previously marginalized locutions, especially when they are vivid, and no existing word quite does the trick. And Shakespeare… Why, Shakespeare actually made words up!

      Reach me mah pearls, Maw, I’m a-headin’ fer the faintin’ couch!

    3. Maximilien

      @Teacher Dan:

      Effective prose is sometimes ornate and formal. Other times it’s direct and plain. And still other times it’s slangy, vulgar, and even profane (please don’t read Matt Taibbi—you’ll be shocked beyond recovery). It all depends on the writer’s subject matter, the tone he or she wants to adopt, and his or her intended audience. To put it succinctly, the only “unacceptable” words in writing are those that fail to clearly convey the writer’s intended meaning. “Diss” in the above context is not one of them.

      P.S. Could you tell me where I might obtain a copy of “Teacher Dan’s Modern English Usage”? I can’t seem to find one anywhere. ;)

      1. Maximilien

        “…to clearly convey…”

        Should be, of course, “to convey clearly”. Sorry about the split infinitive.

  3. Tom Stone

    In Sonoma County march sales were at a 7 year high, inventory near a seven year low and the median price was flat.That edian price is deceptive, you got a little more home this year than last for the same dollar in good areas. Anyone expecting appreciation over the next decade except in a very few special cases is making a mistake.

    1. Leverage

      like in any asset class, y real estate bubble collapse is continued be a long plateau of stable prices because prices increase again.

      This in circumstances where the rest of the economy is well behaving and there is a sufficient nominal AND real growth. Being far from that case, it’s more probable that housing hasn’t even bottomed in some places.

      No, bubblenomics are not coming back no matter how hard there retards try, not anytime soon, probably never because in 70 years the economy and finance will be structurally quite different anyway.

      1. Leverage

        Some terrible grammar there, wrote it fast (also was a general comment, not an answer to that comment):

        Like in any asset class, when a real estate bubble collapses is continued by a long plateau of stable prices because prices increase again.

        This in circumstances where the rest of the economy is well behaving and there is a sufficient nominal AND real growth. Being far from that case, it’s more probable that housing hasn’t even bottomed in some places.

        No, bubblenomics are not coming back no matter how hard these retards try, not anytime soon, probably never because in 70 years the economy and finance will be structurally quite different anyway.

        * I agree with the comment below me, “never say never”, and I was too fast there. But in any foreseeable future, there is not going to be a new bubble, not even a significant rise in prices. Things have to be worked out, that sector is in a depression, even considering there could be one, first there need to be a bottoming process, then a plateau and then prices would start to increase, that’s why always happens after there is an overshot on supply and a collapse in demand due to asset price bubbles. Bulls are just wanting for the “best” years to come back again: is not happening.

        With all that said, the chances of an other significant bubble (sure, it can happen localized in some places, but that’s about it) in the next decade are close to zero right now IMO (despite ZIRP and reflating central bank policies which will fail miserably like they did in Japan). And personally I think the economic and financial structure will be migrating towards a low-growth (or no-growth) environment due to demographic trends, resource constraints or simply the ‘economic problem’ have been already solved (there will be probably quality growth and progress, but gross output as a whole is unlikely to rise much more in highly developed nations).

  4. Paul Tioxon

    The housing market is in a shambles. And, it looks to get worse. Underwater mortgages, unemployment and a demographic of boomer households divesting themselves of long held homes due to death, divorce, retirement, or medical issues causing a moving in with the kids movement will leave housing stock with more units than can be absorbed or will blunt new construction. This does not count wage suppression precluding home purchases altogether by the up and coming generations with their debt to income ratios too high before a home purchase is even thought about. So, will values hold, will homes be a good investment? Wrong questions. Everyone needs a roof over their heads. Better to question the financialization of home ownership than to question the need for housing.

    In additional to the simply practical need to live some where so you don’t freeze to death and can pile up your stuff, the ideological purpose of having to show something for a lifetime of work and passing it along to your kids can not be trivialized. Far from being some sort of welfare state gimmick that conned rubes into signing up for 30 years of boredom while living a quiet life of desperation in the plastic suburbs, most people actually lived lives worth living, even if not under the Libertarian or some other seal of approval. What wrecked the housing market and turned into another economic depression was not some delusion driven by government policy to force people into signing on the line that is dotted. The absolute human need for shelter from the natural environment required no trick by anyone to get almost 70% of American families to sign up.

    The original GSE purpose to get people into homes with lawns than needed to be mowed may have served the purposes of wiley capitalists who saw an indebted proletariat as someone less likely to go on strike. But we tricked the rich and powerful by actually appreciating a home to come to, back yards to relax in, and the enjoyment of our neighborhoods and communities for the most part. I am very skeptical about the motivation of Mr Rosner. Along with Gretchen Morgenson, the co authors of the book “RECKLESS ENDANGERMENT”, that would like to lay the blame on the entire economic catastrophe at the feet of Government forced policies via the GSE mechanism of Fannie and Freddie.

    But as even Yves own book demonstrates, the triggering mechanism of the Magnetar Trade revealed the insatiable appetite of the capital markets and the TBTF investment bankers that made these markets. The simple promise of the New Deal and the populism of every man being the King of His Castle and actually providing him with a deed and a mortgage to the castle has enduring appeal to the rest of humanity that does not want to be reduced to a roving band of traveling plains riders. It was not the promise of the government and the actual policies that allowed for wide spread home ownership that slid down some slippery slope to disaster. The standards of sound banking, with rigid underwriting criteria that would lead to putting people into homes, not just putting people into debt was betrayed by placing the housing policy into the service of Wall St.

    The GSE were spun off into the private sector not by people who see government as a means to a better world, but by the same people who spun the US Postal Service out of the Federal Government and out the White House cabinet. The business culture which has grown to dominate the politics of the nation suborned every entity it could into profit making purposes. Not housing for the people but housing as a commodity, return on equity and investment. It was not the government that demanded that housing policy be undermined by “LIBERAL LENDING CRITERIA”. It was not government that demanded that appraisers boost values, nor was it government that allowed no money down, your signature is all you need. That was all of the business cultures doing and they fought for these privileges and as anyone on this site who has actually taken the time to read Bill Black’s book can see. It was real estate builders, mafia money, and pennyless con artists who wrapped themselves in the best political protection money can buy who forced regulators into retirement and demanded their heads on a platter, heads like Bill Blacks.

    The housing market is a wreck, and the schemers who will try to spin gold out of the real estate debris field will probably make even more disasters in many markets through out America, making the economic recovery that more difficult. And it is already so bad that you would need greedy assholes working overtime to make a buck out of the misery and misfortune of 10s of millions to make it worse. But they will find a way.

    1. Idiot

      “divesting themselves of long held homes due to death, divorce, retirement, or medical issues ”

      That’s but a small part of it, in other words, that’s what normally happened when people lose their homes. In fact, medical issues or retirement typically did not cause divestment because house prices weren’t previously insane and required such as unrealistic amount of income to preserve.

      Talk about missing the point you fucking idiot, they are being *forced* out.
      Remember the *authorities* telling all the old folk that they could safely (we approve anything) use their house like a Bank bank in last decade?

    2. Mr Kotter

      The fact we’re even discussing the scratch of Rosner and Gretchen Morgenson, in light of what has happened, is evidence of yet another astounding propoganda victory. Revisions, omission and embarassingly poor quality writing. Unfortunately, it’s the shit that always gets distributed.

    3. chitown2020

      The 99% got taken to the cleaners by THE FED and the traitor politicians set us up. The GSE’s were a proxy of the U.S. GOVERNMENT, THE FED and the IMF used as a tool to rob us. The TRAITOR politicians are allowing our robbery to continue by FED MONETARY POLICY that is causing massive inflation because the continual bailout by the FED of their TBTF institutions continues to devalue the currency, hypertaxation and fraudclosures. IMO it is all robbery being committed against the people by fascism.

  5. Anonymous Jones

    I’ve already lived long enough to have seen a few housing bubbles in a few different places. It’s always difficult to imagine another one could happen in the aftermath of seeing one burst.

    I have to admit that I think this last one was a quite a bit different than the preceding bubbles I’ve experienced, and the national outlook certainly tends toward the grim, what with the unemployment picture, the underemployment picture, the evisceration of the middle class, etc.

    That said, I cannot be sure of what the future will bring. Maybe there will be an invention that changes the game. I mean, Malthus was right about everything that came before him. Unfortunately for him, the game changed shortly after his theories were formed.

    And it’s an old saw, but seriously, there is a lot of truth to it: Real estate is local.

    It’s not fungible, and it’s highly sensitive to microlocation and changing uses over time. Yeah, it’s fun and all to make predictions about which way the aggregates are going to go, but they’re just aggregates and they hide a more complex picture underneath, and no matter how much of an “expert” one is, one cannot possibly know all the factors that went into that complex picture.

    [And yes, I still have a semantic quibble with the use of the word "cheerleader" to describe almost every single person who has the temerity to suggest that it is even possible that housing prices might rise in some corner at some time in the future, but I get that language evolves and its master is no one but the user of it!]

    1. skippy

      The problem is more profound than you imagine. It is a global issue. The usage of derivative finance catapulted building not unlike a solid fuel booster with a defective O-ring. Massive amounts of crap building, of poor or defective quality, in dubious locations, and all for Securitization.

      Securitization being the *creation of pooled risk*, which is quickly off loaded to bag holders, and converted to *risk free profit today*.

      Creating / enabling false demand, to facilitate the extraction of price, which then could be converted to value… gold toilets, thousand+ dollar bottles of wine, private jets, houses in the Hamptons, castles in Europe, you know, the stuff that delineates the wealthy (winners) from the poor slobs (losers) of this world.

      Skippy… so… if another housing market bombs across the world, you will feel it. Hay were one job crises from our own RE/CRE crash, the bleeding of jobs has started in earnest and with all the repercussions that come with it.

    1. chitown2020

      Like those 10 buck an hour jobs with the funny hats will pay the hyper-inflated prices in the real world. Lets do the math ..if your lucky enough to land a full time 10 buck an hour J.O.B… which most aren’t hiring full timers…after tax take home pay is around $300.00. Most apartment rents are around $850.00 a month. So I guess you have the luxury of eating and putting gas in your car or paying rent.

  6. scraping_by

    The Potemkin recovery in stocks (constant Fed buying), unemployment (stop counting them) derivatives (don’t value the losses) needed to move on to real estate values or the happy days story might ring false.

    So much of the real world twisted to build illusion.

  7. The No Men Attack BOA

    Pirates, from realtors to dirtbag gamed system “gamblers”
    , must find more honorable professions, and get away from housing.
    Particularly realtors, who, with powerful lobbying have somehow covered their profession in teflon, where in every predatory sale hatched their is some quaint little Real-Tor hustling 6-10 percent (or more if they had little criminal arrangements with brokers,) It’s appalling – not a goddamn thing has changed – yet oracles blow wind from their asses as if over all of this prostitution they predict the future,

  8. chitown2020

    They want a nation of RENTERS. No private ownership of property or personal wealth. It is indeed another Hitler plan and until we all stop paying, conforming and complying to tyranny and oppression they will not stop until they steal it ALL from us. The U.N. already hijacked the land that we pay for and then rent forever by paying property tax. Their next move will be their fraudulent fix for all of their fraud will be a World Tax. After we already paid for everything….including the land… they will make us all RENTERS of our homes and businesses too.. Now Congress wants to tax the 401 Ks and other investments…! WAKE UP FOLKS…! THE BIGGEST SWINDLE OF OUR WEALTH IN HISTORY CONTINUES…! They have even hijacked all of our Natural Resources like gas and electric..We truly are a nation of stupid fools for allowing them to do all of this.

  9. rjs

    some of the northern areas that had 80F weather in march normally have blizzards…& a 7% SA MoM decline in sales is firming?

  10. Tom Lawler

    Builder Reports Exceed Expectations

    The Ryland Group, the 8th largest US home builder in 2010, reported that net home orders (including discontinued operations) in the quarter ended March 31st totaled 1,357, up 40.5% from the comparable quarter of 2011. The company’s sales cancellation rate, expressed as a % of gross orders, was 18.0% last quarter, down from 18.2% year ago. Home closings totaled 848 last quarter, up 23.3% from the comparable quarter of 2011. The company’s order backlog on 3/31/12 totaled 2,023, up 38.1% from last March. Ryland noted that sales incentives and price concessions totaled 10.9% last quarter, down from 11.7% a year ago.

    PulteGroup, the 2nd largest US home builder in 2010, reported that net home orders in the quarter ended March 31st totaled 4,991, up 14.9% from the comparable quarter of 2011. The sales gain came despite a 6% decline in community count. The company’s sales cancellation rate, expressed as a % of gross orders, was 15% last quarter, down form 16% a year ago. Home closings last quarter totaled 3,117, down 0.8% from the comparable quarter of 2011. The company’s order backlog on 3/31/12 totaled 5,798, up 11.8% from last March. Pulte noted that while “(w)e are only one quarter into the year, but the start has exceeded our internal estimates and has us cautiously optimistic that housing demand may have reached a positive inflection point.”

    Meritage Homes, the 10th largest US home builder in 2010, reported that net home orders in the quarter ended March 31st totaled 1,144, up 36.2% from the comparable quarter of 2011. Home closings last quarter totaled 759, up 11.9% from the comparable quarter of 2011. The company’s order backlog as of 3/31/12 totaled 1,300, up 38.3% from last March. Meritage noted that “(o)ur spring selling season got off to a strong start, as evidenced by our 36% increase in sales in the first quarter,” and that “(a)s demand has strengthened, we’ve begun to raise prices in most of our communities this year.”

    M/I Homes, the 15th largest US home builder in 2010, reported that net home orders in the quarter ended March 31st totaled 764, up 16.8% from the comparable quarter of 2011. The company’s sales cancellation rate, expressed as a % of gross orders, was 14% last quarter, down from 16% a year ago. Home closings last quarter totaled 507, up 15.5% from the comparable quarter of 2011. The company’s order backlog on 3/31/12 totaled 933, up 24.9% from last March. M/I noted that “(o)ur first quarter results reflect what we believe to be slowly improving housing condition.”

    All of the publicly-traded builders who have reported results for the quarter ended 3/31/12 so far have shown YOY increases in average home sales prices, though in many cases this reflected a change in the mix of homes sold as opposed to overall price increases. By the same token, however, pricing vs. a year ago appears to have been pretty stable, and there appears to have been less price discounting.

    On the next page is a summary of selected stats for the six publicly-traded builders who have released results for the quarter ended in March.

    Settlements Net Orders Backlog
    3/31/12 3/31/11 3/31/10 3/31/12 3/31/11 3/31/10 3/31/12 3/31/11 3/31/10
    D.R. Horton 4,240 3,516 4,260 5,899 4,943 6,438 6,189 5,281 6,314
    NVR 1,924 1,634 1,919 3,157 2,403 2,940 4,909 3,685 4,552
    PulteGroup 3,117 3,141 3,795 4,991 4,345 4,320 5,798 5,188 6,456
    The Ryland Group 848 688 984 1,357 966 1,167 2,023 1,465 1,915
    Meritage Homes 759 678 808 1,144 840 1,064 1,300 940 1,351
    M/I Homes 507 439 475 764 654 765 933 747 936
    Total 11,395 10,096 12,241 17,312 14,151 16,694 21,152 17,306 21,524
    YOY % change 12.9% -17.5% 22.3% -15.2% 22.2% -19.6%

    On Tuesday the Commerce Department estimated that new SF home sales last quarter were up 16% (not seasonally adjusted) from the comparable quarter of last year. Recently, of course, there has been a pattern of upward revisions to preliminary, and historically during improving markets such revisions are commonplace (and in declining markets, downward revisions are common). I’d bet that when the April new home sales report is released, March’s sales estimate will be revised higher.

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