A durable recovery begins with increasing demand. More and more people have both stronger desire and more money to spend on housing when a sustained market rally takes hold. Both sales prices and sales volumes rise when demand increases. If you don’t have both, the rally is suspect. Right now, overall demand is slightly higher, but this is almost entirely due to an increase in investor activity. Despite record low interest rates, demand from owner-occupants is moribund. The truth is the recent increase in prices is almost entirely due to restricted supply, and durable recoveries are not built on weak demand and restricted supply.
By Carrie B. Reyes • Aug 13th, 2012
California’s housing supply is shrinking! Is this a Wall Street Minsky Moment for California’s real estate market?
Data: Housing inventory has decreased by 49% in Los Angeles and 53% in San Diego this summer, compared to the same period one year ago. This lack of listings is causing bidding wars.
Result: Sellers have received high multiples of bids, 50 or more on a single property, lifting home sales volume and prices in the second quarter (Q2) of 2012. All this action puts sellers in the most competitive position they’ve held since the dead cat bounce of late 2009 and early 2010 during the tax credit episode, which stimulated a homebuying surge and resulted in momentum driven speculation.
Thus, a huge level of inventory displacement has taken place, but is it that moment of instant, long-term change?
If the reduced inventory happens to correspond to the bottom in pricing it will only be because lenders managed to maintain their grip on the supply. The problem with the housing market is lack of demand, and it’s not due to negative buyer psychology. There are not legions of scared buyers sitting on the sidelines who can be persuaded to act by any change in conditions. The potential buyers sitting on the sidelines are barred from buying because they have bad credit, likely from a recent short sale or foreclosure.
There has been conversation that this shrinkage in the MLS inventory will contribute to a reset of the housing cycle, as rising home prices will result in increased home equity and reduced negative equity across the board. Thus, more homeowners will be able to conventionally sell their homes without them or the mortgage lender taking a loss.
That’s the banker’s fantasy. It will only become reality if bankers can manage their liquidations without putting too much product on the MLS that they lower prices and without putting so little on the MLS that they snuff out the market’s momentum.
All of this ostensibly adds up to a balanced housing market and a return to more stable days of real estate sales.
first tuesday take
The current shrinking homes-for-sale inventory is a present disturbance which supply side thinkers – that is, most real estate licensees (but not all by any stretch) – profess has reset the market.
Most real estate agents are clueless, and anyone who relies on a realtor as an expert is a fool.
It hasn’t and it won’t, no more than the notion of build it and they will come has ever proven true (except in the movie environment of willful suspension of disbelief).
Rather, in order to bottom in sales volume and pricing there must be sufficient fuel to keep the market in the air, not grounded for failure to lift off. A run at the effort is practice, but does not count. …
The big danger for the market right now is the lack of supply. A low volume rally is easily reversed. Buyers get frustrated and give up, and a small increase in supply in the wrong places and play havoc with neighborhood comps.
What is better understood to move markets, be they labor or real estate, is demand from someone for the use of the stuff. For jobs it is motivated employers, private and public. For real estate, whether housing of any type or commercial properties, demand takes the form of end user-occupants, not flighty flipping speculators.
And as we have seen over and over again, demand from owner-occupants is at late 1990s levels and not increasing. If the chart below were for a stock, would it make you bullish? There is no sign of either reversal or positive upward momentum.
The level of inventory, or supply, merely affects pricing. Pricing (and mortgage rates) presently does not attract many buyer-occupants. Buyer demand is always the prerequisite, needed before the housing market can transition into a solid, upward-bound recovery in volume, then prices.
Builders get it; real estate brokers and agents need to.
The housing market is ultimately driven by end user demand – of which there is presently very little, probably less than half the sales volume experienced in the recently passed Q2 2012. The current low-level mini-bubble in home prices is due to speculators ferociously outbidding one another to snatch up properties, prompting real estate owned (REO) and short sale sellers and lenders to sense increased action then demands higher prices as a result. …
As a result, speculators and lenders have artificially driven volume and prices up a bit, though only temporarily. In the process, they have created the illusion of increased demand where very little actually exists.
The truth is in the numbers: there were roughly half as many buyer-occupants as sellers in the second quarter of 2012, the speculators merely taking the seller’s risk position of locating that buyer-occupant (or interim tenant for lack of an immediate flip).
However, speculators will soon realize their investments aren’t paying off as expected. At some point in the second half of 2012, this mini-bubble will deflate and we’ll be back to square one, a point which may have already passed. Stay tuned for Q4 2012.
Any speculators hoping to flip will likely be disappointed. This rally is reminiscent of the tax-credit rally of 2010 which abruptly reversed. The biggest difference between this rally and that one is the stimulus. The 2010 rally ended with the stimulus was removed. The stimulus for this rally is super low interest rates, and those are likely to be with us for a while, particularly now that the fed is printing more money to buy mortgages.
Agents will then begin talking more frequently with actual homebuyers – seeking them out from the growing stock of tenants, an activity which will build, and reset, the market.
The process of getting renters bank into the housing market may hasten if the FHA waives 3-year waiting period.
This current nostalgic, and hopefully temporary, foray back into that supply-side world of the seller’s market will prove short-lived indeed.
Bold and confident statement. The reasoning is sound, but will it come to pass?
So, what will signal rising demand from end users?
While demand from buyer-occupants and long-term investors is stimulated by lowering interest rates (which have been consistently zero-bound this year), rates must go lower to bring out the buyer-occupants. Mortgage rates, at 3.5%, are actually too high, the yield spread (lender profit margin) between the mortgage rate and the 10-year Treasury Note rate being at least 0.5% too large to excite homebuyers (although the spread does excite the lenders and is putting juicy profits back into their returns).
Market analyst Mark Hanson also stated the current stimulus would fail and that we may see 3% interest rates next year to get more buyers into the market.
Additionally, employment and consumer confidence will need to rise before potential buyer-occupants feel financially secure enough to borrow and buy a home.
What’s a buyer-occupant and buy-to-hold income property investor to do in this environment where supply is sparse due to speculator interference and competition driven prices?
Wait it out, as they are.
Waiting is a wise course of action right now. My OCHN report is giving a buy signal in nearly every city in Orange County, but with such limited supply, it’s nearly impossible to take advantage of the opportunity. If lenders do manage to raise prices by restricting supply, it will hurt affordability and thereby squelch demand. I am waiting for more supply before I seriously consider buying a house.
This mini-bubble will soon pop if it hasn’t already. Actual homebuyers will once again be able to move freely about the inventory, exercising their position as the primary source of demand.
Further, the shadow inventory still waits to get on the market, as lenders are replete with delinquent loans. The properties underlying these delinquencies will eventually be released back into California’s now temporarily depleted inventory. Much like the rising of the tides, the parched California sand will soon be saturated yet again, and buyer’s will have a lot to choose from.
I believe that to be true, but I can’t state it with such confidence. Lenders have been surprising successful at limiting inventory.
Property sellers would be wise to get the most out of this mini-bubble while they can, because it, like the last stimulus of 2009-2010, is the bridge to nowhere.
Many potential sellers think this is a poor time to sell because the market is bottoming. It’s actually a great time to sell. There are many competing buyers, and few sellers providing alternatives. A seller in today’s market can get a 5% to 10% premium over recent comps. That’s an aberration, not the beginning of a new uptrend.
HELOCs are a girl’s best friend
Last week in the post , I lamented about how people consistently run up credit card bills and go to the housing ATM to pay off their bills. It must have been great for the irresponsible when the house was providing them a healthy yearly stipend to pay off their foolish debts. With so many among us being spenders rather than savers, as long as we have HELOCs, we will always have plenty of desire from spenders to buy houses with built-in ATM machines.
- The former owners of today’s featured REO paid 354,000 back on 4/12/1999. They used a $247,800 first mortgage and a $106,200 down payment.
- On 9/15/1999 they opened a HELOC for $45,000.
- On 6/13/2000 they refinanced with a $328,500 first mortgage.
- On 10/18/2001 the obtained a $44,000 HELOC.
- On 7/31/2002 the refinanced with a $414,000 first mortgage. At this point, we can establish that this family was well acquainted with the housing ATM machine.
- In early 2003, the husband passed away, and the widow had to figure out how to cope with $372,500 in mortgage debt. She could have sold the house for a profit and downsized. Instead, she went Ponzi.
- On 12/31/2003 she refinanced with a $465,000 first mortgage.
- On 4/26/2004 she opened a $50,000 HELOC.
- On 5/10/2006 she obtained a $150,000 HELOC.
- On 5/14/2007 she refinanced with a $664,000 Option ARM.
- On 10/12/2007 she opened a $32,911 HELOC.
- She managed to extract $324,411 in four years as she spent the rest of the family home.
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Proprietary OC Housing News home purchase analysis
$614,900 …….. Asking Price
$354,000 ………. Purchase Price
4/12/1999 ………. Purchase Date
$260,900 ………. Gross Gain (Loss)
($28,320) ………… Commissions and Costs at 8%
$232,580 ………. Net Gain (Loss)
73.7% ………. Gross Percent Change
65.7% ………. Net Percent Change
4.1% ………… Annual Appreciation
Cost of Home Ownership
$614,900 …….. Asking Price
$122,980 ………… 20% Down Conventional
3.51% …………. Mortgage Interest Rate
30 ……………… Number of Years
$491,920 …….. Mortgage
$116,871 ………. Income Requirement
$2,212 ………… Monthly Mortgage Payment
$533 ………… Property Tax at 1.04%
$71 ………… Mello Roos & Special Taxes
$154 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$50 ………… Homeowners Association Fees
$3,019 ………. Monthly Cash Outlays
($345) ………. Tax Savings
($773) ………. Equity Hidden in Payment
$137 ………….. Lost Income to Down Payment
$97 ………….. Maintenance and Replacement Reserves
$2,135 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$7,649 ………… Furnishing and Move In at 1% + $1,500
$7,649 ………… Closing Costs at 1% + $1,500
$4,919 ………… Interest Points
$122,980 ………… Down Payment
$143,197 ………. Total Cash Costs
$32,700 ………. Emergency Cash Reserves
$175,897 ………. Total Savings Needed