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Will we get a triple-dip in housing? We might…

It’s been difficult to be bearish in 2012. First, we had the chorus of perennially wrong bottom callers make their usual prognostications, then Calculated Risk called the bottom, then the banks unexpectedly and abruptly slowed their rate of REO processing to create a shortage of MLS inventory. This MLS shortage has resulted in bidding wars, rising prices, and falling sales volumes. With those conditions, even the serious problems overhanging the market look insignificant. Most of the bears have gone into hibernation and their views have been largely ridiculed much like they were in 2006. Even I have caved in to the market bulls. It’s hard to argue for lower prices when affordability is high and supply is low.

There are still a few unabashedly bearish bloggers. Tyler Durden at ZeroHedge is still bearish, and so is mortgage analyst Mark Hanson.

8-22 Housing…The Stimulus Cycle is over. Let the hangover (triple-dip) begin

by Mark on August 22, 2012

Housing saw its stimulus peak in q2.  Now for the year+ long hangover / “triple-dip” trade.

Rates, sentiment, and prices – in aggregate — have never been better and YoY comps never easier to beat – comping against a stimulus hangover/double-dip year — and still July Existing Sales was only up 2.3% YoY.

This is a great point. In 2011 prices fell all year and sales volumes were very low because the tax stimulus pulled so much demand forward into 2010. The fact that 2012 was only a slight improvement over 2011 reveals much about the ongoing weakness in the market.

For the remainder of the year – and through July 2013 at least — YoY comps will be negative, as last year’s Twist ops and lack of rain/snowfall benefit turn into a headwind.

We should see a season retreat this fall and winter, but with the lack of inventory, we have considerable carry-over demand from this summer’s buyers who did not get homes. I think demand will remain relatively strong this winter for that reason.

Bottom line, this year’s housing stimulus cycle (once again mistaken by Wall St, the media and bloggers for a “durable recovery” with “escape velocity”;  (a full blown “recovery” without ever stopping at the bottom for a while) is now over and the stimulus hangover begins. This is a repeat of the 2009/2010 home buyer tax credit stimulus cycle followed by the 2h’10/1h’11 hangover/double-dip.

If the market does turn south, I will give Mark kudos for having the courage of his convictions. I lost mine. The chorus of wishful thinkers has brainwashed me to believe that perhaps the banking cartel can succeed in manipulating the market to save their skins. Right now, it’s hard to argue against their success.

The Sad Part About This

The sad part about the upcoming stimulus hangover / “triple-dip” event is that it didn’t have to turn out this way. The Fed did its job. By creating negative real yields and forcing mortgage rates to levels that not only forced first timers in all at once (very much like the tax stim of 2010) but forced institutional investors into rental property investment in search of yield, they created more than ample demand.

Yes, the federal reserve did create demand by it’s policies in exactly the way Mark described. Since there are so few competing investments providing stable yields, even the paltry 6% to 8% cash yields in real estate look great in comparison.

But the relentless bank and gov’t foreclosure can kicking – banks in order to kick losses and gov’t to get re-elected – on the 5 to 6 million “*rolling” distressed loans IN ADDITION TO the re-leveraging of 5 to 7 million high-risk legacy loans into higher risk / leverage new-vintage loans (aka loan mods) took away millions of units of supply that would have otherwise been purchased by first timers and investors over the past year.

Mark packs a lot into each sentence. First, he is right about the “can kicking.” Amend-extend-pretend is the only policy the banks have. they can’t afford the losses, so they keep pretending they haven’t lost the money until prices come back to make them whole.

Second, his reference to rolling distressed loans is an accurate description of loan modification programs. The bulls all point to falling delinquency rates as the end to the problem. However, much of this drop is due to ongoing efforts to modify loans. These efforts will fail as they always have, and these loans will recycle back into the foreclosure system. Only this time, the US taxpayer will be liable for the losses instead of the stupid lenders who made the bad loans.

*Shadow Inventory Note…I say “rolling” because “shadow inventory is not static.  Most “analysis” I read make no mention of this rather only talk about how quickly it will clear based on 400k monthly existing home sales. But they have their numerators and denominators all wrong. Shadow Inventory increases by the number of new “60 day lates” and “mortgage mods” granted each month — both have a 75% chance of foreclosure in 2 years — and decreases by the number of “distressed” existing home sales per month. Because there are roughly 130k 60-day lates + mods and only 110k distressed resales per NAR, shadow inventory is growing by abut 20k units per month right now.

I pointed out the ridiculousness of how shadow inventory is reported too. When referring to shadow inventory, a responsible reporter would try to establish a measure of when it will completely disappear. That’s not what they report. Previous reports on shadow inventory have shown a six month supply for the last several years. Does that make any sense to you? It’s all a concerted effort to make the problem look smaller than it is in order to minimize public perception of a huge problem.

In short, if foreclosures and short sales had been running at 2+ million a year like they should have been all along house sales would have been 50% to 75% greater this year, “escape velocity” may have been reached, and this would have gone a long way into the ultimate de-leveraging of 20+ million legacy years homeowners that needs to occur before this housing market ever finds a “durable” bottom.

Unfortunately, if that many foreclosures would have been processed, prices would have declined significantly, and the banks would be worried about continued deterioration and larger losses. The banks simply cannot afford deleveraging that’s coming. So they are extending the pain while they earn their way back to solvency. If they can manage to withhold enough product for force prices higher, they might even be able to improve their capital recovery when they finally do process their backlogs.

But because it all continues to be about can kicking, housing will go into a ”triple dip” in the next couple of quarters, which will last a couple of quarters at which time rates will be forced under 3% in order to recreate the same conditions that came on 3.5% this time around.

If rates do fall to 3%, affordability will be truly outstanding. That will prompt more buying — assuming some supply comes to the market to meet that demand.

Bottom line, the never ending cycle of stimulus boomlets (always confused with fundamental economic “recoveries”) and busts continues.

It’s hard to argue against his conclusions. We are in an artificial market completely manipulated by government officials, the federal reserve, and the banking cartel. I wonder if that is ever going to change. Lately, I have been doubting that too. We may have a nationalized housing market in perpetuity.

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Proprietary OC Housing News home purchase analysis

4 CITRUS Ln Ladera Ranch, CA 92694

$735,000    ……..    Asking Price
$1,007,500    ……….    Purchase Price
12/10/2004    ……….    Purchase Date

($272,500)    ……….    Gross Gain (Loss)
($80,600)    …………    Commissions and Costs at 8%
============================================
($353,100)    ……….    Net Gain (Loss)
============================================
-27.0%    ……….    Gross Percent Change
-35.0%    ……….    Net Percent Change
-4.0%    …………    Annual Appreciation

Cost of Home Ownership
——————————————————————————
$735,000    ……..    Asking Price
$147,000    …………    20% Down Conventional
3.55%    ………….    Mortgage Interest Rate
30    ………………    Number of Years
$588,000    ……..    Mortgage
$148,022    ……….    Income Requirement

$2,657    …………    Monthly Mortgage Payment
$637    …………    Property Tax at 1.04%
$183    …………    Mello Roos & Special Taxes
$184    …………    Homeowners Insurance at 0.3%
$0    …………    Private Mortgage Insurance
$163    …………    Homeowners Association Fees
============================================
$3,824    ……….    Monthly Cash Outlays

($594)    ……….    Tax Savings
($917)    ……….    Equity Hidden in Payment
$167    …………..    Lost Income to Down Payment
$112    …………..    Maintenance and Replacement Reserves
============================================
$2,592    ……….    Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$8,850    …………    Furnishing and Move In at 1% + $1,500
$8,850    …………    Closing Costs at 1% + $1,500
$5,880    …………    Interest Points
$147,000    …………    Down Payment
============================================
$170,580    ……….    Total Cash Costs
$39,700    ……….    Emergency Cash Reserves
============================================
$210,280    ……….    Total Savings Needed

6 ADELE St, Ladera Ranch, CA $878,000
6 ADELE St
0.14 miles
4 bd / 3 ba
3,300 Sq. Ft.
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3,300 Sq. Ft.
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0.27 miles
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2,368 Sq. Ft.
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2,261 Sq. Ft.
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0.37 miles
4 bd / 3 ba
3,000 Sq. Ft.
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0.44 miles
4 bd / 3 ba
2,983 Sq. Ft.
27562 SILVER CREEK Dr, San Juan Capistrano, CA $1,229,000
27562 SILVER CREEK Dr
0.63 miles
4 bd / 3.5 ba
3,468 Sq. Ft.
11 Portalon Ct, Ladera Ranch, CA $1,175,000
11 Portalon Ct
0.64 miles
3 bd / 4 ba
3,181 Sq. Ft.
30183 HILLSIDE Ter, San Juan Capistrano, CA $1,095,000
30183 HILLSIDE Ter
0.8 miles
5 bd / 3.75 ba
3,183 Sq. Ft.

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