Mar092015

Is the only meaningful sign of recovery higher home prices?

The current housing recovery is not supported by economic fundamentals, but manipulative price supports will likely hold until fundamentals improve.

housing_recovery_Austin_PowersThe word recovery implies improvement, but so far, the improvement is limited to price. Shouldn’t a housing recovery show improvement in multiple areas, not just price?

A real housing recovery would be characterized by resurging new home construction and steady gains in sales and prices commensurate with strong job growth and rising incomes. The activity currently characterized as recovery lacks these characteristics.

To this, lenders and underwater homeowners undoubtedly say, “so what?” As long as house prices go up, lenders and loanowners get out from under their bad bubble-era loans; they care about nothing else.

Unfortunately, this so-called recovery hurts new buyers, homebuilders, and realtors because higher prices causes new buyers to put more of their income toward housing expenses, and because so many are priced out, it reduces demand and transaction volume, which hurts homebuilders and realtors.lower_standards

Desiring greater transaction volumes, homebuilders and realtors complain about the prevailing prudent lending standards and lobby the FHA and GSEs to lower their standards, which puts the US taxpayer at risk. Lenders respond by reintroducing unstable loan programs that caused the housing crisis, putting the entire financial system at risk. At times it seems like we learned nothing from the housing bubble — or at least those who depend on transactions maintain a willful ignorance.

This is a peculiar housing recovery. Nobody expected to see 20-year lows in home ownership, 6-year lows in home sales, 30-year lows in first-time homebuyer participation, 20-year lows in purchase mortgage originations, new home construction less than 50% of normal, and household formation less than 50% of normal.

As long as a recovery is narrowly defined as only rising home prices with no other significant fundamental improvement, then we are in a housing recovery.

The “Recovery” in U.S. Housing Prices

Author: Daniel Alpert  ·  March 6th, 2015

Housing prices have recovered over 54% of their dramatic 33% decline from peak 2006 levels to their nadir in early 2012. Yet underlying data indicates that the price recovery is not a recovery in the demand for owner-occupied homes.

What evidence supports this? First, purchase originations still languish near 20-year lows. With continued growth in our population, purchase originations should consistently increase to keep pace with our growing population. Clearly, it hasn’t.

Purchase Index and US Population

Second, the home ownership rate is also near 30-year lows.

homeownership-rate

Rather, it is more the result of two factors:

(i) the knock-on effect of the mortgage bubble and crisis of the mid-2000s that has yielded a shortage of homes for sale; and

He’s talking about cloud inventory.

cloud-inventory

(ii) historically low mortgage interest rates unique to the present macroeconomic environment.

Neither of these phenomena are characteristic of a normal recovery in the housing sector and are not likely to be sustainable in the absence of other supporting factors.

U.S. home prices – as they did in the mid-2000s – once again threaten to disconnect from other economic fundamentals, with a supply/demand mismatch that has its roots in the mortgage crisis itself and in post-crash monetary policy.

(See: What will the next housing bust be like)I_want_to_believe

Most analysts, whether they express it or not, know that a material rise in long term interest rates is incompatible with prevailing home prices – unless it is accompanied by significant growth in household incomes.  And such growth is incompatible with present global economic realities.

Realistically, interest rates won’t rise much until wages rise. If interest rates go up in the absence of rising wages, people won’t be able to afford existing debt-service burdens, consumer spending will grind to a halt, and the federal reserve will be forced to lower rates to revive the economy.

Further, with deflation prevailing around the globe, other countries are printing money to devalue their currency relative to the dollar, bringing cheap imports to the United States as the dollar strengthens. We are importing foreign deflation, which makes US bonds desirable and serves to keep our interest rates down.american_life_underwater

But few focus on the degree to which home prices are a reflection of the unique post-crash circumstances that severely restrict the supply of for-sale housing, in terms of restricting both the number of homeowners who are able to trade their present home for another, as well as access to credit.

I am one of the few who writes about this problem frequently.

These constraints have served to flood the rental housing market with demand that has, in turn, escalated rents beyond levels that would be obtained if the inventory of owner-occupied housing was turning over at rates traditionally associate with economic expansion. …

Since many loanowners are allowed to squat or otherwise keep occupying underwater homes on loan modifications, supply of single-family rentals hasn’t kept up with the demand. The one-to-one relationship of former homeowners adding a unit of demand and a unit of supply breaks down, creating an imbalance the pushes rents higher. This in turn stops renters from saving enough to put together a down payment to buy a home.

Download (PDF, 937KB)

The housing market analysts that embraced the recovery meme acknowledge the weak underlying fundamentals, but most assume the market manipulations that took hold in 2012 will be durable enough to last until real fundamentals of job and wage growth improve enough to put the market on a solid foundation; they are probably right.

I think most housing bulls were dismayed by the unusual circumstances I outlined in  The six most unusual and bearish features of the housing recovery, but they always said the road would be “bumpy,” and as long as prices don’t dip below the 2012 bottom, they will be vindicated in their belief in this so-called recovery.

hyperventilation

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