Home sales down, household formation down, purchase applications down: Housing recovery?
Home prices rise, but investors pull back, home sales drop, household formation craters, mortgage applications decline, and the federal reserve frets over weak job growth. We won’t know whether or not the recovery died last year until the spring numbers come in, but suffice to say, right now, the recovery looks shaky at best.
Rising house prices are generally a side effect of a strong economy. A strong housing market recovery would witness rising home sales, rising household formation, increasing purchase applications, rising wages, and employment growth — not just rising prices. Right now, all we have is rising prices, and the lack of fundamental support is good cause to question the strength of the so-called housing recovery.
Anyone who objectively looks at the fundamental measures underpinning the housing recovery can only draw one conclusion: the entire housing recovery meme is a fabrication designed to provide unwarranted confidence in the nation’s homebuyers. There is no real recovery.
Rising home prices are not an indicator of a fundamental recovery now, just as they were not an indicator of a healthy, expanding housing market in 2006.
Why does the media, inside and outside the real estate industry, blindly believe that rising home prices are a prime indicator of a recovery? Given the obvious facts of Federal Reserve pumping of nearly 1 trillion dollars into the housing market annually, the complete lack of private capital in the secondary mortgage market, and the unprecedented growth of Wall-Street-funded buying of single family homes across the nation, it seems fairly obvious that this market is being supported not by fundamental growth in “end-user” demand, but rather it’s being sustained by artificial means that could turn on a dime, and cause an even bigger drop in home sales and values.
A Fundamentally healthy housing recovery and expansion requires sustained job and income growth. I don’t even think that I have to go to the trouble here to prove that neither one of these is currently strong enough to support a general recovery in the absence of QE and hedge fund cash sales. Just ask some of the millions of Americans who have been out of work for years now, or can only find a part-time job.
Rising house prices are the only recovery signal banks care about. If they can recover more on their bad loans, they consider it a recovery. The housing recovery is a bank-promoted pump-and-dump scheme.
Experts warn fundamentals just aren’t there
The sheer volume of institutional purchases in 2013 drove much of the housing price appreciation, without supporting property fundamentals, and that is alarming some experts.
First a little context.
In the pre-meltdown market, about 85% of home sales were individuals purchasing with a mortgage, about 10% were all-cash sales, and about 3-5% were distressed sales.
Flash-forward to 2013 and that sanity is absent — something like 40% of home sales were individuals using a mortgage, 40% were all-cash, more than about 15% were distressed sales and 5% were flips.
More specifically, distressed sales rose to a three-year high of 16.2% of all U.S. residential sales, up from 14.5% in 2012.
“The simple reality is that there has really been very little actual recovery in housing,” says Lance Roberts, at STA Wealth Management. “The optimism over the housing recovery has gotten well ahead of the underlying fundamentals. While the belief was that the Government, and the Fed’s interventions would ignite the housing market creating a self-perpetuating recovery in the economy — it did not turn out that way.
“Instead, it led to a speculative rush into buying rental properties creating a temporary, and artificial, inventory suppression,” Roberts says.
It’s refreshing to read comments from someone who has a clear grasp of the situation.
The self-perpetuating recovery did not happen. In fact, we see evidence of the opposite; rather than motivating buyers to act, rising prices are causing buyers to give up, leading to a drop in demand, slower sales volumes, and lower household formation. If not for the lack of inventory due to lenders manipulations, sellers would be desperately fighting over flagging demand.
A total of 14,471 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was down 21.4 percent from 18,415 in December, and down 9.9 percent from 16,058 sales in January 2013, according to San Diego-based DataQuick….
Last month’s Southland sales were 17.3 percent below the average number of sales – 17,493 – in the month of January since 1988. Sales haven’t been above average for any particular month in more than seven years. January sales have ranged from a low of 9,983 in January 2008 to a high of 26,083 in January 2004.
There is no good news for housing bulls in that report. Sales are down, and although housing bulls and realtors like to blame it on a lack of supply, it’s higher prices that’s really hurting sales.
Tuesday, February 11, 2014
HVS reported annual household growth of just 448,800 in 2013. This represents a 48 percent drop in household growth relative to that from 2012 and marked the lowest annual household growth measure since 2008, in the depths of the Great Recession (Figure 1).
In September we noted that the HVS was showing a disconcerting slowdown in household growth after finally having picked up in 2012.
When household formation rose in 2012, most observers thought the worst was behind us, particularly for housing. Now, they are at a loss to explain why their prognostications went so wrong. The report linked above questions the figures, but based on other evidence, including declining home sales and mortgage applications, household formation is declining, and that isn’t a good sign for housing.
by Bill McBride on 2/12/2014 07:02:00 AM
The 4-week average of the purchase index is now down about 15% from a year ago.
The purchase index is probably understating purchase activity because small lenders tend to focus on purchases, and those small lenders are underrepresented in the purchase index – but this is still very weak.
I’m glad to see Bill added the obvious about this reading being very weak.
Tapering will continue: The Fed has been concerned about lingering long-term unemployment, and is still trying to aid the economy by buying billions in bonds each month. That policy is meant to lower long-term interest rates, which stimulates more borrowing and spending.
The most obvious impact plays out in the housing market, where lower mortgage rates have been a large driver of the recovery over the last year.
Focus on the job market: In January, unemployment neared that level, falling to 6.6%. But the Fed isn’t likely to consider that a success. Much of the decline in the unemployment rate over the last three years has come from Americans dropping out of the labor force.
“We shouldn’t focus only on the unemployment rate,” Yellen said.
Meanwhile, inflation remains well below the Fed’s goal of 2% per year.
“Too many Americans remain unemployed, inflation remains below our longer-run objective, and the work of making the financial system more robust has not yet been completed,” Yellen said.
So Yellen will keep printing money and ignore the bad job numbers. What a surprise… not. The federal reserve will continue printing money until rising long-term rates forces them to stop.
Is the recovery dead?
Prices can still go up; all cash-buyers and limited inventory is a recipe to inflate prices further; however, what most economists were counting on was a resurgence of owner occupants to take the place of investors who are pulling back their purchases due to higher prices. Obviously, that isn’t materializing. For home sales volumes to match last year’s levels, owner-occupants must buy more homes. For home sales volumes to increase — the consensus believes sales volumes will rise in 2014 — then owner occupants must break out of the four-year holding pattern and start buying many, many more homes. Does that seem likely?
What reason do we have to believe owner occupants will buy many more homes in 2014? An improving economy? Lower unemployment? Those are the answers glibly offered by housing analysts. Though an improving economy will create some demand, it’s not likely to be enough to make up for the loss of investor demand, particularly since the cost of ownership is so much higher.
Put yourself in the shoes of a newly employed worker. Two years ago, houses cost nearly 50% less to own on a monthly cost basis. Plus, those investors who drove prices higher are offering great deals on rentals. What’s the compelling reason to buy? Kool-aid intoxication? Fear of being priced out? Given the huge price collapse everyone just witnessed, many potential buyers will wisely remain cautious. Some will recognize that high prices aren’t likely to get pushed higher, at least not by other owner-occupant buyers.
We won’t know whether or not the recovery is dead until the spring numbers come in, but suffice to say, right now, the recovery is on life support.
3004 OCEAN Blvd Corona Del Mar, CA 92625
$6,998,900 …….. Asking Price
$9,200,000 ………. Purchase Price
10/23/2007 ………. Purchase Date
($2,201,100) ………. Gross Gain (Loss)
($559,912) ………… Commissions and Costs at 8%
($2,761,012) ………. Net Gain (Loss)
-23.9% ………. Gross Percent Change
-30.0% ………. Net Percent Change
-4.2% ………… Annual Appreciation
Cost of Home Ownership
$6,998,900 …….. Asking Price
$1,399,780 ………… 20% Down Conventional
4.79% …………. Mortgage Interest Rate
30 ……………… Number of Years
$5,599,120 …….. Mortgage
$1,435,805 ………. Income Requirement
$29,343 ………… Monthly Mortgage Payment
$6,066 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$1,458 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$225 ………… Homeowners Association Fees
$37,092 ………. Monthly Cash Outlays
($4,040) ………. Tax Savings
($6,993) ………. Principal Amortization
$2,558 ………….. Opportunity Cost of Down Payment
$895 ………….. Maintenance and Replacement Reserves
$29,512 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$71,489 ………… Furnishing and Move-In Costs at 1% + $1,500
$71,489 ………… Closing Costs at 1% + $1,500
$55,991 ………… Interest Points at 1%
$1,399,780 ………… Down Payment
$1,598,749 ………. Total Cash Costs
$452,300 ………. Emergency Cash Reserves
$2,051,049 ………. Total Savings Needed