Is the housing hangover cure more stimulants or more jobs?
When the interest rate stimulus ended in mid 2013, sales slumped. Does the market need a dose of low rates, or should we wait for jobs to improve sales?
Government officials, lenders, and the federal reserve will do whatever’s necessary to prop up housing prices. Over the last five years, they suspended proper accounting rules, extended tax breaks to buyers and loanowners, reduced mortgage interest rates to record lows, withheld inventory from the MLS, awarded bad behavior with bailouts, printed money, and bombarded the financial media with feel-good stories designed to stimulate buying activity even if it harmed those buyers.
To people willing to bend, break, or rewrite rules of proper financial conduct, the cure for housing’s woes are whatever drives up prices. Ideally, they would like to see improving fundamentals of job and wage growth, but absent that, they will take any stimulus they believe will prop up prices, no matter the cost.
The problem with stimulants is what happens when the stimulus runs out: a crash, or at best, a heavy hangover.
Diana Olick, October, 23, 2014
First came a historic national crash in home prices, then a surprisingly sharp jolt off the bottom. Investors, desperate for yield and fueled by Fed-induced cheap cash, swarmed the most distressed housing markets, buying bargain-basement properties and turning them into rentals. Some markets saw double-digit annual price appreciation. Some analysts started to float the word “bubble,” again.
Now, finally, reality is setting in yet again.
The market experienced a major bubble, then a painful crash. The manipulations described above artificially propped up prices, and although house prices still overshot to the downside, the bottom was not near as deep as it would have been if the crash was allowed to play out naturally.
Foreclosures have fallen to new lows since the crisis, and investors, while not selling their homes, are not buying nearly as many. That has taken much of the air out of home prices. In addition, the number of homes for sale is rising, pushing sellers from the driver’s seat to the way, way back.
“What a difference a year makes,” said Stan Humphries, chief economist at Zillow. “At this time last year, we were worrying about a number of frothy markets that looked like they could be on the edge of another housing bubble, places where homes were appreciating at more than 20 percent per year and where buyers’ heads were spinning just trying to keep up.”
Now those markets, while not in the red, are barely in the black. Los Angeles, for example, saw home prices rise over 18 percent in the third quarter of 2013 from the same time in 2012. Now its annual appreciation for the quarter is down to 8 percent, according to Zillow. …
While most housing analysts do not expect home prices to go negative on a national level again, some have floated that possibility.
As long as mortgage rates remain near 4%, we probably won’t see a national house price decline, but if mortgage rates move up unexpectedly early next year, we might.
Prices soared again between 2011 and 2013 due to the Federal Reserve’s intervention; it bought billions of dollars worth of mortgage-backed bonds and pushed the average rate on the 30-year fixed to a record low. That pulled buyer demand forward, providing investors with cheap cash to buy foreclosures. Some argue that as that demand goes away, housing will pay a price again.
“If stimulus ‘hangovers’ are proportional to the amount of stimulus that preceded them, then this one could be a doozy,” wrote Mark Hanson, a housing analyst in California.
“Home values should continue to grow, but that growth will increasingly be driven by traditional market fundamentals like household formation and job growth, and less by artificial stimulants like decreased supply and widespread investor demand,” said Zillow’s Humphries.
We are now five years into an economic expansion, and the housing market is still waiting for improvement in underlying fundamentals. Will we get this improvement over the next few years, or will we slip back into recession as the stimulants are removed?
Maybe what the housing market really needs is lower prices…
September Sales Limited by High Prices and Relatively Tough Lending Standards
September 2014 California single-family home and condominium sales fell 5.6 percent to 32,017 units from 33,931 in August. In the past 12 months, sales are down 4.4 percent from 33,484 sales in September 2013. September 2014 sales were the lowest September sales since 2007. On a regional basis, over the past 12 months sales are down 3.7 percent in the Bay Area, 4.9 percent in Southern California, and 8.3 percent in the Central Valley.
“The California real estate market is stuck in low gear,” said Madeline Schnapp, Director of Economic Research for PropertyRadar. “High prices and relatively tough lending standards have pushed many would be homeowners to the sidelines.”
Standards are only tough relative to the housing bubble when we had no standards. (See: Despite industry spin, mortgage lending standards are not tight)
The steady decline of lower priced distressed properties available for sale has been a key factor depressing sales. Whereas in September 2013 23.0 percent of sales were distressed properties, in September 2014 distressed property sales comprised only 16.6 percent of the total. In September 2011, 55.2 percent of sales were distressed property sales.
Improvement in negative equity has stalled due to a slowdown in price appreciation. In September, negative equity positions were nearly unchanged from August. Slightly more than 1.0 million California homeowners, or 11.6 percent remain underwater. Historically elevated levels of negative equity will continue to exert a drag on the California real estate market.
The 11.6% who are underwater, and the 4.4% who barely have enough equity to pay closing costs — 16% of the California housing market — is effectively removed in a purgatory I’ve described as cloud inventory. These homes are currently off the market, but they represent overhead supply that will likely hit the market once prices rise enough for them to get out from under their onerous debts.
The diminished supply problem caused by cloud inventory is mirrored by the diminished demand problem caused by rising prices in the absence of rising wages. The market is finding a new equilibrium price at sales volumes about 15% below the long term average due to both a lack of supply and a lack of demand.
The only way out of these circumstances is an improvement in fundamentals of job and wage growth. Stimulating the market may change the equilibrium price level, but it is no substitute for real demand caused by a resurgent economy producing a plethora of high-paying jobs.