The housing recovery falters in 2014 because… the dog ate it

The financial media blames the weather to cover up the underlying weakness in housing.

“It is better to offer no excuse than a bad one.” ― George Washington

The housing recovery sputters badly; housing starts are down, mortgage applications are down, and buyers evaporated — at the time of year when all of these factors are supposed to increase. These unexpected developments, unexpected by brilliant economists, demand explanation. Mainstream media reporters, the paragons of insightful analysis and objective reporting, explain how these events caught reporters and economists completely by surprise the only way an apologist knows how; they make up a lame excuse: the weather.

Cold weather sinks U.S. home building in January

By Lucia Mutikani, WASHINGTON Wed Feb 19, 2014 2:54pm EST

(Reuters) – U.S. housing starts recorded their biggest drop in almost three years in January as harsh weather disrupted activity, but the third month of declines in permits hinted at some weakness in the housing market.

The weather? Are you kidding me? And it takes three months of declines for them to take a hint? WTF?

“The housing sector already slowed down in the fourth quarter and it’s not picking up,” said Thomas Costerg, a U.S. economist at Standard Chartered Bank in New York. “There is more than the weather at play and the underlying dynamics are not as favorable as people thought they were.”

The only reason people believed the underlying dynamics (fundamentals) of the housing market were good is because the mainstream media ran story after story telling them so. Duh! And now, they start to leak out the truth behind a glib excuse about the weather. Last week I posted that Home sales down, household formation down, purchase applications down: Housing recovery? Perhaps the mainstream media is ready to take a hint: HOUSING FUNDAMENTALS ARE POOR!

Until recently, hopes were high for strong growth this year, but it now appears output in the fourth quarter was not as sturdy as initially thought, with downward revisions to November and December retail sales figures. In addition, export growth was weak in December.

Is that how the financial media sees their function: raising hopes? Foolish me; I thought the point of reporting was to report facts and provide objective interpretation. What was I thinking?

But there are some holes in the weather theory.

No kidding?

The Northeast, which bore the brunt of the frigid temperatures and snow storms, saw groundbreaking hitting its highest level since August 2008. In addition, starts in the West, where temperatures have been a bit warmer, also fell.

So in other words, there isn’t a shred of evidence to support the weather-as-cause theory, and there is plenty of evidence refuting it. Hmmm… That being the case, why is the headline of this report Cold weather sinks U.S. home building in January?

Pardon my digression, but I want to point out to everyone exactly how the financial media operates:

  • First, they believe people read financial news to get good news on their investments, so they spin every piece of information in a positive light, and they quote every economist willing to tell people what they want to hear.
  • Second, they will repeat their spin in groupthink fashion until it becomes conventional wisdom (Do you remember how hard they worked to convince everyone the real estate recovery was real in 2012?)
  • Third, they squelch any dissent from their groupthink wisdom with dismissive articles ridiculing contrary ideas or attacking the credibility of contrary messengers (Rembember John Burn’s quote about Mark Hanson, “I give him zero credibility”?
  • Fourth, when reality proves them wrong — which happens quite often — they disremember the bad information they disseminated and respond incredulously to reality.

Look at how the financial media broke the bad news in this article — and I say “they” because many news articles mimic the bad-weather meme right now. They use a headline that draws in denial seekers; after all, who else wants to believe the weather is responsible for the housing market’s woes? Then, after getting their normal audience to read, they slowly break the bad news, “Sorry, our cover story is bullshit, and the housing market really is in trouble.” Somewhere in there, the financial media should apologize for leading readers astray, but most reporters probably know their readers are hearing what they want to hear anyway, so they don’t feel responsible for misleading them.

I write derisively about the mainstream media quite often, and it isn’t because I harbor some secret jealously or deep desire to be one of them. I find it offensive how they mislead people with bad information or shoddy analysis. People deserve better, particularly those considering making the largest financial purchase of their lives.

Some economists said this suggested some weakening in housing market fundamentals, noting that home sales have been trending lower as higher mortgage rates and rising house prices sideline potential buyers.

We finally get to a nugget of truth; higher prices and higher rates are turning buyers off.

Mortgage applications continue to fall, drop 4.1%

Brena Swanson, February 19, 2014 7:34AM

Mortgage applications continued to fall compared to a week prior and dropped 4.1% for the week ended Feb. 15, the Mortgage Bankers Association report found.

Overall, the refinance share of mortgage activity fell slightly to 61% of mortgage applications.

The refinance index declined 3% from the previous week, as the purchase index dipped 6% from one week earlier.

If purchase applications break down completely and make a new 20-year low — and we are very close to seeing that — I wonder how the media will spin it?

Meanwhile, the 30-year, fixed-rate mortgage with a conforming loan balance increased to 4.50% from 4.45%, while the 30-year, FRM with a jumbo loan balance jumped to 4.45% from 4.40%.

With demand down, mortgage rates should decline as lenders compete for limited business opportunities; however, rates are creeping back up again, likely due to the fed taper.

2014 Housing Market: Where Is Everyone?

by Ellen Haberle |

So far this year, some homebuyers and home sellers seem to have gone missing. We can’t help but wonder: are they coming late to the party, or is it just going to be a smaller, quieter party this year? …

But growth in demand among Redfin homebuyers has been very weak, which reflects a broader decline in the market. In January, applications for new mortgages across the U.S. were about 15 percent lower than last year. Meanwhile, sales across 19 markets in January hit the lowest point in at least four years, falling 9.9 percent year over year.

Redfin agents say the downturn in demand is uneven. “The picture-perfect homes are selling just as fast as last year, often drawing a dozen or more offers,” according to Redfin Washington, D.C. agent Philip Gvinter. “But now the undesirable properties that would have sold in a few months last year aren’t selling at all. The biggest change is in between, with the sort-of-desirable homes. Last year, these homes got multiple offers and sold quickly. Now, they are getting only one offer during the first week, sometimes having to reduce their price, and the home is taking three to six weeks to sell.

Last year, during the height of the frenzy that ended in June, anything put on the market sold quickly, generally for more than previous comparables. Demand withered over the last half of 2013, but most observers dismissed the drop as a season effect. A continuation of demand withering seen in January and February can’t be dismissed so easily. There is still enough demand to ensure well-priced properties get plenty of offers, but marginal properties priced improperly get no interest at all.

The softer demand is, in part, a product of worsening affordability. Last year’s steep price appreciation and rising mortgage rates, as well as stricter mortgage lending regulations in 2014, likely put homebuying out of reach, or made it simply less appealing, for many Americans. The National Association of Realtors says that home purchases by first-time buyers are starting to slip, falling to 27 percent of sales in December from 30 percent last year.

For someone who purchased a $350,000 home in February 2013 at a 30-year fixed rate of 3.53 percent, her monthly mortgage payment would have been $1,577. However, with prices up 14.3 percent, that very same home now costs $400,050. At the current mortgage rate of 4.28 percent, that monthly mortgage payment would now cost $1,975, a 25 percent jump from a year ago.

Affordability with caption
Given this change, some buyers are pushing back. “Phoenix has seen a wave of new, inexperienced real estate agents who are overpricing homes. But, buyers here are unwilling to pay premiums on non-premium homes. These homes are having a very hard time selling,” says Redfin agent Marcus Fleming.

No economists expected buyers to react to higher prices with reluctance. Most expected buyers to get caught up in a frenzy and continue buying no matter how high prices got for fear of being priced out forever. That dog don’t hunt; buyers simply aren’t willing to play that game any longer (See: Is the public growing weary of rising home prices?)

The dearth of inventory across many markets, however, is constraining activity on both sides. In January, the total number of homes for sale slipped 9.4 percent to the lowest point in at least four years, leaving buyers with few homes worth touring. But, low inventory isn’t just a problem for buyers. Sellers almost always need to buy another home when they sell. If sellers have nothing to buy, they may not list.

According to Redfin Denver agent Paul Stone, “I have several sellers whose homes are ready to be listed, but they won’t pull the trigger until they find something to buy. Their biggest fear is that they will be left ‘homeless’ if they sell too quickly, forcing them to move in with in-laws or find an expensive short-term sublease.”

Why is demand really down?

One of the reasons the financial media doesn’t tell people the truth about weak demand is because nothing can be done about it; there are no policy responses from government or private sector entities that can help. People prefer hopeful ignorance to despairing truths.

So why is demand really down?

  1. Prices and interest rates rose too high too fast making housing unaffordable.
  2. Unemployment and underemployment and low FICO scores keeps people out of the prospective buyer pool.
  3. New lending standards went into effect January 10.

Nothing can be done about any of those problems. The government and the banks wanted higher prices, so they aren’t about to bring prices down. The federal reserve has printed all the money it can to stimulate employment, so now they must let rates rise, which harms affordability. Although lenders might want them too, Congress is not going to roll back the Dodd-Frank rules that went into effect in January.

Demand will come back in time. We will almost certainly see an increase in activity from the low levels we’re seeing today, but I’m feeling more solid about my prediction that sales volumes will be “unexpectedly” lower in 2014 than last year.

[dfads params=’groups=164&limit=1′]

[idx-listing mlsnumber=”OC14035325″]

875 ACAPULCO St Laguna Beach, CA 92651

$1,049,900 …….. Asking Price
$620,000 ………. Purchase Price
8/13/2002 ………. Purchase Date

$429,900 ………. Gross Gain (Loss)
($83,992) ………… Commissions and Costs at 8%
$345,908 ………. Net Gain (Loss)
69.3% ………. Gross Percent Change
55.8% ………. Net Percent Change
4.5% ………… Annual Appreciation

Cost of Home Ownership
$1,049,900 …….. Asking Price
$209,980 ………… 20% Down Conventional
4.77% …………. Mortgage Interest Rate
30 ……………… Number of Years
$839,920 …….. Mortgage
$213,685 ………. Income Requirement

$4,392 ………… Monthly Mortgage Payment
$910 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$219 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$5,520 ………. Monthly Cash Outlays

($1,241) ………. Tax Savings
($1,053) ………. Principal Amortization
$381 ………….. Opportunity Cost of Down Payment
$282 ………….. Maintenance and Replacement Reserves
$3,891 ………. Monthly Cost of Ownership

Cash Acquisition Demands
$11,999 ………… Furnishing and Move-In Costs at 1% + $1,500
$11,999 ………… Closing Costs at 1% + $1,500
$8,399 ………… Interest Points at 1%
$209,980 ………… Down Payment
$242,377 ………. Total Cash Costs
$59,600 ………. Emergency Cash Reserves
$301,977 ………. Total Savings Needed
[raw_html_snippet id=”property”]