Will the reflated housing bubble buoy the move-up market?
The move-up market will not get the hoped-for boost from the reflated housing bubble because the move-up equity flowed instead to the banks.
In past real estate boom and bust cycles, lenders were forced to write down bad loans, foreclose on the houses, and liquidate their inventory for whatever they could get — which is why the bust nearly always overshoots fundamentals to the downside.
This time around, the problem was so severe that following the market-cleansing process of the past would have displaced another 10 million families and bankrupted the banking system, so another solution was implemented: lenders kicked the can with loan modifications.
The short-term, visible effect of this solution was that millions of borrowers stayed in homes they couldn’t afford, and banks cooked the books with mark-to-model accounting to provide a veneer of solvency. Problem solved, right?
As Fredric Bastiat, a mid 19th century economist noted, “There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.” Politicians are often intentionally bad economists because the visible effect is the only factor in their reelection.
The invisible effect of preserving the bad debts of the housing bubble reveals itself in two forms: a weakened economy, and a long-term weakness in the move-up market. I recently documented how the lingering debt from the housing bust weakened the economy, hidden effect number one. Today, we will look in more detail at hidden effect number two, the long-term weakness in the move-up market.
Move-up Equity Saved the Banks
If the bust and recovery had resolved the bad debts like previous busts, when prices rebounded, a new crop of equity owners would be able to make a move-up trade, but since the old debt was not purged, most of what would have been home equity ended up bailing out the banks.
The move-up market functions when equity accumulates; however, unrestrained mortgage equity withdrawal during the housing bubble plus a large number of peak buyers left many homeowners with little or no equity; millions of homeowners are still underwater. Without this accumulated equity, the the move-up market only finds support from the continued withholding of supply by owners who can’t or won’t sell for a loss — a temporary market manipulation, not fundamental support.
The only groups with equity are those long-term owners who didn’t borrow and spend their equity and those who bought from 2009 to 2014, and as we know from the chart on originations, the number of buyers who purchased in that window is relatively small.
Plus, many more buyers than usual are either small investors or hedge funds. In a normal market about 35% of purchases are for investment (the inverse of a 65% home ownership rate). Over the last few years, about 50% of home purchases have been investors. Investors don’t sell their properties to complete a move-up trade, so 15% of the market that ordinarily would have been move-ups will not be over the next decade.
As I pointed out in One man’s mortgage debt is an entire neighborhood’s equity, the equity that would otherwise be accruing to homeowners is instead recollateralizing the bad loans on underwater properties. With 25% of properties underwater, a huge portion of the move-up market won’t have equity because that money will instead be going to a bank.
With 15% of the move-up market removed by investors and 25% removed by recovering underwater loanowners, 40% of the demand for future move-ups is gone.
Keep that in mind as you read hopeful articles expounding the resurgent move-up market. It’s all wishful thinking.
I suspect articles like this one are off-the-shelf productions from the last bust. The editor tells the reporter, “go write an article about the improving move-up market,” so the reporter dutifully complies without regard to whether or not the story is accurate today.
… Despite an improving economy and rock-bottom rates, inventory of available homes is inconsistent. Anything more than a trickle of listings sends prices down, causing sellers to pull their homes off the market.Then prices go up again because competition gets fierce, and sellers re-emerge. As a result, a bustle of trade-up activity is expected for this spring’s selling season, before conditions change again.
“I think a lot of people have made a lot of money in the stock market the last few years. People who want to enjoy a luxury home, now is the time. Everyone has more cash available to them,” says Ken Barber, a real estate agent in Wellesley, Massachusetts. …
Now is always the time to generate a real estate commission.
Notice how the people have cash from the stock market and not from home equity. I don’t think that’s how the move-up market is supposed to work.
And more consumers have positive equity. Last spring, 19 percent of homeowners in Redfin markets (such as Atlanta and Philadelphia) had low or negative equity. That was down to 11 percent in November. Nela Richardson, Redfin’s chief economist, expects it to hit 8 percent by March 2015.
Reflating the housing bubble is certainly helping the banks… Oh, wait, it was supposed to look like it was helping homeowners, but when the number of underwater borrowers decreases, it’s the banks that reap all the benefits.
Those trading up in 2015 should hit a sweet spot of selling near the top but not buying at the top, says Margaret Wilcox, an agent from agent in Glastonbury, Connecticut, for William Raveis.
Typical realtor double-talk nonsense. How can someone sell near the top and buy another home, but not also be buying at the top?
I know I’m jaded, but when I read such preposterous nonsense from people passing themselves off as “experts,” I feel both anger at the foolish advice and embarrassment for the person offering it.
Wilcox says a client couple recently traded up from a $500,000 house to a $1 million home. They did not get quite the price they wanted for the sale of their old home, but they got a discount of nearly $300,000 on their new purchase, Wilcox says.
There are a few red flags for buyers and sellers. …
Keith Jurow, a housing market analyst who writes the Capital Preservation Real Estate Report, is something of a doomsayer and thinks talk of a housing recovery “is phony and only an illusion,” he says.
Given the number of mortgages originated between 2004 and 2010, he feels that too many of the people who would like to trade up still have little or no equity in their homes and are not prepared to do a sale below their purchase price.
He is exactly right.
“Unless you bring more cash to the table, you can’t trade up,” Jurow says.
Also, foreboding makes some people want to act now. They do not want to be the family that missed their chance, adds Bob Walters, chief economist for Quicken Loans. “People won’t delay forever,” he says.
Perhaps they should buy now or risk being priced out forever. After all, that worked out so well for people in 2006, right?
(from the NAr in 2006)