8-22 Housing…The Stimulus Cycle is over. Let the hangover (triple-dip) begin

by Mark on August 22, 2012

 Housing saw its stimulus peak in q2.  Now for the year+ long hangover / “triple-dip” trade.

Rates, sentiment, and prices – in aggregate — have never been better and YoY comps never easier to beat – comping against a stimulus hangover/double-dip year — and still July Existing Sales was only up 2.3% YoY.  For the remainder of the year – and through July 2013 at least — YoY comps will be negative, as last year’s Twist ops and lack of rain/snowfall benefit turn into a headwind.

Bottom line, this year’s housing stimulus cycle (once again mistaken by WallSt, the media and bloggers for a “durable recovery” with “escape velocity”;  (a full blown “recovery” without ever stopping at the bottom for a while) is now over and the stimulus hangover begins. This is a repeat of the 2009/2010 home buyer tax credit stimulus cycle followed by the 2h’10/1h’11 hangover/double-dip.

 

The Sad Part About This

The sad part about the upcoming stimulus hangover / “triple-dip” event is that it didn’t have to turn out this way. The Fed did its job. By creating negative real yields and forcing mortgage rates to levels that not only forced first timers in all at once (very much like the tax stim of 2010) but forced institutional investors into rental property investment in search of yield, they created more than ample demand.

But the relentless bank and gov’t foreclosure can kicking – banks in order to kick losses and gov’t to get re-elected – on the 5 to 6 million “*rolling” distressed loans IN ADDITION TO the re-leveraging of 5 to 7 million high-risk legacy loans into higher risk / leverage new-vintage loans (aka loan mods) took away millions of units of supply that would have otherwise been purchased by first timers and investors over the past year.

*Shadow Inventory Note…I say “rolling” because “shadow inventory is not static.  Most “analysis” I read make no mention of this rather only talk about how quickly it will clear based on 400k monthly existing home sales. But they have their numerators and denominators all wrong. Shadow Inventory increases by the number of new “60 day lates” and “mortgage mods” granted each month — both have a 75% chance of foreclosure in 2 years — and decreases by the number of “distressed” existing home sales per month. Because there are roughly 130k 60-day lates + mods and only 110k distressed resales per NAR, shadow inventory is growing by abut 20k units per month right now.

In short, if foreclosures and short sales had been running at 2+ million a year like they should have been all along house sales would have been 50% to 75% greater this year, “escape velocity” may have been reached, and this would have gone a long way into the ultimate de-leveraging of 20+ million legacy years homeowners that needs to occur before this housing market ever finds a “durable” bottom.

But because it all continues to be about can kicking, housing will go into a “triple dip” in the next couple of quarters, which will last a couple of quarters at which time rates will be forced under 3% in order to recreate the same conditions that came on 3.5% this time around.

 

Bottom line, the never ending cycle of stimulus boomlets (always confused with fundamental economic “recoveries”) and busts continues.

 

Have a fantastic day!

{ 24 comments… read them below or add one }

i'm not here August 22, 2012 at 4:06 pm

Keep up the good work. Not to foggy where you are standing.

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BobH August 22, 2012 at 4:45 pm

Mark:
Lower rate will drive up prices….right?

Higher prices puts more sellers in the market…right?

More sellers in the market creates more inventory…right?

More inventory creates more sales…right?

What’s wrong with this picture?

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Duncan August 22, 2012 at 5:55 pm

Why would more inventory create more sales? Sales are going to be sales. If inventory (supply) increases and sales are flat, prices fall.

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Greg August 22, 2012 at 4:49 pm

Arent the companies who are “kicking the can”, the same ones getting a lower yeild on the mortgages?

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Al August 23, 2012 at 2:50 pm

No, a large percentage of new loans are FHA and the risk of default goes to the US tax payer.

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Al August 22, 2012 at 6:03 pm

Bobh,

The only question mark with your theory is that “more sellers in the market creates more inventory.” The problem with the market is that many homeowners are significantly underwater and can never sell their home unless they are foreclosed or do a short sale. This is what Mark has been preaching since day 1. So the true recovery starts when those underwater homeowners are flushed out which will never happen because of the can-kicking.

Prices were up this year modestly but sales down so that refutes the argument for an increase in inventory.

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Mark August 22, 2012 at 6:22 pm

Right now there is a lack of supply for the “right type” of supply by the demand cohorts that were “activated” when rates dropped by 30% — from 5% to 3.5% — last September. These are first timers and investors who have been known to leave the market over the period of a single month or two. A true durabel recovery needs repeat buyers who leave a unit of supply for the first timers and investors and buy a larger unit for instance. Right now with half of the US effectively underwater and first timers and investors making up half the demand inventory is being depleted at an artificially fast pace which will tend to influence prices higher. But prices cant respond too much because first timers can only put down so much and qualify for so high of a loan amount and investors simply wont buy without the right rate of return. Repeat buyers are also many times more emotional or necessity buyers, which creates a good stable demand profile across the market.

On supply creating demand we are in a supply driven market. One would argue it’s demand driven but based on what is selling the fastest — foreclosure resales and short sales to first timers and investors — I argue that if a million units were to hit the market tomorrow a substantial portion would be under contract the first month. That’s of course unless rates rise to “nosebleed” 5% level then much of the reason first timers and investors are buying goes out the window. Same with the repeats that are active.

Bottom line, this is a stimulus driven market. It all started when rates plunged 1.5% in a month last year, which is no coincidence.

Once again Wall St, the media and bloggers are mistaking stimulus with fundamentals.

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Tom Lipinski August 22, 2012 at 6:44 pm

I have already started to notice my inventory growing and I am seeing a lot more for sale signs as I travel Detroit suburb neighborhoods. It is slowing right now. Yes, I am working a pant-load of first time buyers and investors and yes, there are multiple offer situations a-plenty, but I am sensing this stimulus-driven recovery starting to slow. In a month or two or three, I will bet that multiple offer situations will be the exception and not the rule.

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Dbacktim August 22, 2012 at 9:43 pm

Mark, I live in Phoenix and what you are writing is spot on over here. I believe these low interest rates are forcing the homebuilders hand here to buy new land. I met with a realtor last week and he basically told me in so many words that I could get a 12% add to my house if I wanted to sell due to the low inventory and high investor numbers. My house is in the 400,000 range. I’m thinking of selling but might wait until the Fed lowers rates again. Maybe I might get a higher price. Your thoughts.

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Dbacktim August 22, 2012 at 10:04 pm

One other item of note. Employment peaked here in June of 2007. Our total employment now is the same level as 2004/2005. My thought are that, save for new homes for retirees, that every home built since 2006 to current is surplus. It’s like a mini bubble.

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Steve August 22, 2012 at 10:08 pm

Mark, do you see differences in the Judicial vs Non Judicial states in terms of shadow inventory clearing? Do you think the Non Judicial will recover faster over the next 3-5 yrs?

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Billionaire soon! August 23, 2012 at 7:18 am

Bought and sold almost 23,000 acres in California.
Your so off, it’s like shooting the car at the pistol range…
USA will grow from $13T to $18T by the end of Romney’s TERM!

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Joe S. August 23, 2012 at 8:20 am

There is can kicking and then there is the Law of unintended Consequences.

FNM and FRM have a new mandate to wind down their inventory at a rate of 15% a year. More inventory from the entities who have been “the market” for the last 5 years what do you think the TBTF banks will do with their inventory?

In addition there is this new program from Fannie and Freddie
http://tbwsdailyshow.com/2012/08/23/short-sales-smooth-sailing/

Its only speculation but …. it would fit with the Law of Unintended Consequences.
The one thing all these programs have tried to avoid, falling asset prices, may finally arrive. Your thoughts?

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Adi August 24, 2012 at 3:48 pm

Mark whats your view of the below published data where they claim that shadow inventory is not a threat and shows a graph where its winding down. Is this data correct ?

http://blogs.wsj.com/developments/2012/08/14/shadow-inventory-its-not-as-scary-as-it-looks/

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Tom Lawler October 2, 2012 at 4:00 pm

CoreLogic’s HPI in August was up 4.6% from last August, and only six states showed a YOY decline; and there were no big declines! OMG (can I use that here?) Not too surprising (though a larger gain) than competent housing analysts expected. Any view?

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Tom Lawler October 6, 2012 at 3:26 pm

Fannie and Freddie don’t have a mandate to lower their “inventory,”; rather they have a mandate to lower the number of mortgages they hold.

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Really Good STUFF

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holiday deals in africa December 25, 2012 at 10:22 pm

Fannie and Freddie don’t have a mandate to lower their “inventory,”; rather they have a mandate to lower the number of mortgages they hold.

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french Foie Gras December 27, 2012 at 12:08 am

Mark whats your view of the below published data where they claim that shadow inventory is not a threat and shows a graph where its winding down. Is this data correct ?

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Keller Texas Locksmith March 15, 2013 at 12:46 am

Mark whats your view of the below published data where they claim that shadow inventory is not a threat and shows a graph where its winding down. Is this data correct ?

Reply

menopause relief March 15, 2013 at 4:39 am

One other item of note. Employment peaked here in June of 2007. Our total employment now is the same level as 2004/2005. My thought are that, save for new homes for retirees, that every home built since 2006 to current is surplus. It’s like a mini bubble.

Reply

electronic document management system software March 15, 2013 at 10:05 pm

No, a large percentage of new loans are FHA and the risk of default goes to the US tax payer.

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Retail property in Manchester June 25, 2013 at 11:18 pm

No, a large percentage of new loans are FHA and the risk of default goes to the US tax payer.

Reply

http://www.blogger.com/comment.g?blogID=5686620240916183065&postID=19568728977335722&page=1&token=1384250992878 November 12, 2013 at 2:10 am

No, a large percentage of new loans are FHA and the risk of default goes to the US tax payer.

Reply

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