10-9 Housing…”Recovery” Theme Inconsistencies Abound

by Mark on October 9, 2012

Each month we tear apart the monthly housing resale and new home sales data in search of items consistent or inconsistent with the consensus view that US housing is experiencing a “full blown, durable recovery with escape velocity and v-bottom that will last for years”.

Each month we find all sorts of neat things. Last month was no exception.  In fact, inconsistencies with the consensus recovery thesis abound and are occurring with more frequency in recent months.

Summary

While the August Existing Sales headline print released last month looked great the internals say something more sanguine.  As such, I believe a demand hiccup (stimulus payback) is here;  right as the rates stimulus, weather, and supply headwinds hit full force and last for a year.

As follows I will quickly review the data that has me looking looking elsewhere than “recovery” for answers and should have perma housing bulls overweight this sector looking at a hedge or three.

Data Overview

  • Housing Demand by Buyer Cohort…very forward looking. Points to significant demand slowing here and now
  • A Serious Negative...Investors volume NEGATIVE YoY
  • A closer look at the Demand equation…First Timers and Investors Flat to Lower / Repeats driving this market until they go away as well in the off season
  • Builder Sales – Not as “Robust as Headlines would have you believe
  • Santa Clara County…past 7-years pending sales. Closing in on record lows
  • Phoenix Home Sales Demand Paralysis…the Epitome of a “stimulus hangover”
  • “Lost” Vegas single family and condo sales at record lows for September
  • Gas prices have been at record highs for weeks now. In CA they broke to $5 in recent days.
  • Record Low Supply…a function of never ending foreclosure process delays and 6 million mortgage mods created in the past 2.5 years, which in structure, are worse than Subprime loans ever were;  and 50% of all mortgage’d homeowners being zombies.
  • House price gains…a function of the Fed Twist Ops plunge in rates of 150bps YoY increasing “purchasing power” by 15%
  • The one bright spot…but it’s transitory – Organic Repeat Buyers will go away as quickly as they came

 

Item 1)  Housing Demand by Buyer Cohort…very forward looking. Points to significant demand slowing here and now

a)  First-Timer demand went flat in May and have remained there for months.  Shows house prices already out of whack with flat incomes of first timers

b)  Investor demand DOWN YoY in August.  This cohort won’t come back until Foreclosures start churning back up.  Remember, if Foreclosures triple I will be bullish housing.

c)  Repeat Buyers carrying this market…a temporary phenomenon.  Low rates and ample supply at mid-to-high end has drawn out years of pent-up supply.  But this cohort is thin and weak relative to any time before in history, as over 50% do not have the equity in their present house to sell and rebuy or the credit to get a loan.

d)  Repeat buyers driving the market bodes ill for the off-season when they go away.  That’s because last year’s off-season was strong on Twist, lack of rain and snowfall, and inventory.  These all become headwinds in Q4.

“August Existing Home Sales” — that resulted from purchase and pricing decisions made in June and July — were stronger than expected.  One could call the report a “breakout” if this exact thing didn’t happen last August to an even greater extent.  Then in September 2011 sales dumped 15% MoM even as rates plunged 150bps from the Fed’s Twist ops.  If sales drop 21% this month then they go negative YoY and remain negative for the next 12 months at least.

Bottom line, the August Existing Home Sales consensus ‘beat’ came exclusively from a late season surge in “repeat” buyer ‘closings’.   This is unsustainable…they are a seasonal cohort.   Moreover, I think much of this has to do with short sales closing not only ahead of the school year but the Bush 2007 Mortgage Relief Act fiscal cliff.

It is very important to grasp that investor volume was down YoY and first-timer volume peaked in May, as reflected in the following chart.

And going into Q4 everything becomes a headwind.  Due to the abnormal demand profile of this housing market — controlled by investors and first timers through mid-year who do not leave a unit of supply when they purchase one and then taken over by repeat buyers who turned on the pent-up heat coming out of the busy season – sales volume beating on a YoY basis will be nearly impossible.  That’s of course unless a flood of Foreclosures hit all at once beginning in the near term.  In such a case I would become bullish on house sales volume.

 

Item 2)  A Serious Negative…Investors volume NEGATIVE YoY

Investors have carried the market for a long time…now they are gone until Foreclosures crank up again.

 

Item 3)  A closer look at the Demand equation…First Timers and Investors Flat to Lower / Repeats driving this market until they go away as well in the off season

What’s kept macro housing ‘higher’ last season was investors and first timers jumping on distressed supply. Now that trade is gone.

Now, it’s all up to repeats to carry the market this off-season in the midst of YoY rates and weather headwinds that will blow strong.

 

Item 4)  Builder Sales – Not as “Robust as Headlines would have you believe
As shown, national New Home Sales peak in May, went flat through July and fell in August.  This year New Home Sales can’t even keep pace with 2009 when the global financial system blew up.  Obviously, sales are higher that 2010 and 2011, as they were tax-credit hangover years…payback years for all the pulled forward activity into late 2009 and early 2010.

 

Item 5)  Santa Clara County…past 7-years pending sales. Closing in on record lows.

In tech-boom, Facebook billioniare Santa Clara County, demand is weak. I expect 2013 to be a record weak year for house sales volume here.

This is highly inconsistent with an organic, durable housing market recovery.

 

 

 Item 6)  Phoenix Home Sales Demand Paralysis…the Epitome of a “stimulus hangover”

Despite what headline drums continue to beat, Phoenix Realtors are not happy people with sales volume down nearly 20% from last year. Nor are buyers.

 

 Item 7)  “Lost” Vegas single family and condo sales at record lows for September

In the context of a “durable housing market recovery with escape velocity” how can this be???  It can’t be.

But if the past year of ‘elevated’ sales activity was stimulus-induced it certainly can.   If so, it would mean there is a hangover to follow, which is exactly what is happening in Vegas.

 

Item 8)  Another look at Vegas…all monthly sales (condo + SFR)

 

Item 9)  Gas prices have been at record highs for weeks now. In CA they broke to $5 in recent days.

In the world I know as fundamental, volatility in energy prices dampens macro and housing market specific sentiment. Not to mention the ability to buy.

 

 

Item 10)  Record Low Supply is not fundamental;  rather a function of…

a)  never ending foreclosure process delays and 6 million mortgage mods created in the past 2.5 years, which in structure, are worse than Subprime loans ever were.  This is a form of “shadow supply” nobody ever includes in the totals despite mortgage mods re-defaulting at a 25%+ annualized pace (a greater annual default rate than legacy Subprime loans).

 

b)  half of the nation unable to sell their property and rebuy a new one

Amazing really…half of the nation’s mortgage’d homeowners are “zombified”.

 

Item 11) House price gains…a function of a 150bps decline in mortgage rates in September 2011 through the Fed’s Operation Twist

Identical to the period from 2003 to 2007 — when high-leverage, exotic loans increased purchasing power every year until the market blew-up — the Fed has been decreasing mortgage rates each year, which has the same effect on ‘prices paid’ for houses.

Bottom line, 72% of all the homeowners that buy using a mortgage can now pay 15% more for a house this year vs last year for the same monthly payment, which is what it’s all about to most buyers. The problem is “house prices” are up less than 15% meaning real house price depreciation remains a force.

 

Item 12) The one bright spot…but it’s transitory – Organic Repeat Buyers will go away as quickly as they came

This is exactly what we will see when the a real recovery is in place several years down the road. But for now we know beyond a doubt that epidemic effective negative equity, poor credit, and legacy HELOCs trap well over 50% of all potential repeat buyers making this action more than likely pent-up demand being filled.  What you are seeing here is end of season fence sitters all jumping at the same time in order to move before the school season starts.   As such, I believe there is an “organic buyer hangover” on deck that will make for a repeat buyer demand void throughout the winter.

 

 

Have a great day!

{ 11 comments… read them below or add one }

Cassidy M. October 9, 2012 at 7:40 pm

I’ve been reading your blogs since the summer and feel I have gained a lot of insight into issues with the current housing market in the States. In this particular blog and perhaps others, you discuss well-known areas that were hard hit by the housing bubble such as Las Vegas.

I’d be curious to know your thoughts about NYC. Most of what I read about the housing market in NYC is that it has largely been unaffected by the housing bubble because it is — and is likely to remain — a desirable place to live. Is NYC truly impervious to the housing bubble that occurred? I have lived in NYC all my life but my family and I struggle to remain here because of the cost of living and lack of affordable housing available to us.

My husband and I are would-be first-time home buyers that have abandoned our home search several times over the years (we are in the category you so aptly described in previous blogs). We actually made offers on three houses during the past several years only to withdraw for different reasons (fear that we would be paying more than the actual value of the home, unforeseen issues with one home inspection, and just plain cold feet because of the overall state of the economy among other reasons). A few of our friends who purchased homes between 2006 and 2008 lament their purchases because they have incurred negative equity and can’t expect a profit in the foreseeable future. Based on our friends’ experiences I would think NYC has its own share of problems in this housing mess but many of the news reports out there seem to indicate otherwise.

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Tom in San Diego October 9, 2012 at 8:06 pm

Thanks for sharing your very solid analysis, Mark. You are a beacon of truth and (quantitative) understanding in a world of shills. I applaud you for continuing to report your numbers and stick to the story that the numbers show you. I am in your camp and realize that this housing madness cannot continue. Keep up the great work.

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Dave Duncan October 9, 2012 at 9:11 pm

what’s the negative equity rate for kansas? it’s not on the chart.

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Gerald McGeown October 10, 2012 at 1:13 am

And yet,government statistics dares to say otherwise,whilst we in the real world suffer food and fuel inflation and our houses deflate.Just how do the polticos expect this to end with their neverending cronyism and nepotism?

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Chris Grande October 11, 2012 at 8:31 am

Fabulous work as usual Mark. It’s exciting actually to compare yours and Bill McBride’s arguments side by side. In my mind, one thing is for sure: this is a completely manipulated market (as opposed to partially manip markets in the past). In the past there was interest rate policy. Now we have all of the fiscal policy ideas in play too. is it desperation or will it work? We will see…

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Keith McCartney October 11, 2012 at 10:18 am

Outstanding stuff…perhaps a copy to Jack Welch wouldn’t be amiss.

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Tom Lawler October 15, 2012 at 3:12 pm

I could not understand this analysis.

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Stephen October 16, 2012 at 8:20 pm

The housing industry runs on fraud, deception, inflated appraisals, lying realtors and predatory lenders. The largest law enforcement coalition in history is all over the housing industry and as long as it continues, housing will not return to the festering boil it once was.

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jack tarver October 17, 2012 at 1:02 am

You are a ray of sunshine in a world of darkness. The general consensus that the housing market has bottomed will cause as much, if not more, pain to current home buyers than the initial phase of the crash. This consensus of a bottom has repetitively caused pain in the stock market.

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A. S. October 23, 2012 at 6:13 pm

While I fully agree that sales volume may go lower, what it does to the house prices is not very clear. In fact, it is due to the low inventory situation that prices are rapidly trending up (at least, in the Bay Area), I suppose. As a buyer I only care about the house price, not about the sales volume. Do you think, house prices would be further trending up as sales volume goes lower.
Should I buy into the headlines of housing recovery and expect prices to go up from here (even with lower YOY sales volume). Or, you are anticipating another leg down in prices (> 10 %) from here.

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Advisor November 12, 2012 at 8:34 pm

Prices aren’t “rapidly trending up” anywhere.

And “low inventory”??? Friend…. there are roughly 24 MILLION excess empty houses in the US today.

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