9/7 Hanson…”Housing”…Where We Sit

by Mark on September 8, 2013

The following is my opinion based on my research.  I could be completely wrong; I often am.  But I am right more than I am wrong.  And it’s a lot easier predicting the end of this ‘movie’ when you have already seen the previous two installments of this series in the past 6-years.   The next few months will bring out the truth abut the “post-surge” housing market.


Last month, after the “shocking” 27.4% July MoM drop in headline unrevised New Home Sales — reported down a rosey 17% NSA (-13% SAR) after the record 10.4% June downward revision was swept under the rug — that followed by “2-days” a multi-year high “July” Existing Home Sales, the market is thirsting for more, “post-surge” housing data.  Especially, given how much the leading indicating builder stocks have sold off on the rate “surge” and how little everything else related to housing has on a relative basis.

The market remains polarized on the topic. Some think the rate “surge” will have little impact; others are betting the surge had a “calming”, or “normalizing” effect; while the bears — clearly a minority at this stage (perhaps just me at this point!) — think the rate surge was a rare and powerful “catalyst” only rivaled two times in the last seven years.  The first, when the housing market lost all it’s high-leverage loan programs all at once in 2007/2008; and the second, on the sunset of the Homebuyer Tax Credit in 2010.

In both these previous instances — over a long period of time — leverage-in-finance/stimulus created a ton of incremental demand and pulled-forward as much, or more. Then, when the leverage/stimulus went away — over a very short period of time — housing “reset” to the current supply/demand/lending guideline/interest rate environment, which in 2008 resulted in the “great housing crash”, and in 2010 the “double-dip”.

Here we sit in a eerily similar situation.  Starting in Q4 2011 “housing” was injected with arguably the greatest stimulus of all time; a 2% “permanent mortgage rate buy down” gift from the Fed.  As a result of rates plunging over a very short period of time in 2011 from the 5%’s to the low-to-mid 3%’s an instant 15% to 20% “purchasing power” was created out of thin air. In other words, house got 20% cheaper almost overnight.  Put another way, a buyer on a flat income could instantly pay 15% to 20% more for the same house.   Put a third way, somebody could buy a house that cost 15% to 20% more…ca-ching! Over a few short quarters, housing prices “reset” higher to this new found purchasing power.

By mid-2012, everybody was so used to the Fed stepping on rates for so long they completely forgot that all this new found interest in houses was happening in the context of the greatest stimulus of all time, and starting chanting “escape velocity” and “durable recovery”.   It’s amazing to me that housing nosed up at the exact time rates were forced down on stimulus and nobody put two and two together.  In fact, by mid-2012 the common thought was that the “recovery” must be great because the “government” wasn’t in the market with stimulus.   Well, I guess technically they are right because the Fed is not a Gov’t agency.  But they were certainly wrong about the stimulus piece.

If it all would have stopped there we would “not” be sitting atop another housing bubble right now…that just popped.  Rather, we would be sitting on a hill ready for a “retracement” of “some” of the past 18 months of gains…no harm, no foul.

But it didn’t stop there. The QE-induced lack of yield anywhere in the world drove investors worldwide into US housing as a “trade”.  Small and large investors alike went on a rampage — regularly paying 10% to 20% over appraised value/list price — using flawed rental cap-rate models and/or irrational flipper-exuberance as their guide. Moreover, “phantom appreciation” from house flippers — popular house price gauges measure rehab materials and labor as “appreciation” — pushed up prices and price indices in the most popular housing “trade” regions to nose-bleed levels.

All this, at a time when supply was being suppressed by the big banks and Gov’t outright outlawing foreclosures and becoming the largest landlords in the world through 7 MILLION mortgage mods. Funny, people don’t talk about that too often…if I were a large PE firm in the “buy to rent” trade I would not want to compete with BofA and the Gov’t effectively renting houses back to their distressed owners vis-a’-vi mortgage modifications at 2% interest only.

In summary, the past two-years of massive Fed, Gov’t, and bank intrusion into the housing market went way too far.  Houses are mis-allocated, there is no shortage of houses “in which to live”, and in ALL the popular “mega-recovery” regions are at least 50% expensive on a monthly payment basis than they were at the peak of the housing bubble in 2006. And all it will take is the wave of “cash-money” buyers ‘easing off” a bit; “some” of the organic first-time and repeat buyer cohort stepping away due to the sudden lack of “affordability”; and/or a wave of supply from “panic sellers” hitting the market to send sales volume and prices down sharply, over a very short period of time. And I think the rate “surge” catalyst has caused all three to occur at the same time.


{ 36 comments… read them below or add one }

Allen September 8, 2013 at 1:22 pm

Excellent summary. You aren’t the only bear out there Mark. To me, this bubble is feeling more like 2006 than 2010.


Ted September 8, 2013 at 3:37 pm

If memory serves, the fed bought $1.5-2.0 trillion worth of questionable mortgages. Do we have any way of knowing how much the fed still holds and if they are worth anything? And what is the fed going to do with them?


JoAnn Bentley September 8, 2013 at 4:50 pm

Yes, you are right, you are right on everything…the 2006 peak, the massive Fed intrusion into the housing market being the driver, the cash-money buyers easing off a bit, panic sellers hitting the market (not quite yet but the calls are coming in regularly), all of it happening at the same time, yes, feels like a calamity about to hit, but there’s one monster thing that only shows it’s face on the street, in the mud hole with newbie buyers – drum roll….. they don’t have a clue what we’re talking about. I cannot-cannot!! carry my 2006 baggage around when working with buyers.

They aren’t even aware of the tax write-off and interest write-off they get when they buy a house. They aren’t aware of scribbling numbers on a napkin to see if they’re getting a decent deal or not. They don’t even care and they can’t multiply or divide anyway. They will actually fight the appraiser to get the value UP so the seller won’t cancel and sell to somebody else.

First-time AND “Second-Time-Buyers-who-went-belly-up-two-years-ago (YES!!!)” are all new. Time has marched on and they want a house and they’re going to get one. Even the 60-somethings, they want houses too. Something happens to a buyer when they realize they are in a contract and the house is going to be theirs. “Especially” after they’ve lost a house a couple years ago. They’re high, smiling, validated.

It’s the you’s and the me’s that are stuck in “what happened”, “what they did”, and “what they’re doing deep into the night”, “end of the year”, “when we’re not looking”; we will always be stuck in remembering. But, “they” didn’t have to wait till we all died in order to move on, they counted on the new generation of home buyers to slightly turn the lens just enough so young people don’t know what we’re complaining about.

As always, I am a fan and look forward to reading everything you write.


red September 12, 2013 at 8:40 am

are you a realtor, what you say is so true.

People just hear/read in the media housing is going up! Thats all they care/fear. They hear it appreciated 20%-30% already in some markets. They hear it “bottomed”. They hear “rates are historically low”.

And once they start looking(dreaming) into houses, they (usually the wives) have to have it.

But things can change very quickly in todays RE market. If the media starts talking about increase in inventory, lower sales, look out.


Bob Meyer September 8, 2013 at 5:08 pm

Dear Mr. Mark Hanson,

I recently saw a chart with mortgage applications crashing as the house prices were climbing. It looked like a diagnosis for an H1N1 flu to the Real Estate Sector. In one above average income suburb of Chicago there is a rush to buy up the houses, it looks like a major Hedge Fund discovered the town and wants to own it. It is adjacent to Medina Golf Course, were they just built a new Masonic Temple. I guess they want to own the regions next to their Golf Mecca. Other towns near by seem untouched,,,,,,,,,,,so far.
Bob Meyer


rj chicago September 10, 2013 at 11:09 am

Bob – interesting that you note Medina – that is in the Bloomingdale IL area if I am correct. Sort of the second wave of suburbs to go under the dozer as it were – the near ins are already experiencing the result of the McMansion on small lot syndrome – Park Ridge, Des Plaines and the like.
Point is go about 15 miles west of Medina into and beyond St. Charles and the landscape is quite different. Lots of far out suburban folk underwater on big newbie built inventory. I just drive out there from time to time and my assessment (mostly anectdotal) sees the cracks in the framework are there for an utter collapse if people are buying high from a severe low point over the last few years. Rinse Wash Repeat!!


Logan Mohtashami September 8, 2013 at 6:16 pm

And lets take a look back in March of 2013

When Ivy Zelman came out and said “Housing is In Nirvana” and that the homebuilders were at great value 2x book. That the market place can take a 200 basis point hit and home prices could take on a 20% appreciation model and be ok



jak tarver September 9, 2013 at 4:19 am

You, Fleckenstein and a handful of otters have a grasp of what is happening in the housing market. That the increase in supply doesn’t seem to matter to housing bulls baffles me. If watermelon sales are slow at the farmers market the last thing the seller needs is for another truckload of melons for sale to pull up next to his truck.


Michaela Graham September 9, 2013 at 7:42 am

Have watched inventory in 5 areas around the SF Bay area and this is a spread of inventory for 8/18 and 9/8. Major jump happened right after labor day.

Hercules 22 33
Berkeley 99 170
San Rafael 147 186
San Jose 1843 1991
94801 39 82


Phil September 12, 2013 at 12:24 pm

Michaela, How do you find out the inventory levels? I tried to find on Zillow but that info does not seem to be there.


Rick September 9, 2013 at 11:16 am

Everything you’re saying is true, but what happens if you’re right and all the housing data comes in negative for the next 6 months? Will the Fed decide to do QE4, even bigger and better than the current one? Going into the 2014 elections, it seems logical that Obama’s next Fed chairman will return the favor by doing a QE4.


Me September 10, 2013 at 8:22 pm

You betcha. If you look back in history, at study debt driven economies you will find huge disparities and inflated markets ..often controlled with central planning. This is exactly where we are headed. Just look at the Bay Area. The wealth disparity and quality of living is ridiculous. It looks like a banana republic. As they say, where CA goes, so goes the nation.


Rick September 18, 2013 at 6:06 pm

Looks like the taper isn’t going to happen on schedule. QE3 continues uninterrupted, perhaps for years to come. Any thoughts on what that might mean for the housing market? My first thought is that we don’t yet know if APRs will ever get back to the 3.5% they hovered around before Bernanke (in May) started talking about the taper. Maybe they’ll only fall back to 4.25%. I’m curious what other people are thinking about today’s news.


Matias Fernandez September 9, 2013 at 12:34 pm

The keywords are: artificial affordability, investor hype, capital misallocation.

The mortgage/residential real estate situation is completely analogous with Howard Mark’s following statement:

“…if you lend banks money at zero, which they can lend out at 5% it’s like you gave them $5 times the capital, and that’s great. What most people didn’t catch on, I must admit that I didn’t catch on to the current extent is that when you reduce the interest rates on treasury to zero you force people at the risk curve because it pulls down the whole risk curve, and so if you want to get the returns like you used to get before it happens, you must go further out the risk curve to make that money. And, that’s been the story over the last few years in the capital markets.”


tom lawlerq September 9, 2013 at 4:09 pm

I know it has been a horrible time for you, and your predictions/forecasts have been as wrong as wrong can be. but I value your insights, but quite frankly could not figure out what you were trying to say.


Mark September 9, 2013 at 5:06 pm

Hi Tom…basically I predicted that…

1) in May on the “surge” in rates the homebuilder stocks everybody was levered-long in would dump hard.

2) they have been a great leading indicator for years and sometime over the few months following the homebuilder dump it would infect anciliary names.

3) Then, sometime by July/August the “New Home Sales” number would plunge by 20% to 30%, about the same as on the sunset of the homebuyer tax credit.

4) Then 2 months after that — September Existing Sales reported in Oct — Existing Sales would finally catch up on the downside. Again, exactly like it happened on the sunset of the homebuyer tax credit.

So let’s see how I did.

1) direct hit
2) getting there…but HD and alike are only down 10% vs the homebuilders being down 25% to 40% from their highs
3) direct hit – New Home Sales in July at 35k were down 27.4% from the headline June number of 48k sales
4) not here yet, but if Hovnanian is any indicator there is trouble coming to Existing as well.


Juan Quant0 September 10, 2013 at 12:08 am

What people are forgetting is how 2005-2008 seemed like if you didn’t buy then you would NEVER ever get a chance again. Some smelled the top, who thought housing would go down 5-10% to only find it go down by 40-50%. Yes, back then you’d be crazy to say that it was even possible for such a drop – the argument was “but people need somewhere to live and who would “choose” to lose their home?” So, many did.

So, it is no doubt that even though a portion of the market is supported by large down (25%+) payments and “skin in the game” it still has increased the range of pricing and affordability which will leave many out. On top of that – there is a VERY LARGE IRRELEVANT FACTOR: people talk about HISTORICAL Interest rates, – like in the 80′s BUT what they are ALSO missing is that prices were 1/10th of what they are now. an $80k house is now $800k. when interest rates are 20% on a 50k mortgage the number as don’t mean much, but when you have a # in the high $100k’s then that little 1% means a LOT. We shouldn’t see interest rates ta 18% again and that is the reason – a 500k house would cost you $20k/month. if inflation and wages rise that sharply then it may be possible to support, but not at those levels and not for long as inflation would spiral so out of control we’d have a serious money problem.

But when prices are BACK to record highs in many areas like now, you got to smell that as a CLEAR Signal – it can’t persist forever like we all thought it could back when it seemed like it always would.

ALL THINGS COME BACK TO NORMAL – not levels like in the 80′s but if interest rates were to be 20% they certainly could bring prices back to 70% lower or more. there has been too much positive growth and global growth to have pricing back to 1990′s levels, but a revisit to 2002 is not out of the question.


mirage2123 September 10, 2013 at 7:28 pm

As a first time home buyer with a large down payment, this makes me believe that i should wait for the clearance sale of the decade. Should i wait until sellers are practically begging to take my offers or what?


Crush The Lies September 11, 2013 at 4:44 pm

With tens of millions of excess, empty and defaulted housing inventory and many millions more coming as boomers die off, you’re best off sitting tight and saving cash.


rj chicago September 11, 2013 at 12:50 pm

Here ya go – this from Reuters via CNBC via Peter Schiff’s site europac.net
Mortgage apps plunge.



Russ Wetherill September 11, 2013 at 1:59 pm

The 2010 tax credit had an outsized impact on the lower end of the market. In coastal California, and 8k credit is peanuts. While house prices fell somewhat in the lower priced areas, they barely budged when the credit expired. Now when the rates dropped from the low 5s, to 3.5% that had a HUGE impact in the coastal areas, much more than any tax credit ever could. With the low rate stimulus now expiring, we can expect to have as large an impact to the downside as we had to the upside.

The other factor is lack of distressed inventory. That hasn’t changed with the rise in rates. There still aren’t that many foreclosures or short sales out there. If the combination of low rates and low inventory caused prices to rise by 30% over the last year, I don’t think it is unexpected that removing one of the two might cause half the price increase to retrace to a lower level. That combined with the rise in inventory from decade low levels in the spring, will no doubt significantly impact the coastal market. To think otherwise is not to think at all.


rj chicago September 11, 2013 at 2:24 pm

Further evidence of mortgage issues starting to surface.


Mark September 11, 2013 at 2:31 pm

good find rj. it’s happening everywhere and fast.


1stTimeHomeBuyer September 11, 2013 at 3:20 pm

I have the same question as mirage2123
@Mark : I am a first time home buyer. I feel that I missed the boat of cheap houses available couple till feb 2013. I also think that if I do not purchase now, then I will never be able to purchase again (all the more because I live in Bay Area / San Jose in California where housing is very costly ). Please let us know if you think people like me should wait.


Mark September 12, 2013 at 5:45 am

Hi 1stTimeHomeBuyer,

I can’t really advise individuals on what to do because every situation is different. However, I think on the surge in rates sales volume has plunged and will further and much more supply will hit the market over the next 9 months. If I am right that would mean more selection at a cheaper price. If I am not, I struggle to see how house prices can continue to rise further from here…and we already know inventory is increasing. So, if it were me I would wait and watch. But again, everybody is different.


Goldman September 12, 2013 at 12:48 pm

1st Time Home Buyer,
I recommend you take a trip back in time with your favorite search engine. I have no idea what House price will do in the future……but, there is a very long history of land booms and busts. Oh, I know things are different this time and a land bust will never happen again (ever). ;-)

For example, read what was said about Real Estate in 2005 http://www.nytimes.com/2005/07/09/realestate/09complex.html?pagewanted=all&_r=0
Or http://usatoday30.usatoday.com/money/economy/housing/2005-11-01-real-estate-usat_x.htm

And read a little history on Land booms and busts……….. https://www.google.com/search?q=history+of+land+booms+and+busts&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a#



1stTimeHomeBuyer September 13, 2013 at 2:01 pm

Thank you Mark and Goldman for the comments.
There is one very important thing we are missing here. And that is rental rates. We all understand

1) Houses are very costly
2) Intereste rates are very high

Based on these we all think that in future housing prices will go down and make is more affordable (bubble burst). The question is how much time it is going to take. If it is going to take 2 years, then it means people like me have to spend close to 55K on rent (plus loss of tax deduction due to no mortgage makes this figure more than 65K for 2 years) . If the home prices are not going to go down by that much in next 2 years, am I better off purchasing house at today’s price instead of paying $2100 rent in BayArea / San Jose


Crush The Lies September 17, 2013 at 7:37 pm

What would you rather do?

-Pay $50k in rent or;
-Overpay by $250k for a rapidly depreciating asset(house) at a grossly inflated price?

And remember…. your losses are magnified(doubled) when financing. And don’t forget this…. current resale housing prices are inflated by 220%+.

Rick September 18, 2013 at 6:09 pm

Your first few years of mortgage payments will consist of a ton of interest and very little principal. You could think of those mortgage payments as, essentially, rent. You’re renting a big pile of money rather than a house, but it’s the same idea. The major difference would be that mortgage interest is deductible and rent is not, but I wouldn’t buy a house right now just to get a write-off.

Goldman September 19, 2013 at 6:10 am

Buying vs Renting – RISK!

1st time Buyer,

There is always a costs associated with Buying or Renting! When Renting you cost is fully loaded with depreciation, property taxes, and the cost of the Housing. Buyers (or Mortgage holders) never calculate the true cost of carrying a home and when there is a Land/Housing boom it appears like there is no cost.

A home is constantly depreciating and depreciation costs need to be calculated when you own. I have friends who have owned while my family rents. My maximum obligation if I need to move suddenly is the time remaining on the lease (assuming we can’t find someone to rent the place). While our friends who are owners would need to prep their home for sale, find a Real Estate broker who gets a fee, replace the broken A/C condenser for $5,000, paint and repair the exterior. I don’t have to mow the lawn, or trim the bushes, or shovel the snow, or repair broken gutters.

Add up all your costs if you chose to buy which would include replacing Appliances as they break, HOA/ maintenance costs.

If you rent you need to save your down payment in some vehicle that will increase with inflation – find a Advisor who gets MHanson thesis on Real Estate and understands inflation.

Ray Schmitz September 12, 2013 at 4:00 am

You’re probably right or mostly right, which means policy moves of one sort or another continue having more impact on the market than basics like household income and formation. That is very bad. Over a sufficiently long time, perceptions will be altered by the years of government interference.

For consumers, that means more scepticism, probably resulting in a continuing drop in the homeownership rate.
For investors, upward revision in estimated risk is justified, resulting in a higher expected ROI demands.

Not a great long term outlook.


Crush The Lies September 12, 2013 at 6:14 am

It’s a great time to be a seller. Hint: Exit now while you still can.

It’s a horrible time to be a buyer. Hint: You’ll overpay massively and sustain losses from which you’ll never recover. Those losses are magnified tremendously if you finance.


JB September 14, 2013 at 7:35 pm

great summary ,, I have been following this phenomena since the last housing crash ; piecing together info from many sources. you (MARK) have seemed to pull it all together. This chapter should be entitled :
“SINGLE FAMILY HOMES – the rise of a new ASSET class. ” , as many households are forced into rentals .

2013 property taxes will reflect the dramatic increase in valuations hence spiking carry costs for those holding this investment.
The low hanging fruit was picked 2 years ago . it is a shame that the all cash cohort has crowded out
those that require a mortgage to buy a home.

demand side cash cohort (i.e., investors, lessors, second home purchasers, foreign buyers , flippers will realize
that their money can be invested at higher yields with less risk as rates normalize. Higher property taxes will
reduce their ROI . According to zero hedge the NAR lobbyed extensively to exempt foreign money from
anti- laundering regs if applied to a U. S. real estate purchase . Can anybody confirm ? a lot of hot money
came in .

demand side mortgage cohort will be reduced because of higher rates. Affordability index dropped significantly.
this quarter http://money.cnn.com/2013/08/13/real_estate/housing-affordability/index.html.

but who can get a mortgage? REAL income is at pre crash levels? government eminent domain on underwater
home owners might happen . if so who will want to underwrite mortgage money if the government prevails ?


SO who , in the future will lend ? just Freddie and Fannie ? federal government wants to privatize this albatross.
incidentally I am seeing more rent to own real estate here is south west Florida .

Looks like we are heading in a massive rental cycle that may prevail for some time . will this scenario
be able to absorb all of the excess housing we have?


rj chicago September 14, 2013 at 8:13 pm

Via Ritholtz’s Big Picture blog:

5) MBA said refi applications plunge by 20.2% w/o/w to lowest since June ’09 and is now down by 70% since May when initial taper talk from Bernanke began. Purchase apps fall 2.7% to 4 week low.

Me thinks that Mark et al in this forum are correct so far in terms of rising interest rates and ‘affordability’.


Ingrid Hess October 8, 2013 at 7:27 pm

I am with you for the same reasons and many more. And I am a very successful Realtor. It is a pity but there is no way people can fool themselves into thinking that this is real. There is no solid foundation for a strong market.


Crush The Lies October 9, 2013 at 10:37 am



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