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.