12-17 Housing “Bubble 2.0″; Same as “Bubble 1.0″, only different actors

by Mark on December 18, 2013

Happy Holidays.

In order to achieve the greatest risk/reward asymmetry from the 2014 single-family housing stimulus “hangover”, or “reset”, happening right now you must change the way you think about this asset class.  When doing so, clarity emerges (at least to me).

Things come into mind, such as;

When other asset classes go through periods of excessive price appreciation or returns, most reasonable people worry that a “consolidation” or “correction” could happen at any time.  In large part, this fear can keep asset class prices higher for longer than anybody ever thought possible.  However, with respect to housing, when prices are moving higher, not a soul will ever forecast a “consolidation” or “contraction”, rather periods of “less appreciation”.  I think that in the “new-era” housing market this is odd, misguided, and will lead to many more periods of unprecedented volatility in housing (down and up) like we have seen from 2007 to 2013.

Or, when “greater fool” trades consisting of highly populated cohorts blow up there are serious consequences like we saw when housing crashed in 2008-09.  But, at least, because the demand base is so wide (everybody individual in America participated or wanted to be part of “Housing Bubble 1.0″) you have ‘some’ heads to hit the bid all the way down.  However, when greater fool trade demand cohorts are razor thin like in “Housing Bubble 2.0″ – local area private investors and a hand-full of giant PE firms – extreme volatility is almost certain, as the “trade” wanes or reverses completely.

In this short note, I outline where my research is going at the first of the year supporting ideas about why a “strong economy” is negative for this housing market;  houses are far “more expensive” today then from 2003-2007 (i.e., “affordability” much worse); and how everybody has been “fooled by stimulus” and unprecedented monetary policy, yet again.

This report — which I am in the process of turning into a ppt presentation — establishes what US housing has really become over the past 12-years and in my opinion makes it far easier to time its unprecedented volatility and forecast the outcomes that since 2002 have fooled most of the people most of the time.

 This housing market is “resetting” right now;  for the third time in six years. It might look and feel a little different, but as I detail in this note, it’s not really different this time around.

1)  Overview, Housing Bubble 1.0 vs. Bubble 2.0;  Same flicker, different actors

We can all agree that extraordinary monetary policy and excessive speculation can cause price distortions and potential bubbles in almost any asset class.  I think we can also agree that in 2006 housing was in a legitimate “bubble”.  I contend that this housing market is in a bubble, right here and now.

Most have completely forgotten — or are too young to remember — what the 2003 to 2007 housing and finance era was all about.  It’s so wild to me, for instance, when I constantly hear economists or the media rattle off “affordability” comparisons between then and now;  with such confidence that houses have not been as affordable as they are today in decades.  Of course, invariably, they assume everybody always used 30-year fixed rate loans when on the contrary, from 2003 to 2007, these were the “minority” of originations.  Not acknowledging, or normalizing “affordability” to account for this, radically changes everything.

At the superficial level, the misguided belief about today’s superior “affordability” makes sense because during Bubble 1.0 – when the economy and labor markets were doing great – ‘rates were higher’ than today.  Hey, just look at a chart of Fannie Mae rates or 10-year UST, right?  Yes, they are right, technically; “rates were higher” then, than now.  And house prices went through the roof.  That’s the correlation everybody is sticking too…strong economy + higher rates = higher house prices.   But, this would be incorrect.

In reality, on Main Street – to tens of millions of homeowners – from 2003 to 07 mortgages were much cheaper on a monthly payment basis than ever before in history and ever have been since.  This statement is true, even when factoring in the much higher nominal house prices back then, and the recent Fed-induced sub-3.5% that lasted from 2011 through May 2013.  This was because the incremental – in fact, the “primary” in many regions around the nation — buyer, refinancer, and HELOC user used “other than” 30-year fixed rate money.

In contrast to the revisionist history being peddled today, the 2003-2007 era was all about introducing extreme leverage-in-finance — incrementally increasing each year — through exotic lending.  This made it so people could keep buying more expensive houses and refinancing at higher loan amounts on income that didn’t support it. 

The advent and increasingly exotic nature of mortgage loans from 2003 to 2007 enabled the greatest “greater fool” trade of all time.  Despite “rates being higher” from 2003 to 2007, everybody always earned the amount necessary to qualify for a loan;  it turned virtually every homeowner in America into a Real Estate speculator driving the market with reckless abandon.   Then, in 2008, when all the high-leverage loans went away at the same time, housing “reset” to what the fundamental, “organic” demand cohort could really “afford” using 30-year fixed rate, fully-amortizing financing and when made to prove their income and assets.

Today, those looking at 2006 house prices as a benchmark for where house prices are headed — or assuming house prices are ‘safe’ or not back in a ‘bubble’ because they haven’t regained those prices – are looking at the wrong thing.  That’s because house prices never can get back there unless employment surges and incomes rise double-digit percentage points with a respectable number in front.  Or, unless all the exotic, high-leverage, no documentation loans come back.

In other words, for house prices to get back where they once were, something has to be introduced that brings back the leverage-in-finance lost when exotic loans went away and everybody suddenly went from earning $20k a month to their real incomes when qualify for a mortgage loan.

Certainly, if we are staring a multi-year economic recovery in the face that brings higher rates, the accompanying job and income growth over the next several years won’t hold a candle to the historical “affordability” from 2003 to 2007 using a “Pay Option ARM” or “stated income” loan.

 

2)   2003-2007 vs 2011-2013…a stark comparison 

There is little difference between between 2003 – 2007, when housing went through “Ma and Pa America speculation-fever” and 2011 – 2013, when private and institutional “investors” caught speculation-fever.  Of course, other than the actors being different;  the primary monetary policy recipient and speculator cohort changed from Ma and Pa shelter speculator to Dick & Son’s Property Flippers and Blackstone.

This is obvious through a dozen different datasets, and especially in the sales volume divergence between “new” and “resale” houses.  Even “resale” volume on an absolute basis highlights the lack of true “organic” demand when normalized for “distressed” and investors reselling flips and rentals, which can look like “organic” sales to most everybody when using surface level data.

 

The stimulus-induced housing market pumps and subsequent “reset” periods 2003-2013:

a)  Housing didn’t peak in 2006.  Rather, they peaked with respect to “affordability” in 2002.  That’s when the average house became “unaffordable” to the average household on a monthly payment basis using a 30-year fixed mortgage. To makes matters worse, rates surged in 2003

b)  Voila’!  Enter, high-leverage, exotic loans in 2003. Exotic loans removed the “fundamentals” and mortgage loan guidelines “governor” on house prices. 

c)  Using high-leverage, exotic loans from 2003-07 Ma and Pa America were able to circumvent the fundamental laws of supply, demand, and affordability and became speculators.  Suddenly, everybody in America got a substantial pay raise through the new found leverage-in-finance;  they earned enough money per month to buy whatever house they wanted using interest only, Pay Option ARMs, HELOC’s, or SISA’s and NINJA’s.

 Bottom Line on 2003 – 07:  “Bubble 1.0″ – the 2003 to 2007 parabolic period – was mostly due to exotic loan leverage-in-finance (easy credit) being introduced, which — because house prices follow the most readily available mortgage financing terms and guidelines – drove the incremental and primary buyer / refinancer speculator demand cohort, Ma and PA America.  In fact, in 2005-06 in CA 70% of all loans were “other than” 30-year fixed rates loans.

d)  Then in 2008 the housing market “reset” — when all the exotic, high-leverage loans went away at the same time — to fundamentals (what somebody could buy or qualify for using a 30-year fixed rate mortgage and guidelines looking at real employment, income, assets, DTI, appraisal etc.)

e)  Vo1la’!  Enter, the 2009-10 “Homebuyer Tax-Credit, $8k nationally and $18k in CA.  In 38 states the credit could be monetized for the purposes of an FHA downpayment making it the first, best, and last chance hundreds of thousands of “first-time” buyers had to buy a house.  In fact, first-time buyer volume has never been as high since.  During the tax credit period there were “lines of buyers around the corner”, “multiple-offers”, and the Case-Shiller index went “vertical”. Everybody was convinced housing was in a “durable” recovery with “escape velocity”.  Huge bets were made by well-known investors on ‘this’ recovery.

f)  Then in 2010 the housing market “reset” — on the sunset of the Tax-Credit — to fundamentals (what somebody could buy or qualify for without the free downpayment, using a 30-year fixed rate mortgage and guidelines looking at real employment, income, assets, DTI, appraisal etc.).   Housing went into a technical “double-dip” in 2011.

g)  Voila’!  Enter, the summer of 2011 “Operation Twist” speculation that drove down mortgage rates and UST to historically low levels. Cheap cash starving for yield on the back of years of ZIRP and on QE was mobilized.  Just like Ma and Pa did in item b) and c) above, “all-cash” buyers, using flawed cap-rate models as a guide, removed the “fundamentals” and mortgage loan guidelines “governor” on house prices.

Bottom Line on 2011 – 13:  “Bubble 2.0″ – the 2011 to May 2013 parabolic period – was mostly due to easy and cheap capital in search for yield turning private and institutional investors into the incremental buyer / speculator demand cohort.  Like Ma and Pa from 2003 to 2007 (items b) and c)) above, they have been able to circumvent the fundamental laws of supply, demand, and affordability but through “all-cash” using flawed cap-rate models as a guide.  The parallels are many.  For example, in Bubble 1.0 hot spots, over half of all mortgage loans were “exotic” in nature.  In Bubble 2.0 hot spots, over half of the buyers paid in cash.

 

 3)  Housing responds well to “stimulus”;  contracts when stimulus is removed.  The next “Reset”

The point of items a - g  above is clear;  housing responds well to “stimulus” and “resets” when the stimulus dries up.

From 2011-13 the “stimulus” was most utilized – not by end-users like from 2003 to 2007 and again from 2009-10 – but by ‘yield starved” investors.   Which is exactly the “catalyst” for the next “reset”.  That is, a move from “distressed”, which has ruled the market for years, back to an “organic”, or a “fundamental” based housing market  – as the private and institutional investors leave – in which people use mortgage loans to buy will once again be “governed” by 30-year fixed rate mortgages, fundamentals, guidelines looking at real employment, income, assets, DTI, appraisal etc.

And as in 2008, and again in 2010, when the “governor” is put back on, prices will “reset”.   Right now, under house prices, there is an air-pocket equal to half the past 2 year gains.

 

4)  My Favorite Datasets…Bubble 2.0 in Pictures

These following data show how “cheap” houses really were from 2003 to 2007 (affordability high) relative to today, for those using a mortgage loan to buy relative to today.

 

a)  California Mega-Bubble 2.0

House prices are down 26% from peak 2006.   But it costs 12% MORE on a monthly payment basis to buy today’s median priced house.   Say what!?!?

Or, put another way if house prices were the same as 2006 today, using today’s 4.625% 30 year fixed rate mortgage it would cost 34% more per month to buy;  one would have to earn 48% more to qualify.  Astounding!

That’s because back then the primary buyer/refinancer/price pusher used “other than” fixed rate loans.  In fact, in 2005 to 2007 over 60% of all mortgages were “other than” 30-year fixed-rate fully documented loans.

Masking the “unaffordability” of today’s housing market is “all-cash” buyers who are not “governed” by end-user fundamentals (what somebody could buy or qualify for using a 30-year fixed rate mortgage and guidelines looking at real employment, income, assets, DTI, appraisal etc.)

Bottom line:  If 2003 to 2007 was a bubble then why isn’t today a bubble with it so much more expensive to own on a monthly payment basis?  I believe it is, and as investors slow or shut down the buying and the market turns more “organic” — or normal — in nature, significant price pressure will present again.

 CA House Afford
For those with questions on “Column 4)” above, what this says in a nutshell is “don’t look at 2006 prices and think there’s a shot in hell for prices to get back there. Especially, if the market returns to more historical end-user demand percentages because to buy the 2006 priced house today using a 30-year fixed at a 45% DTI, the population has to earn 44% more per year.”

 

b)  The Smoking Gun

 The red line in the chart represents the mortgage payment needed for the median priced CA house (black bar) from 2000 to 2013.  This chart assumes that from 2003 to 2007 the primary purchase/refi/price pusher cohort used the popular loan programs of the time, “other than” 30-year fixed-rate fully-documented loans.

Bottom line:  Houses first became “unaffordable” in 2002.  Then, exotic loans were introduced in 2003 allowing people to keep buying more house without income following suit.  When the exotic loans all went away at the same time in 2008 house prices “reset” to the real “affordability” using a 30-year fixed rate mortgages requiring proof of income and assets.  The market ticked higher slightly in 2010 on the Homebuyer Tax-Credit then “double-dipped” as the stimulus was removed.  Of course, the third major stimulus aimed at housing in the last 10 years came in Q4 2011, exactly when housing caught it’s most recent bid.  The past two-year move was so fast and large that the subsequent “reset” should be ‘another’ one for the record books.

CA Med Price and Payment using popular loan progs - Bar vs Lone chart

 

c)  The Smoking Gun 2

Like the chart above, this shows the monthly payment for the median CA house from 2001 to 2013 using the popular loan programs of each period.

Bottom line:  Houses have not been MORE EXPENSIVE” on a monthly payment basis in 11 years, right before when exotic loans were introduced to promote affordability.

Question is, what will be introduced to promote affordability after years of ZIRP and QE?

Or, will a massive economic recovery complete with a full labor market recovery and surging incomes take the place of artificial affordability tactics?

Those betting on a “durable” housing market recovery are betting 100% on the latter.

CA Mo Payment to buy median priced house 2000-13 - loan progs shown1

Best Regards,

 If 2003 to 2007 was a bubble then why isn’t today a bubble with it so much more expensive to own on a monthly payment basis?  I believe it is, and as investors slow or shut down the buying and the market turns more “organic” — or normal — in nature, significant price pressure will present again.

{ 108 comments… read them below or add one }

Logan Mohtashami December 18, 2013 at 3:16 pm

I am glad you and I have Diana’s ear to give some real time information to counter the Trulia, Zillow, Ivy Zelman, Bill Mcbride crew

Mortgage purchase applications very telling now 14% YOY gain before rates rose and now a negative 11% print on the 4 week moving average

http://loganmohtashami.com/2013/10/24/mortgage-purchase-applications-falling-slope/

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hope&aprayer December 18, 2013 at 4:08 pm

Wow that was a long gap between posts, I have been clamoring for more data…I was getting antsy wondering if you had caved or something. I am glad to read this report and happy to have data to look at to continue my waiting game with this market…I will be ready to go once this next reset hits bottom and starts to climb!

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RentalWatch December 26, 2013 at 9:14 am

“I will be ready to go once this next reset hits bottom and starts to climb!”

Any climbing is a decade or more away.

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HP December 18, 2013 at 4:16 pm

Are your values adjusted for inflation? Although it has been very low, the compound effect over 10 years will still be there. For example, in your last figure, the 2002 payment will look even higher compared to 2014.

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RentalWatch December 21, 2013 at 2:50 pm

What inflation?

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Ed January 9, 2014 at 11:05 am

Real incomes are trending down. In 2002 the average American made more than they do now. Even if dollars are worth less now compared to 2002, it doesn’t matter because the average American isn’t getting paid more to compensate for that.
http://qz.com/124935/american-incomes-are-down-8-3-since-2007/

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Sandeep December 18, 2013 at 4:17 pm

Interesting and largely accurate analysis. I agree that prices (esp. in California) could take a beating. However, there are couple of alternate (and equilikely) possibilities too:
- The 2008 reset occurred as the popular (exotic) loan program went away. In today’s age – the popular 30 yr fixed loan program is “not going away”. Agreed that cash buyers’ may disappear – but the presence of 30 yr fixed loan program could compensate for a large degree to sustain (not increase) current prices.
- The exotic loan programs could come back! Banks are healthy again and flush with cash. And if that happens – the bubble 2.0 could continue to inflate further (towards 2006 prices and beyond)

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JB December 18, 2013 at 6:49 pm

Problem with that theory is that interest rates are on the rise; bond market is losing steam quickly. 2014 looks to be a good year for rates increasing more lowering peoples purchasing power; appears FHA is lowering limits hurting high cost areas for low down buyers at the same time that they’re losing purchase power as well. So although the 30 year product “isn’t going away” the changes afoot don’t bode well for sustained values. Exotic products coming back? Doubtful, but who knows what they’ll dream up next. Banks healthy? Are you kidding me. Just stop giving them QE and see how healthy they are.

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bb December 19, 2013 at 5:00 am

I wouldn’t take for granted that the 30 year fixed loan is “not going away.” That is one of the possibilities being considered by lawmakers who are currently determining how to replace Fannie and Freddie. That isn’t to say that it’s necessarily likely, just that it is a possibility. I am sure that many in the industry will fight tooth and nail to keep it from going away, but the ultimate decision is not up to them.

That said, even if it does go away, that doesn’t mean it would necessarily go away overnight. It could be phased out over a long enough period of time to blunt the impact and (partially) pacify those dependent on that entitlement. In that case, your point is still relevant.

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RentalWatch December 24, 2013 at 9:51 am

Getting rid of the 30 year debt slavery instrument would be a good first start in cleaning up this mess. Second on the list is getting rid of the mortgage interest deduction.

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anon January 19, 2014 at 11:52 am

Interest rates will not be @ 4.4% if regular user demand comes in. One needs to add in the fact that real payscales have declined and if common sense applied, people would not be going in for houses above their reach ( hoping a lesson learnt ). If interest rates rise, home prices come down period. No two ways there. Just do the math :

At 3.5% interest rate for a 200K house, mortgage comes to about 900$. Assuming that’s the best one can pay as mortgage per month :

What will a 900$ mortgage payment what will it buy @ 4.5% interest rate ? The price is about 170K.

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Al Khella December 18, 2013 at 4:56 pm

Mark,

Great analysis and your posts are always appreciated. There are some people who say that there is less of a bubble now because of the large number of cash buyers. These cash buyers (investors) are supposedly not pressured to sell, walk way, short sale, or be foreclosed like what had happened during the 2008 – 2009 period when most people didnt have any skin in the game and were forced to make a decision one way or another especially when unemployment peaked. Do you see this logic possibly being true? Or it doesnt matter because the market has become priced out for new buyers and are thus forced into the waiting game until the market resets to normalized levels?

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Shoeguy December 20, 2013 at 9:32 am

I would say that the opposite is true. These cash buyers aren’t looking to own a home to live in, they’re looking at housing like investing in the stock market. As soon as their “investment” starts losing value, like any volatile stock, they’ll try to dump it as soon as they can in order to minimize losses. Once one group of investors sees another dumping the same asset they’re holding, they’ll immediately do the same, flooding the market with houses…..houses who’s value is constantly dropping because interest rates are rising above 5% while incomes stagnate or slowly decrease.

This becomes a downward self fulfilling prophesy that causes further home price drops that directly mirrors the mania leading up to the housing bubble.

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Flipper January 31, 2014 at 6:59 pm

I disagree, the we’ll capitalized all-cash buyers are not going to sell at a loss. They continue to cash the monthly rent checks and wait for the market to turn back up.

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to fliper February 17, 2014 at 10:34 pm

The so called “cash buyers” are not cash buyers as of today. They were cash buyers at the time of closing; after that they refinanced or for really large Wall Street firms they got the loans beforehand from large lenders like Deutchbank. Therefore, at the first tremble in the market they will drop the houses like hot potatoes. Wait and see.

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Goldman December 18, 2013 at 5:16 pm

Mark,
I was curious if you had any commentary on the inversion of rates for conventional mortgages vs Jumbo, as you can now get a lower rate on a Jumbo loan than a conventional!

Sound logic because people with high income never go bankrupt. ;-)
http://online.wsj.com/news/articles/SB10001424127887323893004579055283906962194

In the Boston area you are seeing lots of tear downs/rebuild and then buyer coming in purchasing with Jumbo loans. I suspect the same theme can be found in Metro NYC and Metro San Fran.

Curious if you are following this trend?

Thank you.

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Maria das Santos December 19, 2013 at 12:06 am

Dear Mr Hanson,
Thank you for taking the time and huge effort to produce the analysis that is our housing.Fabian4liberty has suggested that the government of the USA will be producing unlimited loans for properties that are below $50,000 and he asserts that will produce a period such as 2003-2008.What is this loan program the USA government is formenting and will it produce the bubble as envisaged?
Here in the UK we have a huge dichotomy in our economy.The financial sector based in London,which allegedly is beyond reproach ,has a “strong”basis,whilst outside this sector and central London the whole country is struggling.Northern Ireland and Scotland might as well be Outer Mongolia and Northern England might as well be Siberia.Yes housing and its attendant financing still occurs but at hugely unaffordable levels to the average person.Yet house prices march ever upward if more slowly.
Our manufacturing base is small and many entrepreneurs are preventing from starting by huge bureaucratic barriers,has the USA the same problems.Croynism and nepotism and corruption is rampant,but of course “one”cannot bring this up with all the pc WASPs in our system,but off shore money from any source is welcomed into the property market which is viewed as a bank.Does this common theme not at least alarm a few?
So unaffordability hit the US in 2002 and still continued with central bank help for another six years,cannot the Fed not do the same again?
Merry Christmas to you and your team Mark.I and my colleagues here on the floor mopping service just love your analysis and the questions that arise from it.

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Contrarian December 19, 2013 at 9:57 am

Great article, Mark, however, encoded in your piece is the assumption that we are at the tail end of bubble 2.0 rather than at the beginning or mid-point. Not sure I agree.

The monetary mandarins at the Fed and USGovt lawmakers have repeatedly shown a wonton disregard for long-term consequences of their reckless policymaking. What makes you think they will stand aside and allow free market forces to prevail on the housing market without a fight? No doubt, when this artificially supported economy hits an air pocket and drops, and the institutional investors begin to sell, housing prices are going to fall, but policymakers have proven time and again their willingness to do whatever it takes to keep the party going today, even if that means creating a much greater financial catastrophe tomorrow.

If the Fed’s get even the slightest whiff of deflation or an inclining of another housing collapse, don’t you think they will dust off the old playbook and attempt to re-manipulate the housing market higher? Would they not implement another round of new homebuyer tax credits, reintroduce the exotic high-leverage loan programs, or concoct some other yet-to-be-invented scheme to prevent the housing market 2.0 bubble from popping?

If they still have some ammo left they are sure to use it, and if they do, isn’t possible they can manipulate this housing market even higher? If we’ve yet to see the last act of a desperate man, doesn’t that argue for the bubble growing much bigger from here?

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Bubbabear December 22, 2013 at 10:44 am

If they still have some ammo left they are sure to use it, and if they do, isn’t possible they can manipulate this housing market even higher? If we’ve yet to see the last act of a desperate man, doesn’t that argue for the bubble growing much bigger from here?
——————————————–
If policymakers were gunfighters, they’d be out of bullets: They have run out of effective policy tools to improve the economy.
http://gonzalolira.blogspot.com/2013/12/what-if-theres-recession-in-2014.html

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Aaron Layman December 19, 2013 at 1:11 pm

I’ve been looking at the home builders for the past few weeks, watching the shoes drop. KB just got hammered today on rather poor results. Other builders aren’t faring much better because the wall of affordability is just that, a wall. As a practicing broker, I think a lot of people in the industry want to make excuses to keep sales and optimism alive, but that won’t improve affordability. You need higher incomes or lower house prices for that. Affordability will be a big issue for the housing market in 2014.

http://aaronlayman.com/2013/12/kb-homes-sales-flatten-as-cancellations-edge-higher/

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black dog December 19, 2013 at 1:24 pm

However, with respect to housing, when prices are moving higher, not a single soul will ever forecast a “consolidation” or “contraction”, rather periods of “less appreciation”.

i remember 2006 quite well.

very evident to me that we were in a bubble, but did not know a soul personally who agreed. In 2006 asked straight out 2 real estate agents (each with 20+ years in the biz)”how could the insanity continue?” Both read from the same script. Prices will plateau for a year or two to let “fundamentals” catch up and then onward and upward. Even my bankster buddy (normally a very sharp cookie) thought no bubble and didn’t mind the interest only / negative amortization loans – “not paying the principal saves the trouble of lending the $$s out again”.

Fast forward to 2009 – everyone i know “yeah, things were crazy then ……….”

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J.R. Roren December 19, 2013 at 4:23 pm

Very good presentation. As someone who meets with “upside down” homeowners every day, I concur. What even adds to the dilemma is the fact that many of the folks in AZ are either self-employed or have a job related to construction. Their wages were MUCH stronger back then. Because EVERYONE had money, was investing and building.

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Bob Wells December 19, 2013 at 5:08 pm

The term is “voila!”, not “viola!” (see points 2b, 2e, and 2g above). The former term is used to call attention to an idea. The latter is a musical instrument.

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Mark December 19, 2013 at 5:20 pm

Damn spell check. I was toying around with “skin flute”, which is basically what we were all given in those periods. Figured “viola” could go either way. Just kidding…thanks for the catch.

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Dave Duncan December 19, 2013 at 8:22 pm

Much of your analysis assumes a static population, does it not? How do your projections change when additional demand could take place due to: (1) the lack of household formation over the past few years and (2) general population growth? If supply is limited and demand is strong, it would seem that a housing recovery could be sustainable even with higher interest rate scenarios.

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Mark December 20, 2013 at 8:07 am

Great questions DD.

For this note, I simply figured that singe family builders have kept building; multi-family has reached escape velocity back to 2006 levels and continues to surge; and demolition is almost non-existent, as houses that once would have been slated to tear down are being used as rehab and flip/rent opportunities. This, against a languishing household formation number about equals out.

But one thing that runs in my favor that nobody ever factors in, is that about half of the all potential home buyers that existed prior to the 2008, died since. That is, they are zombies to the repeat world due to negative equity; effective negative equity; a legacy HELOC not charged off prohibiting them from rebuying; insufficient job/income/credit for a mortgage loan; and the 7 million mods created since 2010. In 2006 everybody could always sell and rebuy whenever they wanted regardless of income and equity. Now, the Total Potential Demand of the US is a fraction of what it once was. If not for the Fed creating a massive bid by investors for any yield they can find, which went to housing, the past year and a half would have never happened.

And not conducive to the buy-to-rent trade is high house prices and rising bond yields. Why buy a CA house for a 3% rental yield when you can lever up 10 year notes?

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RentalWatch December 21, 2013 at 8:31 am

Whoa with this same old rusty market distortion.

Heres what we know

-Population growth is the lowest in US history

-Immigration is flat to negative

-80 MILLION elderly “homeowners” have one foot on a banana peel and the other in a grave

-25 MILLION excess, empty and defaulted houses and growing

-Housing demand at 16 year lows and falling

Why is anyone even implying there is a “supply” issue?

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Mark December 21, 2013 at 8:52 am

great data

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Bill White December 21, 2013 at 11:19 am

“Why buy a CA house for a 3% rental yield when you can lever up 10 year notes?”

Because all the same idiots are out there projectioning asset appreciation rates that far exceed inflation. If you truly believe that then a 3% cap rate is not problem. The idiot sheeple of this country believe that, and that is how they get away with this BS time and time again.

I wish I were a just sheep and not so frustrated with society.

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Russ Wetherill December 23, 2013 at 11:38 am

The flip side of the lack of move-up buyers is a lack of starter-home sellers. What does the inability to sell a starter home do to the number of starter homes on the market? If not for the lack of jobs for those 20-somethings in the starter-home category, we would be talking about this issue in a very different way.

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black dog December 21, 2013 at 12:57 pm

Look at graphs in Table A-1.

Doesn’t seem to bode well for household formation

http://www.census.gov/hhes/migration/data/cps/historical.html

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RentalWatch December 21, 2013 at 4:01 pm

Exactly.

Household formation is at multidecade lows.

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Bronco Fan December 20, 2013 at 12:16 pm

Always an entertaining read, thanks for your time Mark. Many economists will predict “how things may play out” but most will agree that nobody can predict “when things will play out.” Fair enough? I have rented a home since 2010 and the landlord has never raised the rent. I’m itching to buy and my wife gets anxious as we watch prices rise. I managed to hold out through 2013 but 2014 will be tough and 2015 it’s probably time to buy come correction or not.

So, When will things play out? :)

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RentalWatch December 21, 2013 at 8:32 am

Take a look for yourself. Prices resumed falling in October.

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Mark December 21, 2013 at 10:59 am

Great piece! I wondered what your thoughts were on the Canadian market that continues to rise despite all
the contrarian calls for years now. Help me out with this one Mark!

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RentalWatch December 21, 2013 at 2:49 pm

The longer Canada deviates from the long term trend, the greater and deeper the impeding housing correction will be.

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Bill White December 21, 2013 at 11:25 am

Mark, do a post on how ridiculous these DTI numbers are. They are simply a disaster waiting to happen. With taxes going up and the cost of food and energy increasing, there is not enough money in the budget to afford these DTI’s. I have a good spreadsheet to use for it email if you want it.

The reality of the matter is that no bank would give loans to people in the sub 100k incomes at these DTI’s, unless the government was guaranteeing them. We are doomed to a volatile housing cycle with lots of foreclosures. Few people will ever actually own a home again.

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RentalWatch December 21, 2013 at 4:02 pm

No offense but…

It’s the price stupid.

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someguy February 25, 2014 at 2:22 pm

Bill, exactly right. we can go evee a step futher, what about all the AUS (automated underwirting system) these systems issue out approval with huge DTI’s not factoring certian off credit report expenses and (as you refferanced) cost of living, food, fuel, utilites, and textiles going thru the roof. bad moon rising.

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John G. December 21, 2013 at 6:31 pm

Great analysis, Mark. Thank you for it. I can see nothing to disagree with.

We have chosen to rent since late ’04, after selling our last home in ’03.

We will not buy until employment is increasing, NODs are declining, and sales are rising (or gold and silver shoots through the roof). Those were the three factors that I found predicted the rise in prices in the ’80s and again in the ’90s, after the peak and fall in the late ’80/early ’90s.

And, Merry Christmas, sir!

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RentalWatch December 22, 2013 at 4:04 pm

Here’s a novel approach…..

Don’t buy housing until prices roll back to pre bubble levels.

Hint: Prices have a long way to fall before getting back to pre bubble levels.

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BillyBob December 26, 2013 at 3:37 am

2009 was your year and you didn’t pull the trigger.

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RentalWatch December 26, 2013 at 7:38 am

Actually, the year to escape the housing debacle was 2006. If you didn’t exit then, your losses have grown tremendously.

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Joe Sterling December 31, 2013 at 3:50 pm

Not if you live in Palo Alto, Ca.

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RentalWatch December 31, 2013 at 5:36 pm

And Palo Alto too.

Joe Sterling February 19, 2014 at 6:28 pm

Median price for Palo Alto, ca. Jan 2006 $1.1Mil.

Median price for Palo Alto, ca. Jan 2014 $1.8Mil.(source Zillow)

How has your loss grown “tremendously”?

Russ Wetherill December 23, 2013 at 11:28 am

“Of course, invariably, they assume everybody always used 30-year fixed rate loans when on the contrary, from 2003 to 2007, these were the “minority” of originations. ”

True. It is very silly to say that affordability has improved for everyone. Houses are much less affordable now for those who could only afford to pay 1% interest on a Neg-Am loan. But, for those who never considered using an “affordability” product, 30yrFRM rates in the 4s makes housing significantly more affordable today than during the last bubble when rates were in the 5s, 6s or 7s. Not to mention that incomes are up somewhat from where they were a decade ago (at least for those who are buying houses). And, for those that have seen significant drops in income, now is probably not the time to buy, anyhow.

Conventional 30 yr buyers are certainly better off now then they were during 2004-6. For this subset of all buyers, the affordability argument holds water. Now does this mean that this subset of buyers can push the market higher? Depends on sales volumes. The thinner the market, the more impact a small group will have. We saw this with investors in 2012. If investors are now leaving these markets, and subprime, Alt-A, NegAm buyers are already long gone, that leaves conventional buyers, right?

The 3.5% rates backstopped the fall, but these rates weren’t available to everyone, only to those with high credit scores (770 average at Fannie and Freddie, I believe). So affordability for this group was phenomenally better than 2004-6, and is now only marginally better with the rise in prices and rates. As incomes grow and loan balances amortize prices will stabilize. Maybe what we can learn from the last two bubble pops is that it matters how the stimulus is removed, not just that it is removed. The financial crises in 2008 immediately dried up access to credit virtually overnight. The tax rebate had a hard expiration date as well. The FED also raised short term borrowing rates over an eighteen month period as the bubble expanded. We aren’t facing anything so dramatic this time around. Rates are up about a point now from a year ago, but with that rise in rates comes greater access to credit for more marginal buyers. This way lenders are compensated for the greater risk of default. More approved loans means more demand. Time will tell if demand is great enough to maintain or even raise prices. But I don’t think a significant correction is in the offing.

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Mark December 24, 2013 at 6:20 am

great post RW. But I think a combination of mortgage rates rising over a month from sub 3.5% to 4.75%, which undeniably hurt traditonal buyers and UST moving from 1.5% to close to 3%, which has hurt private and insti investors in their buy to rent trade, will act a lot like the hard stops we saw in 2008 and 2010. Remember, for many/most insti buyers the buy to rent trade was a Treasury replacement trade. When it began one could get 6% on a house and the chance for appreciation vs 1.5% on a 10 year note. That was a hell of a spread trade. Now the cash on cash yield in the most popular buy to rent regions is 3% or less. In the most popular buy to rent regions we are seeing sales volume literally plunge and supply literally surge. That is a rare event; can’t really happen if the market is “organic” and “traditional” buyers are selling one house and buying another. In this case you wouldn’t see such a supply / demand divergence and volatility. Lastly because house prices follow mortgage rates and sales volume, the next leg for housing — if in fact the rise in rates and UST has “wounded” the primary demand cohorts — is much lower.

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black dog December 24, 2013 at 11:01 am

*We aren’t facing anything so dramatic this time around. Rates are up about a point now from a year ago, but with that rise in rates comes greater access to credit for more marginal buyers.*

no evidence mortgage buyers stepping up … and with rates trending higher?

“Following the Federal Reserve’s taper announcement, mortgage application volume dropped again last week, with rates increasing and refinance application volume falling to its lowest level since November 2008,” said Mike Fratantoni, MBA’s Vice President of Research and Economics. “Purchase application volume was weak too, continuing to run more than ten percent below last year’s pace. Notably, government purchase application volume is almost 25 percent below where it was at this time last year, with the larger drop compared to conventional purchase likely due to the increase in FHA premiums over the course of the year.”

http://www.mortgagebankers.org/NewsandMedia/PressCenter/86649.htm

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Chris December 23, 2013 at 6:08 pm

I am a small investor and have purchased multiple properties cash only and as long as my cap rates make sense I’m happy to make the purchase. I have also been very fortunate with the equity appreciation but I’m not really in it for that, that will possibly be a windfall for my children. I invest for steady retirement income cash flow and I believe that fundamentally, real estate investing works well for that. The industrial investors appear to have slowed now that cap rates have fallen which implies they were investing with an eye on ROI. You make a reference to “flawed cap-rate models”. What do you mean by this? I assess every deal with a clear head and I have found my cap rate projections to be pretty accurate and I believe the industrial investors are far more sophisticated than I.

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Mark December 24, 2013 at 6:22 am

I have seen large insti investors cap rate models. They have “tweaked” multi family models for houses spread all over the nation. The glaring mistake they all made is in the “repairs and maintenance” metric, which I have seen range from 3% to 5% of rents. Maybe for an apartment 4% of rents is ok. But on an SFR, good luck with that. And if they are off by only a few percentage points, they bottom line cap rate changes dramatically. It actually crushes the trade.

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RentalWatch December 24, 2013 at 9:53 am

I hate to tell you Chris but cap rates are negative at current asking prices. Worse yet, rental rates are falling as are asking prices.

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Gary December 26, 2013 at 11:46 am

At this point everyone has refinanced to an affordable monthly payment and the rest have been foreclosed on. The banks arent giving loans to people that cannot afford them so things are now stable. Housing prices are dropping because they always do at this part of the year. Now just show up to work. continue making your payment on time and watch your homes value increase this summer.

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RentalWatch December 26, 2013 at 6:30 pm

Nonsense.

There are foreclosure moratoriums or some type of temporary relief in all 50 states. Secondly, housing prices don’t “always drop this time of year”. In fact the current precipitous decline that began in March outpaces any declines since 2007.

And always remember….. houses depreciate.

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whays December 26, 2013 at 11:58 am

Another cost that’s starting to sting is the new flood insurance rates. All of these properties near the ocean are going to get expensive to own between, taxes, insurace and flood insurance.

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rj chicago December 27, 2013 at 7:38 am

Mark – AGAIN – great analysis – that caused me to read the Nov. 2013 issue of Imprimis. I ran across the link below from Hillsdale College – a great brief history of Fan and Fred and how the gubmit really is at the crux of this mess in housing – all going back to the bad recession in my year of birth 1957. Suggest that anyone thinking the finance crisis was due to lack of regulation on private markets this fellow makes a sound argument that invariably the gubmit distorts the free market causing bubbles – much like what is being suggested in the current blog post.
Happy New Year!!

http://imprimis.hillsdale.edu/file/archives/pdf/2013_11_Imprimis.pdf

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Doug December 27, 2013 at 9:20 pm

Many people keep referring to all the cash sales from large institutional investors as a stabalizing force. Although most can reason that if prices started falling they might flood the market to try and get out to capture the most profit or limit their losses.

I contend that calling them cash buyers is probably not accurate. Sure, when buying the houses, they put down all cash. They also might never tie a mortgage to a single property.

But….
My experience with watching big money players is that they rarely play without leveraging their cash. I think they are leveraging the funds they have raised (and probably leveraged heavily) before they go out and pay “all cash” for the homes they purchase.

Should prices pull back, underwater big money could be forced into panic selling. What do you think?

Doug

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Mark December 27, 2013 at 11:05 pm

keen observation…they make the market much more volatile than if the risk was spread across millions of homeowners (like in 2006). Just look how fast this bubble blew…2 years vs 2003 to 2007 last time around.

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RentalWatch December 28, 2013 at 5:51 am

Mark,

As I recall, the bubble actually started inflating 1996 with the widespread push and democratization of funky financing. By 1999, prices were already 50% over trend. 2002 they had doubled then a little bit, 2004 they doubled once again and 2006 they doubled again.

Current prices are still at 2004 levels….. and falling

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Mark December 28, 2013 at 6:12 am

One could argue the bubble really started in 1985 into the tax reforms of 1986. But remember, we had our first recent history low rate event in the early 90′s. Then rates surged and the real estate market was hurt. So, like you said in 95/96 early vintage exotic were introduced. Thus, leading to my conclusion in this post that “housing didn’t peak in 2006, it peaked in 2002″.

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rj chicago December 30, 2013 at 2:21 pm

Mark – agree with you.
See my attachement to my post above to help support this argument. The imprimis article is prescient given your discussion herewith.

Gary December 30, 2013 at 7:23 pm

Should the stock market crash, those invested in real estate will continue to profit from their rental properties

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RentalWatch December 31, 2013 at 5:35 pm

Depends when they bought them. If they bought them in the last 14 years, theyre cashflow negative.

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Dougie944 December 31, 2013 at 8:26 pm

I bought a 4 rentals, about 3 years ago and I am nowhere near cashflow negative as you suggest.

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RentalWatch January 2, 2014 at 6:57 pm

That and a dollar will get you a cup of coffee.

If you’d like to substantiate yourself, go ahead a post a zillow link.

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Doug January 5, 2014 at 6:51 am

http://www.zillow.com/homedetails/1916-S-47th-Ave-Yuma-AZ-85364/48138907_zpid/

There you go big talker. Paid cash $85k, rents for $925 with $600/mth Cash flow. That’s with a property manager. 8+% ROI without figuring in the 30% increase in value of the property. Maybe you aren’t sure what cash flow is.

Arik Silverman January 1, 2014 at 7:24 pm

I’m sure you have something important to say, but your jargon-filled gobbledygook is impossible for the average person to decipher.

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RentalWatch January 2, 2014 at 6:59 pm

It’s quite simple “Arik”.

Housing prices are massively inflated yet prices are falling.

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siddh January 2, 2014 at 10:10 pm

It is probably falling in whole of US, EXCEPT the silicon valley. In silicon valley (san jose, cupertino, mountain view, palo alto) what exist is something called as bidding WAR. There are 5 to 25 offers on single property and at the end the property sells for 200K more than asking price.

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RentalWatch January 3, 2014 at 7:17 am

Prices are down 5% year over year in Palo Alto. This makes sense considering the level of housing fraud in silicon alley. With massive price declines baked in the cake there, you might want to keep your wallet in your pocket.

http://www.movoto.com/statistics/ca/palo-alto.htm

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Mark January 3, 2014 at 7:25 am

great reply, also in Silicon Valley pending sales are plunging, down 31% YoY in December, to historical lows. That’s massive.

Gary January 3, 2014 at 6:10 am

Remember Housingpanic.com? What a great blog that was… On another note, Californians are gearing up for the spring buying frenzy.

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RentalWatch January 3, 2014 at 12:04 pm
siddh January 4, 2014 at 6:30 pm

Yes.
In palo alto, the prices are down. From 3M, the are down to 1.7M. What a joke. ! Only CEOs and employees with stock options can purchase these homes.

I went to new homes release for a builder recently and you won’t believe the number or people showed up. All the houses were gone in a jiffy. Prices may get stabilized, but I do not see any price declines happening in silicon valley. I have been looking for a house since 8 months. I have not seen a single house in good school district declining in price. The moment a home in good school district comes in silicon valley, it gets sold at more than asking price. why?
Because there are people willing to pay

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RentalWatch January 6, 2014 at 7:48 am

“Because there are people willing to pay”

Apparently not considering housing sales have collapsed 30% YoY in Palo Alto.

http://www.zillow.com/local-info/CA-Palo-Alto-home-value/r_26374/#metric=mt%3D24%26dt%3D1%26tp%3D5%26rt%3D8%26r%3D26374%252C343608%252C343609%252C343611%26el%3D0

Sit tight and hold your cash because the price declines in SillyCon Vallee are accelerating.

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JSB January 7, 2014 at 2:48 pm

looked at this chart ,, can’t believe the wild swings YOY . can anybody provide insight ?

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RentalWatch January 8, 2014 at 5:39 am

Clearly it’s fraud.

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RentalWatch January 6, 2014 at 8:31 am

“Game Over for Real Estate: Time to Short US Housing Market”

http://www.nomadiccapitalpartners.com/short-us-housing-market/

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RentalWatch January 6, 2014 at 8:33 am
Doug January 8, 2014 at 9:05 am

I bought 8 houses and 1 commercial property in San Diego and Florida around 2001 and sold all of them in 2005 to avoid the pullback. I then purchased 5 (1 being a personal home) houses and 1 distressed commercial asset at or near the recent bottom and currently have a 30% appreciation across the board on them all if I wanted to sell now. The yield is easily over 11%.

I also have a house I just flipped, under contract, and I’ll make 40k when it closes.

Please keep educating me on real estate and my losses while I keep making money. I am not one who thinks things are good right now, but money can be made if you know what you are doing and aren’t frightened to death.

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RentalWatch January 8, 2014 at 12:31 pm

Like I say….. that and a dollar will get you a cup of coffee.

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Gary January 9, 2014 at 5:32 pm

According to corelogic “Year over Year, US housing prices appreciated every month in 2013.” Focus on YOY data, it matters more.

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45north January 15, 2014 at 5:57 pm

Mark, I don’t like to whine but I cannot download your latest stuff.

Here some stuff that sounds like what you are saying
So, is the housing market more resilient to another downturn? No way, says Calvo, “They’ve securitized the rental properties, which are now making the net effect of a collapse in values in the market much more devastating for the economy.” Calvo predicts, “The next leg down in the real estate market will be much, much larger . . . Still, Calvo says don’t expect a crash in 2014, and he says, “We’ll pretty much see a repeat of 2013.” Calvo says to watch when hedge funds start selling their real estate holdings. He says, “I think that will be around 2015. That will be the handwriting on the wall that the collapse in housing prices will be coming.”

http://www.greaterfool.ca/2014/01/14/you-should-be-worried/#comments

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Goldman January 23, 2014 at 2:44 pm

Mark,
Have you been following the trend of Mortgage Brokers owning Appraisal Management companies?

Does anyone remember that Appraisal Management Co role was created in response to the close relationship between Mortgage Brokers and Appraiser who were bidding up Home values.

Here is an example: Prospect Mortgage -C2C Appraisal Services LLC, a wholly-owned subsidiary of Prospect Mortgage, LLC.- the CEO of Prospect Mortgage is a former Fannie Mae heavy weight- http://myprospectmortgage.com/blog/2012-11-29/Press-Release/Prospect-Mortgage-Names-Michael-J-Williams-Former-Fannie-Mae-CEO-as-Chairman

Prospect Mortgage owns http://reoservicestraining.com/who_we_are.php
“C2C REO Services Training is offered by C2C Appraisal Services LLC, a wholly-owned subsidiary of Prospect Mortgage, LLC. Prospect Mortgage is the largest independent nationwide lender focused on providing our clients with a full spectrum of competitively priced mortgage products and programs”

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Tommy January 29, 2014 at 7:58 pm

South Fla is going nuts, the prices are rising on homes that have sat for years, it’s as the realtors are trying to make the market look healthy, the problem is the homes owners are falling for the realtors hot air and a lot are loosing the homes trying to wait for the all cash buyer from china myth all talking about down here. good luck i was all out 3 years a geo and not going near this market until we see at least 50% off these crazy prices .

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jacs310 February 12, 2014 at 5:21 pm

Big thanks guys, especially Mark!

I’m really excited to stumble across this blog and see a lot of hunches, and personal experiences I’ve had over the past year be confirmed in such a cohesive, data driven, point of view on the housing market.

I’m one of those people (in Southern California) that has saved up the downpayment to buy a house for my family and spent the last year getting outbid by all cash offers from investors and see the prices launch in real time. As far as I can tell, most of the investors have been flipping the homes in my area, as I see many of the homes re-enter the market with a Home Depot facelift 2 months later, selling for 250-300k more. Now, I’m at a point where rent is high and “affordability” with buying is so clearly out of wack and I’m not sure what to do – aside from moving that is.

I guess my big question is, how does all of this play out when the crash comes?

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jacs310 February 14, 2014 at 12:20 pm

Mark & RentalWatch, any thoughts on how the crash plays out?

Will savers be able to enter the market with lower home prices or is inventory going to be locked down with everyone upside down? Are they going to freeze foreclosures? What about the investors (renters & flippers)? Mortgage rates?

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swflorida February 13, 2014 at 7:16 pm

read your coverage on Las Vegas implosion . 02/12/2014 you stated 6 months supply there on living units , this guy says 2 months ,, where is the discrepancy ? https://www.youtube.com/watch?v=053Jv0Dgt90

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Mark February 13, 2014 at 7:35 pm

I like that guy. Maybe I’ll reach out to share data.

On his analysis, I also show 40k sales over the past year, but sales volume has plunged since June. Therefore, working off back half 2013 numbers, which are more contemporary, sales are averaging 3000 per mo or 36k per year. But, because supply is very seasonal to work an accurate “months supply” factor you really have to look at supply and demand for the current month or two. When looking at January figures, in the “Greater Las Vegas” region you have 13,537 houses and condos for sale with a January sales total of 2527, making for 6.5 mos supply.

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swflorida February 17, 2014 at 6:32 pm

thought I had you MARK ,, should have known better ..anyways back to business

I have been following fannie mae home path listings here in LEE county Florida and have seen a spike in listings
almost 300 active , Freddie MAC has 100 active , FHA lowest I seen , Also these units aren’t flying off the shelves
like before .

and then the realty trac bomb landed:: notice of defaults up 57 % in CALY . whats up?

could it be the end of The Mortgage Forgiveness Debt Relief Act’s (MFDRA) as of January,, force
more people into foreclosure rather than short sale ( under the old law the write-off was NOT considered income )
now it is.
more supply in the pipeline

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swflorida February 25, 2014 at 5:04 pm

hot off the press ,, your Arizona analysis/predictions seem to be coming true

. http://blogs.wsj.com/economics/2014/02/25/americas-hottest-housing-market-has-suddenly-cooled-down/

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T.Boomdea February 15, 2014 at 12:14 pm

Another Vegas realtor
(Las Vegas Housing Bubble Remix) February Las Vegas Real Estate Update
https://www.youtube.com/watch?v=dX_rqTATgVI

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swflorida February 18, 2014 at 8:04 am

I had watched this earlier ,, mark does not have the moniker of ‘LONE BEAR ” anymore – the video reaffirms marks data –
this market could go into a tailspin if any hint of deflation appears .

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Jim Morrison February 17, 2014 at 1:41 am

“Foreclosure filings – default notices, scheduled auctions, and bank repossessions – suddenly jumped 8% to 124,419 in January across the nation, according to RealtyTrac. Which left some people scratching their heads. A mild uptick was expected after the holidays, but 8%? And what about the polar vortices – weren’t they supposed to have slowed things down to a crawl? [...]

It’s not just in California. Foreclosure starts rose 10% from December to hit 57,259 properties across the country. That they on average were still down 12% from a year earlier obscured major annual increases in certain individual states, and not just in one or two, like us crazies out here in California, but in 22 states! And California with its 57% jump in foreclosure starts now suddenly seems tame: In New Jersey, they soared 79%, in Connecticut 82%, and in Maryland 126%!”

http://www.testosteronepit.com/home/2014/2/13/foreclosure-rebound-pattern-foreclosures-suddenly-jump-57-in.html

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Jim Morrison February 17, 2014 at 1:53 am

Mark – my comment posted on February 17th somehow ended up being posted not at the end of the thread, but higher up. Thinking I made a mistake, I posted again. Let’s see if this one ends up being posted at the end.

So foreclosure filings are up. Are the banks suddenly feeling safe enough to release more homes? A slow trickle to allow prices to stay up?

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Bubs February 19, 2014 at 3:14 pm

Mark,
Love this blog
How about a new article update for us public viewers. Its been 2 months. Looks like a lot happening.
Thanks!

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rj chicago February 25, 2014 at 8:43 am

Mark – where are you? Wondering what your outlook is on the housing front.

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Mark January 5, 2014 at 10:31 pm

smokin deal. But you bought the right house in the right window of time. You couldn’t get that today, yet institutional investors using other people’s money with zero idea how to manage hundreds or thousands of houses spread all over the place geographically are still bidding up prices looking at peak prices in 2006 as their benchmark. Funny, I read through a big insti investors capital raise material and they were modeling 4% of rents for “repairs and maintenance”. They pulled 4% right out of an apartment building profit & loss probably. Good luck with that 4%. Problem is, when this single metric comes it at 8% or 10%, given how levered these big buyers actually are, they are cash flow negative when buying today.

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RentalWatch January 6, 2014 at 7:51 am

That is if you believe our friend “Doug”. Even if he were telling the truth, it’s quite clear that the $100k total he has in it doesn’t yield much at all.

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Doug January 7, 2014 at 12:08 pm

I understand that prices have been bid up and that is why I stopped purchasing properties again. The returns weren’t enough with the higher prices.

I was responding to Rentalwatch’s claim that anyone that purchased in last 14yrs had negative cash flow. That is wrong and way too pessimistic as there was a window where a respectable cash flow was present in a lot of cities. That is why houses started selling again and why the government should stay out of the way of the free market.

I am under no illusion that house prices could not push down from here, but housing prices going down will not affect my cash flow. I still believe Rentalwatch doesn’t understand the difference between cash flow and rising/falling home prices.

Mark….just rediscovered your blog. I read everything I could find that you had written during the crisis. You were the most informative source out there. Thanks for your work and I believe you are absolutely spot on with your analysis of the current state of housing. For real estate to have appreciated organically like it has recently, incomes would have needed to have increased and that has not happened.

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Doug January 7, 2014 at 12:21 pm

You asked for an example, I gave you one. I also explained the rental situation to you.

Your reading comprehension needs some work. My cost basis is 85k, not 100k. I told you my yield is over 8% unleveredged, and you still are unsure what my yield was. I could leveredge the home and make a much higher yield, but I like the security and guaranteed cash flow for now. Plus, I wouldn’t currently know what to invest the money into after I got it back.

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RentalWatch January 7, 2014 at 1:09 pm

That and a dollar will get you a cup of coffee.

In the meantime, rental rates continue to fall along with housing prices. Remember, houses depreciate rapidly.

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RentalWatch January 7, 2014 at 1:12 pm

I understand cash flow, cap rates and ROI as our profits depend on it.

The reality is housing is a massive loss at current prices and at any price in the last 14 years.

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black dog January 8, 2014 at 7:56 am

*I was responding to Rentalwatch’s claim that anyone that purchased in last 14yrs had negative cash flow. That is wrong and way too pessimistic as there was a window where a respectable cash flow was present in a lot of cities.*

yes … but using an all cash bid to bolster your point??

my (old school) rule of thumb is 20% down and rent should cover PITI plus expenses and leave a sliver of cash flow. In my locale (virginia) those deals “left the building” several years ago … and the best deals then never made it to the mls.

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Doug January 7, 2014 at 4:53 pm

For someone that “thinks” they know the value of housing, you are really awful at knowing how much coffee costs.

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RentalWatch January 7, 2014 at 6:20 pm

They’re your losses. You’re just one of many millions of people who paid a grossly inflated price for a depreciating asset. Carry on.

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RentalWatch January 8, 2014 at 10:49 am

Give it time…. The dead cat bounce is over.

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Jim Morrison March 11, 2014 at 12:55 am

Good article entitled “The Truth About Record High Household Net Worth,” and a great singular comment under the article by a realtor who gives some insight into what’s happening in his area – not good at all.

http://www.theburningplatform.com/2014/03/10/the-truth-about-record-high-household-net-worth/#comments

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