House prices are on the rise. This happens every year. Sometimes this age-old phenom starts a month or two earlier or later than the year before depending on the timing and size of the stimulus aimed at housing. But, save some divergence in 2007 & 2008 (NAR prices up/CS down) you can always count on housing’s generational seasonality trend to boost sales volume and pricing in the spring and summer.
The annual house price and sales volume ”bottom” has passed again. Feb & Mar NAR median and average prices reflect this. Beginning next month the monthly Case-Schiller will begin rising sequentially.
But an “annual” bottom and “the bottom” are two different things. When a major asset class has “bottomed” four years straight it’s a fairly powerful sign and trend. Fool me once, shame on me; fool me every futher mucking year and call me a 28 year-old MBA employed by the sell side, or a blogger with a bad memory and database.
This quick note summarizes my ideas of what will happen to “housing” over the next few quarters; how investors and analysts don’t recognize and are not handicapping present conditions as the most “stimulated” we have ever seen; why this looks exactly like Q1/Q2 2010 during the home buyer tax-credit period to me (remember, “bidding wars” filled the headlines back then too as people paid $30k more than the ask price in order to get their $8k tax credit) even though last month’s Existing and New Home Sales volume was LOWER than in March 2010 (a very important metric nobody picked up on); and how uncertainty will quickly reign when house sales volume begins its string of YoY disappoints in Q2 amidst seasonally up trending prices.
Bottom line, for various reasons tireless expressed for the past several months (and years before that), I am not convinced that a “durable, escape velocity recovery” can occur yet. Of course, “stimulus and transitory event driven demand spurts” certainly can occur, as evidenced by 2010 and right now. But concluding this is “the” durable “bottom” is a leap I can’t make. That’s because I still see lower seasonal highs, and lower off-season lows as the trend. Calling this “the bottom”, particularly in the context of investing, is reckless. Sure, ”trade” the data and sentiment momentum all you want. But for long term investors, if this truly is a durable bottom, it will mean positive change for years to come meaning even if you wait for confirmation you are still very early.
Whether it’s crisis fatigue, hypnosis, capitulation, etc, this lack of memory of the recent past and inability to recognize, normalize and handicap stimulus and transitory events is amazing to me. But at the end of the day it doesn’t surprise me. That’s because reversion through the mean is a bitch; just ask the Japanese who fought this same battle for 16 years.
1) On “this year’s” house price ”bottom” to be confirmed by Case-Schiller in Q2
I expect house prices to rise each month sequentially this spring and summer. This is the exact same thing I “predicted” last year and the year before. Oh yea, and the 20 previous years as well while working and investing in the mortgage and housing sector. It’s one of those no-brainer calls that in the midst of a lot of noise, can make you look really smart. In fact, last September as rates plunged to sub 4%, builder stocks were at multi-year lows, and house price were at cycle lows, we went long the most beaten up builders. It was a no-brainer call (didn’t admit that at the time to clients) that made us look smart. Admittedly, we got out way too soon at the end of last year but in this market why not take a 50% gain in 4 months.
In the housing sector, one of the only things you can be virtually certain of year after year is for house prices to rise in the spring and summer. Yes, even during Armageddon 2008 and 09 NAR median and average house prices rose for the “season”.
The “noise” over yet another house price “bottom” will begin to get much louder as this age-old seasonal factor kicks in.
In fact, with rates 100bps lower YoY, I also expected YoY CS house price gains by June. This is identical to what occurred during the tax-credit period of 2010 when gov’t stimulus also allowed people to buy more house with the same income and enhanced the seasonal factors.
By and large people have forgotten how seasonality and rates stimulus interact with housing, Thus, every year in the Spring we get screams of housing “bottoms”. But when you study the longer term, the post-bubble trend of lower seasonal highs and lower off-season lows is clear.
In short, an “annual bottom” and “the bottom” (a durable bottom) are two completely different things. Yet each year when houses prices annually “bottom” and seasonally begin to rise, consensus quickly considers it ”the” bottom.
Within the context of this year’s “bottom”, most analysts and investors think this is a “clean year” with respect to stimulus. I hear it all the time…”the gov’t doesn’t have any incentive programs this year to boost housing and sales and prices are rising”. I argue these people have stimulus hypnosis (or they are so young they just don’t remember a time when the rates market was not heavily manipulated).
I see the past two quarters as the most heavily stimulated housing market we have ever seen. We are so used to intrusion into this market, we don’ even recognize that sub-4% rates — 100bps lower than last year or the year before; a drop in rates that equals 10% house price appreciation – as massive housing market stimulus with measurable positive effects. A massive stimulus that will reverse on a dime if the 2% of investors who are bearish US Treasury during this powerful macro “recovery” trade end up being right.
In short, massive transitory rates stimulus of over 100bps YoY (worth more than 10% house price “appreciation” on it’s own) and other powerful seasonal and/or one-off factors have combined to act as a mega-stimulus tailwind beginning last year. Most all of these have gone largely mostly unrecognized and handicapped by investors and paid forecasters as “stimulus” (save the weather phenomenon that was discounted in Jan when I first started pounding the table over it but now is fully accepted as such). I am in the business of handicapping and normalizing. Below are items I must weigh when considering whether “this years” housing recovery has “escape velocity and durability”.
- a) The Fed jimmy’s rates down to the unsustainable level of under 4% in Q3’11 through the Twist ops announcement. That’s a long runway leading into the Spring 2012 housing season. The 100bps drop in rates is worth at least 10% appreciation in itself to those buying with a mortgage loan.
- b) Liquidity (once again) rushes back into the financial and mortgage markets.
- c) The ECB starts printing and then goes vertical with LTRO. The world is awash in liquidity. Junk assets rotate in heavy favor. Investors are looking for a hedge against Euro risk.
- d) This is married with record low house prices and virtually no precipitation or snowfall in major metropolitan regions throughout the nation. (note “temperature” has much less to do with housing that rain and snow)
- e) (Very Important) FHA telegraphs big changes coming in Q2 that will result in a much greater cost beginning April 1 than the zero to buy a house prior. For Realtors and loan agents this is a top selling feature in the winter and led to a sharp uptick in Feb through April “pendings”, a record number of which will never close.
- f) Banks and mortgage servicers continue to avoid foreclosures at all costs on the back of heavy government regulations, new government can-kicking programs, and cycle high loss severities, reducing distressed supply.
- g) The gov’t then releases a half dozen “new and improved” mortgage mod type programs that results in ready sellers, short-sellers, and strategic defaulters not carrying through with plans to sell or defaults, rather apply for a government hand-out reducing supply even further”.
- h) Warren Buffett gives housing a “strong buy” for the third-year running” and says he “wishes he could buy a couple of hundred thousand houses”
- i) Lastly, headlines are filled with gov’t bulk REO-to-rental schemes aimed at institutional investors that lights a fire under private investors looking to front-run them.
Bottom line, never bet against house prices rising MoM in the spring and summer. Seasonal house price increases always happen. However, this year, like in 2010, we should also get YoY price gains. This will really put the recovery junkies out over their skis. But it’s not all roses…existing house sales volume will begin a strong of disappoints in Q2 and new home sales volume will not live up to “escape velocity” forecasts. In fact, both existing and new home sales in March were lower than in 2010, a very important metric to note. Moreover, mid-to-high end housing has no pricing power so house price compression will be more pronounced. So, soon we will be in the midst of rising seasonal prices and disappointing sales volume. Then the path of least resistance for analysts will be to call for lower off-season prices due to stagnating volume, higher rates, Euro risk, or an an economic shock brought about by any number of the plethora of gut wrenching events we face around and after the election time.
2) Parallels to the 2010 Homebuyer Tax Credit Period
In the first half of 2010, we had the $8k home buyer tax credit, which in 38 states could be monetized for down payment purposes making for 100%+ loans. This acted much in the same way today’s sub-4% rates, the lack of precipitation and snowfall in the weather, and the artificial and transitory lack of supply has in 2011/12.
In 1h’10 everybody was preaching an identical theme as today. That was “the bottom”. Everybody was convinced. Large bets were made. Remember…headlines were filled with stories of “bidding wars“, as buyers paid $30k more than ask price in order to get their $8k tax credit. Top named investors lost serious double digit AUM percentages being wrong. When the tax-credit ramp was in full-effect, calls by investors, analysts, economists and bloggers were very loud about that ”durable” housing bottom and “escape velocity”. In fact, the parallels between 1h10 and 1h12 are too many to list. On that note, I have actually gone back through all my written work during that time and a lot of my research this year are rewrites of past research with updated numbers and dates.
The big difference between 2010 and this year’s stimulus primed market – most of the stimulus not even recognized as such by investors and analysts – is the quantity of “stimulants” in the housing system dwarfs the 2010 $8k tax credit. Never confuse stimulus enhanced volume and pricing activity with economic fundamentals or truth. In a world awash in QE and gov’t intrusion, many times price isn’t truth. Because income growth in non-existent the Fed must engineer lower and lower rates in order to promote stability in pricing. In short, when rates are low people can “afford” to buy more house with the same amount of monthly payment, the latter the most important part to most when purchasing anything. Stimulus also brings about greed forcing people to make hasty decision in fear of being “left out”. But in housing, it is my bet that the type of stimulus and transitory events described in item #1 above will not lead to “escape velocity” or a “durable” recovery.
In fact, the spring “busy” season was preceded by a hell of a long runway of historic low rates and well-telegraphed FHA lending changes. These are important to remember. A runway of stimulus this long was only seen leading up to the 2010 tax credit expiration…and still, existing and new home sales volume in March was lower than then.
The historic low rates, pulled-forward demand and transitory lack of “in-demand” supply (low end housing) has caused price stability, which will lead to gains, at the margin. It will also promote house-price-compression as mid-to-high end sellers come down to meet the primary demand cohorts who are hard capped at what they are able to pay for a house.
Bottom line, the home buyer tax credit period ended with a cliff dive. I don’t expect this years “recovery” to end in the same abrupt manner yet fully expect volume to precede price lower going out of the busy season and uncertainty to be a major theme in Q3. In the context of a consensus housing market “v” shaped, “durable” recovery trade, this will “feel” really badly.
3) In Conclusion
In conclusion, this is not a healthy housing market; rather an epic “stimulus” and “select supply driven” dash-to-trash trap, which will lead to housing market “paralysis” and lower sales volume and prices.
Investors tripping all over themselves (and all over first-time buyers) on a liquidity high – in fear of being put out of business by the gov’t due to a variety of recent events and confusing headlines — looking at artificial, manipulated and transitory fundamentals — can’t create “escape velocity” in macro housing.
That’s because this is a “distressed supply” and “stimulus” driven market. Unlike the bubble years when legions of buyers were out sucking down supply while pushing up house prices with ever more exotic high-leverage loans, when investors are driving the market — many paying cash — the supply/demand fundamentals are different.
Sure, these demand spurts burn off excess available supply pretty well, but once that’s burned off what next? It’s not as if investors will turn to Pulte for a house, chase ask prices higher along side first-timers, or pay $500k because the $90k foreclosure is not available. To that end, it’s not is as first-timers will buy a bigger house using a stated income, interest only or Pay Option ARM if prices rise to levels they can’t qualify for…incomes don’t warrant any durable house price increases for now. In fact, just the opposite…if rates rise, incomes warrant further house price contraction.
On the contrary, what this type of heavy stimulus and targeted demand will create is a air pocket under sales and prices due to no supply. This type of demand can leave the market as quickly as it came, as evidenced in 2010.
A case for certain builders. These markets are years away from ultimately “clearing”, yet a lack of supply exists. Counter intuitively, in the midst of lower sales volume a low price-point, volume builder could sharp-shoot weak or seized-up existing home sales communities and do well (at least with respect to “volume”, perhaps not margins unless rates and other conditions remain this favorable). But laying down roots (larger communities) is highly risky. Nothing about “this” housing market bodes well long-term for high-end of luxury builders in my opinion.
Remember, this is not a normal or natural market, so do not expect normal or historic results. For example, both sales volume and supply in this market are more correlated to defaults, Foreclosures, mortgage mods, negative & effective negative equity, and mortgage guidelines than each other. To that end, based on the type of demand for such specific properties, if Foreclosure completions tripled from here I would have to change my stance to bullish house sales volume for the remainder of the year.
Over the long-term, before the housing market can finally clear, we need to get through at least two-thirds of the supply from:
- Supply Cohort 1 – Ghost Supply: 25 to 30 million mortgage’d homeowners without enough equity to sell (pay a Realtor 6% and put 10% to 20% down on a new property) and rebuy (have a job for a certain length of time, good credit etc). These borrowers have been “stuck” since 2006 and historically people move for one reason or another every 6 to 8 years.
- Supply Cohort 2 – Shadow Inventory: 6 million delinquent, defaulted, in foreclosure borrowers (some of this cohort also belong to cohort #1)
- Supply Cohort 3 – New Subprime loan bubble: 5 to 7 million borrowers given new-vintage, higher-leverage worse-than-Subprime loans (i.e., mods) in the past 2.5 years under the guide of “helping homeowners” through “foreclosure prevention”. (some of these belong to cohorts 1 & 2)
What I think most likely going into summer is that we get a continued surge in pendings fall out…already contract failures are over 30% of pendings vs 10% just a year ago. The only way to quickly supply the investors driving the demand is through fresh distressed supply, which will bring down prices. To that end, investors who have been buying over the past two years will lighten up the load into the latest investor rush. Lastly, the demand at the low-end of the market will prompt mid-to-higher end homeowners who have wanted to sell for years (with enough equity to sell) to move down prices in order to hit bids resulting in further house price compression.
Soon I suspect the GSE’s, FHA, banks and the gov’t realize that unless this market gets the type of supply it wants the demand will roll over and die. As a result they quickly begin flooding the market with foreclosures and short sales right about the time rates rise and the investors driving these markets go away resulting in a slingshot effect the other way.
NAR median and Average House Prices
A chart of March NAR median and average house prices. They always rise for the “season”. They began to “rise” early this year, which makes perfect sense based on rates, FHA changes and the plethora of other stimulus detailed previously. But concluding this is “the” durable bottom is a leap I can’t make yet. That’s because I still see lower seasonal highs, and lower seasonal lows. Calling this “the bottom”, particularly in the context of investing, is reckless. Sure, ”trade” the data and sentiment momentum all you want. But for long term investors, if this truly is a durable bottom it will mean positive change for years to come meaning even if you wait for confirmation you are still very early.