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Case Shiller, a Blast from the Bubble Past
Yesterday, the “November” Case Shiller — an average of Sept through Nov “closed” home sales prices – revealed that consumer shopping experiences between May and Oct (when rates were at “historical lows”), which resulted in purchase and pricing decisions (Pendings) from July through Oct, on houses that closed between Sept and Nov, produced higher YY prices by about the consensus forecast.
Bottom line: We knew this 6-months ago through my data, which is not delayed 7-months at the tail like the CS.
It’s important to note, that the index gain is about exactly what the 1% YY decline in mortgage rates to historical lows during the sample produced given ~70% of buyers use mortgage loans.
In other words, the reported “gain” is nothing more than 2016 summer buyers able to pay a higher sales price for the same house than in 2015 due to the increase in affordability (same monthly payment for a larger mortgage) from lower rates.
Going forward, the 1% increase in rates should produce an equivalent percentage house-price headwind YY when data “finally” come out that incorporates the rate surge a couple of “quarters” from now.
ON MAIN STREET, HOUSE PRICING POWER IS WEAK
House list and sales price haircuts are happening. House prices have softened and are actually falling in several core markets, nationwide, especially at the middle to higher end. This trend began long before the Nov rate surge. The data are clear. But, it simply takes time and more sales to occur for the haircuts to turn into comps, the comps to impact other transactions, and the recorded transactions to put the pressure on the popular house price indices.
House prices trend-changes and the reporting of such act like cancer; forms on day, grows, and spreads undetected until it presents in a way noticeable to the host, which at that stage can be advanced and untreatable.
Some popular indices, like Corelogic, for example, which weigh year-lagging home appraisals into the mix, might not pick up on this until it’s already in the mainstream headlines.
Beginning in early summer 2016, demand weakness became evident (versus 2014-15 when “dozens of offers” was a constant headline). Longer sales times, more list-price haircuts, and greater supply (post-crash record number of full-remodels or infill new-builds in established neighborhoods) became emerging trends.
Another indicator of peak-housing that I track – which nobody else has ever talked about – is listings and sales of houses in “undesirable locations” (i.e., on main drags; near schools, fire stations, airports, hospitals, or shopping centers). Properties like this rarely sell by comparison. They are purchased by those who want the cheapest houses in a particular area, generally stay a long time, and do little with respect to upgrades. These are the houses and yards along the main thoroughfare that look beat up compared to those two streets removed. My “undesirable location” listing indicator has been on red-alert since middle 2014 and peaked in 2015. The last time I saw as much real estate in terrible locations being upgraded, listed, and sold was in 2006.
As summer ended, list-price haircuts were increasing significantly – in both volume and size — and so were sales at well below the original list prices.
Into Q4’16, more listings were pulled off the market for the winter doldrums, quicker, than in the past several years. In other words, few wanted to market their house over the winter soft season, which isn’t always the case, especially if they had been marketing it since summer and because of much less competition.
This leaves a situation in Feb through May — when last-years failed listings and fresh houses both come onto the market for the spring and summer busy seasons – where supply is going to be much greater and demand softer than in previous, post-crash years.
As sellers re-list at, or above, the lofty prices that didn’t attract buyers the season prior a greater number of less price-sensitive sellers will accept the early, best offers than in previous years. The rationale is that this offer is where the market is at, they don’t want to deal with more months of open houses, will probably be able to buy their next house cheaper than they thought, and can finally move.
Bottom line: The resale and builder — sales & house-price — comp hurdles in 2017 are at heights, which will be nearly impossible to clear due to the tailwind last year from 2015 year-end rate plunge. This year, those significant tailwinds have turned 180 degrees…into significant headwinds due to the rate surge in late 2016 Whether house prices are actually reported down yy by the lagging indices in the first part of 2017 doesn’t really matter, as headline contraction will be the theme.
Item 1) 20-YEARS OF CASE-SHILLER: If 2007 was the largest bubble in history with “affordability” never better vis s’ vis exotic loans; the workforce growing, and decent wage inflation, then what do you call this market with house prices at, or above, Bubble 1.0 levels; far worse affordability; tighter credit; a weak total workforce; and stagnant wages?
Whatever you call it, it’s a “bigger thing” than Bubble 1.0 was.