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Bottom line: The “durable”, rate-surge SLAMMED purchase-power by over 11% from last year for end-user, mortgage-needing, shelter-buyers going into the busy, spring and summer seasons (see chart and math in Item 2 below)
The equals a best-case hit of $34k on a $300k purchase ($68k on a $600k purchase, etc), which must come from somewhere.
My data and research points to sellers (private and builders) taking the brunt of the loss by pricing houses more competitively from the start, accepting best offers sooner, losing counter-offer battles, and/or increasing incentives.
- To Main Street, the sudden hit to purchase-power impacts the move they make next; price-band, down-payment, interior & exterior upgrades, and furnishings, among many other things. Some will simply not be able to sell ad/or rebuy on such a hit to the net proceeds.
- To builders, that set prices based conditions of the past — or, who went into “contract” pre-rate surge – and have been experiencing margin pressure for quarters, this is a wallop; less demand, further margin deterioration, and increased fall-out of up to 20%, over and above, typical and predictable fall-out.
- To speculators, buying to rehab and flip, their business model has been changed considerably going forward. In fact, many have watched in horror over the winter, as dumps bought at top dollar last year – into which much more was injected based on financial models of similar conditions this year — will lead to losses.
- To investors buying to rent, as a bond-alternative trade, that’s for a different report. But, if bonds and other alternatives are being sold with such vigor, it probably means that houses meant to be bonds won’t experience an acceleration in demand.
1) Deep, Affordability Challenges for Buyers and the End of Aspirational Pricing Will Lead to Weak Sellers this Busy Season
When analyzing the rate-surge impact on housing, most analysts and economists simplistically look at the monthly payment and conclude something such as, “the rise in rates is only about $200/mo and not too hurtful to the macro housing market”.
But, it doesn’t work like that in real practice on Main Street, which most analysts, or economists, know little about.
To Main Street, it’s all about the leverage-in-finance and how much house the $200/mo buys, which is about $34k in house price.
Further, because in the heat of the deal, most buyers always buy the maximum for which they qualify using contemporary mortgage guidelines and rates, it means….
- Buyers will lower their expectations and shop for lower-priced houses, where the inventory is the tightest.
- And/or, sellers of higher priced houses, where there is more supply, will drop prices to meet the new purchase-power of the post-rate-surge market.
My data and research points to #2 being the highest likelihood in most cases. In fact, I am already seeing this play out throughout the west coast this year.
This is it, everything has changed. This is not the same housing market as last year. In fact, there is a credible argument to be made that this housing demand cycle peaked sometime in late 2015.
2) The popular theme among analysts, economists, and investors — that the rate surge is great for the housing market and this year will show larger gains than last year — is simply not credible.
Real, Main Street Loss of Purchase-Power from Rate-Surge
Note, this chart implies a 20% down-payment, which is highly aggressive. If the down-payment is less, rates are higher, mortgage-insurance is required, and affordability is worse.
3) BONUS…HELP ME ADD TO THIS LIST…
Housing Market Headwinds in 2017
I review daily, whether the following features of this housing market are, in fact, wildly bullish, as analysts, economists, and stock prices conditions suggest. Or, downright bearish, as intuitively, they seem.
- Surging mortgage rates at 3-year highs, effectively making house prices to end-user shelter-buyers over 11% higher than last year, which has to come from somewhere;
- end-user, shelter-buyer affordability at post-crisis lows, which doesn’t promote buying, with homeownership at 50-year lows;
- the income needed for end-user, mortgage-needing, shelter-buyers to buy the average priced resale, or new home, at least 75% greater than at peak bubble 1.0, using contemporary mortgage guidelines, based on my proprietary, real-world, affordability models;
- builder New Home Sales at early-to-mid 1990 levels, even after 7-years of ZIRP and trillions aimed directly at housing;
- investor/speculator demand at an historical 37% of all transactions in 2016, clearly supporting the entire US housing market (sales and prices), and an impossible hurdle to jump in 2017;
- institutional demand for single-family rentals off sharply and some beginning to liquidate;
- middle-high-to-luxury segment dislocations in core markets across the nation, leading to increased and larger list-price reductions earlier in the selling season than in recent years;
- “mismatched”, core markets leading to weak pricing-power and mark-downs into spring/summer when comps are the steepest since 2006;
- a few massively outperforming regions, such as Seattle & Portland, loaded with less price-sensitive tech & foreign capital and rehabs & flips, artificially skewing the popular, national house price indices higher;
- multi-family rental demand and prices dropping, vacancies rising, and a flood of supply to hit over the next two years;
- foreign capital for rentals and lock boxes drying up;
- Immigration uncertainty, especially H1B and EB5 visas, which drove housing in core, STEM-centric markets;
- first-timers saddled with so much student, auto, and card debt, a large percentage are indefinitely sidelined;
- and the tallest sales and price comp hurdles since 2006 hit this spring and summer;
And afterward, every day, I struggle to come up with neutral to bullish catalysts going into the pivotal spring and summer “busy season”, when most of each year’s house price mark-ups and demand increases traditionally occur.