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3-17 HANSON: HOUSE “SUPPLY SHORTAGE” is a Red-Herring / The Next “Foreclosure-Type” Cycle
Bottom line: There are plenty of houses in which to live, but a shortage of traditional, end-user, shelter-buyer supply in “certain”, generally lower, price bands, most sought after by “unorthodox” demand.
Exactly like Bubble 1.0, houses have been turned into popular financial assets for yield and trading — a whopper 37% of all purchases last year were to non-end-users — which created a “distribution” problem, hurting end-user, shelter-buyers.
The response has been to crank-up single and multi-family building, which is great for the developers, but adds to the chronic over-supply problem, which will present itself again like it did during the foreclosure crisis from 2007 to 2010.
1) Herd Mentality is the Risk; the next “Foreclose-Type” Cycle
Based on the formations and construction data, rolling oversupply is exactly where is stood at Peak-Bubble 1.0. If the market was “over-supplied’ then, it must be now as well.
Herd mentality was in play from 2010 to 2014, as insti, foreign, and private investors and speculators dove into housing head-first. So, it’s reasonable to assume selling will not be measured, or protracted.
Bottom line: If for any number of reasons, such as rising rates, “unorthodox” parties – bought a mind-bending 37% of all houses last year – decide to exit their cyclical trades and move to growth, or higher yielding investments than a 3-cap house, it will act somewhat like the years of foreclosures that hit housing from 2009 to 2014.
2) Household Formations vs Housing Completions About the Same as Peak Bubble 1.0. If the market was so wildly oversupplied then, why isn’t it now?
You hear analysts, economists, and investors say all the time things such as, “we need 1.5 million housing starts each year just to keep up with new households being formed”.
It sounds great, but it’s fake news. Blaming a “supply shortage” for end-user, shelter-buyer woes, was a simple narrative that made sense, intuitively, so it stuck.
But, the math isn’t as easy as looking at “month’s supply” for sale and saying “historically 6-mo’s supply is considered normal”, so 3-mos must be a “tight market”. Especially, in an era where rentals and purchases have never been more fungible.
The chart below tracks household formations against completed housing units from 2001 through 2016 and the rolling supply change (blue line).
Note, this does not include “vacant” short sales and foreclosures from 2009 through 2014, purchased by investors, rehabbed, and put on the market for sale, acting on market dynamics exactly like new construction. Or dwellings held and rented out, dampening demand for purchases.
Bottom line: At peak Bubble 1.0 in 2007 the market was oversupplied by 7.887 MILLION units based on household formations. Today, the market is oversupplied by 7.905 MILLION, as well.
HOUSEHOLD FORMATIONS vs. SINLE-FAM DWELLINGS and ROLLING SUPPLY
3) Most NEW CONSTRUCITON is occurring where “unorthodox” demand has created the largest “distribution” problems for end-user, mortgage-needing, shelter-buyers.
The lever, or catalyst, in this housing market is the massive supply held, as investment, speculation, or a cash-park by “unorthodox” — often price-insensitive — domestic, foreign, or corporate owners. If for any number of reasons, such as rising rates, “unorthodox” parties – bought a mind-bending 37% of all houses last year – decide to exit their cyclical trades and move to growth, or higher yielding investments than a 3-cap house, it will act somewhat like the years of foreclosures that hit housing from 2009 to 2014.
4) HANSON’S HOUSING HEADWINDS FOR 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.