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BOTTOM LINE: Here and now, houses have never cost more to the end-user, mortgage-needing, shelter-buyer due to historical prices and the rate surge. Based on decades of data in this note, a reversion to the mean is inevitable, soon.
- strained, end-users competing with record speculation for fewer houses in the same, lower-price-bands while there’s an abundance of higher-price band houses and rentals (“mismatched markets” & “distribution crisis”);
- investors and speculators making up a massive ~40% of all purchases last year driving US housing, while bonds and bond-like investments are in less favor this year;
- tidal-wave of en-vogue, apartments and condos in core regions rushing to market over the next two years;
- immigrant/immigration uncertainty;
- AND, increased cost of debt service, sky-high auto and revolving debt, out-of-control healthcare expense, retail spend deceleration, and variety of other headwinds blowing stiff this spring and summer;
…I struggle to come up with a credible forecast on where incremental demand and purchasing/pricing power will come from this year.
ITEM 1) REVERSION TO MEAN INEVITABLE. NEVER, has it required more ANNUAL INCOME to buy the average priced Builders and Resale House.
IMPORTANT: Note, how over FOUR DECADES — due to the power of continually dropping rates and easing credit — the annual income required to buy the average priced house has remained constant despite house prices soaring.
BOTTOM LINE: The income/house price divergence is so completely out of scope that surging incomes, plunging rates, and/or an immediate roll-out and retail acceptance of Bubble 1.0 type exotic credit is needed, OR, dumping house prices will be catalyst for the inevitable “reversion to the mean”
A) BUILDER affordability completely diverged from decades of history.
B) RESALE affordability completely diverged from decades of history.
ITEM 2) BUILDER & RESALE House Prices vs Income
BOTTOM LINE: The income/house price divergence is so completely out of scope that surging incomes, plunging rates, and/or an immediate roll-out and retail acceptance of Bubble 1.0 type exotic credit is needed, OR, dumping house prices will be catalyst for the inevitable “reversion to the mean”.
A) BUILDER income / house prices completely diverged from decades of history.
B) RESALE income / house prices completely diverged from decades of history, other than in PEAK-BUBBLE 1.0.
ITEM 3) Most Obvious 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;
- 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) while producing an artificial “shortage” of houses for traditional, end-user, shelter-buyers;
- Investor/speculator demand
- household formations vs resi construction puts rolling supply at the exact levels, as peak-Bubble 1.0;
- 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 hubs for 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 – 20% are in default of student loans — 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.