Since the great crash I have always said the same thing about a housing “bottom”. That is, “it will happen when nobody is looking for it; when my Uncle Jack isn’t bragging at Thanksgiving dinner about how much money he made ‘flipping’ houses; when people treat houses as ‘shelter’ and not a speculative ‘trade’; and finally when people understand that housing is not ‘the biggest investment’ of their lives. And we are a long, long way away from any of my indicators occurring…we have gotten further away than we have ever been over the past year. In fact, I would argue the speculative fervor is greater than in 2005 due to zero interest rate policy; the Fed’s quantitative easing driving institutions into single family housing as rentals in search of any yield they can get; the banks and gov’t artificially driving down supply through the ‘great mortgage mod bubble‘; and the outright outlawing of foreclosures in certain states. As such, we should not expect an easily identifiable and definable “recovery”. Rather significantly increased volatility as housing acts like high-beta, speculative, tech stock (I.e., up double digits one year, down double digits the next…and so on). Certainly, do not look for a “durable” recovery after the banks and Fed have manipulated demand and supply metrics to such extremes in the past two years. There will be payback in the form of another housing market contraction, the severity of which is the big question.
The following note drills down on many of the common misperceptions using hard housing data from the state of CA for Feb…”housing speculation central”. It also points out major housing market headwinds that will create flat to negative 2013 rates of change. Market forecasts and sector stock multiples are forecasting sales, price and home improvement gains similar to what we saw in 2012 YoY. This will not occur.
Summary: Following nearly 20 years of an unprecedented housing sector and mortgage credit expansion/bubble that resulted in the greatest housing and mortgage credit collapse in history one must be hopelessly optimistic or recklessly naive — or both — to think that 2012 was “the” durable bottom.
1) the Homebuyer tax credit of 2009/10 also created a “short squeeze” in the housing sector that everybody thought was a “durable bottom”;
2) at least 50% of all mortgage’d homeowners coast to coast are Zombies…dead to the housing market equation — unable to freely sell and rebuy — due to negative equity; “effective” negative equity (not enough equity to pay a Realtor 5% and put 10% to 20% down on a new house); or insufficient income or credit needed for a mortgage;
3) banks and the gov’t have turned up to 8 million legacy distressed borrowers into underwater renters of their own houses by the use of new-vintage, higher-leverage, worse-than-Subprime loans (aka Mortgage Mods) that re-default at about the same clip as legacy Subprime loans defaulted from in the first place;
4) thin and more transitory demand cohorts — the first-timer and institutional/private ‘buy and rent’ speculator “investor” — make up half housing demand;
5) and repeat buyers — historically housings’ primary demand AND supply cohort — remain structurally unable to carry the sector until significant legacy first and second lien de-leveraging occurs.
As such, the CA housing data for February presented as follows highlight why calling “the bottom” is a risky (and early) proposition. I will agree the 2012 “bottom” (and 2010 “bottom”) are all part of a “bottoming process”. But so was the Homebuyer Tax Credit stimulus “hangover” of 2011 and the much larger Twist hangover that will grip housing in 2013/14.
To all those who don’t care about the CA housing market, it is important to remember that CA is hugely important to the country economically speaking and tends to lead housing and mortgage lending trends good and bad. And the housing trends detailed below can also found in most all bubble/legacy distressed/first-mover “recovery” regions around the nation.
CA Feb Home Sales…FLAT for 5-straight years. YoY rate of change now flat to negative. The first negative MoM and YoY print since 2008.
Bottom line: Beginning in Q3 2011 and continuing through late 2012 housing & finance enjoyed YoY comparables against very weak housing market activity — the severe hangover created by the perma- Homebuyer Tax Credit stimulus that sunsetted in mid-2010 — while at the exact same time being injected with the greatest rates jet fuel stimulus in the history of the known universe a la Twist. On the supply side, bank portfolio mortgage modifications — ultimate in legacy loan high-risk can-kicking that leaves homeowners as over-levered, underwater renters of their own house — surged to several million units.
Post-Crash Stimulus and Hangover Cycle Backgrounder
The 2012 Spring/Summer peak-season YoY “hangover to jet fuel” stimulus imbalance created the ‘appearance’ of much stronger market activity than was really occurring. But most importantly, it made for a sharply positive rate-of-change in the deeply cyclical housing market that analysts’ could extrapolate forward at the same pace every year for a decade into the future making for a situation in which fundamental analysis and PE ratios are thrown out the window. But if all of a sudden data begin to show that the house sales volume and pricing rate of change has flattened, or worse turned negative (happening now in key leading indicator markets around the nation), then the high-flyer names in this sector will have a bad year one month.
Remember back a few years…this exact same happened. A YoY massive stimulus imbalance occurred beginning mid-2009 through mid-2010 on the Homebuyer Tax Credit. There were “lines down the street making multiple offers”, the Case-Shiller went positive YoY for several months in a row, and consensus shifted to a “full-blown housing market recovery with escape velocity”. Nobody even wanted to hear when ‘some’ cited major pulled-forward demand occurring especially in the first-time buyer cohort. Bulls called the tax credit “de minimis”; we called it “the first, best, and last chance millions of homebuyers will have to buy a house” with nothing down on an FHA loan when monetizing the credit, which was allowed in 38 states for FHA lending purposes. In short, the month after the tax-credit sunsetted in mid-2010 house sales volume fell 30% MoM and the first major “stimulus hangover” was born. This hangover lasted until rates fell the most in history over the shortest time period ever — rates down 30% in Q3 2011 — in anticipation of Twist.
Yes, the Twist-induced 30% drop in mortgage rates and historic low UST yields have been a much more powerful and long lasting stimulus than the Homebuyer Tax Credits. And this is being reflected in the numbers. But at the end of the day, “the greater the stimulus the greater the hangover that follows” and the Tax Credit gave us a great look at that.
And now — after a year and a half of the “Twist effect in full force — rates are up, investor and first timer demand cohorts are burning out, and repeat buyers are only slightly less structurally imprisoned. But obviously, sentiment is much better. It certainly will be interesting to see how many houses Mr Sentiment can buy at 10% over ask/appraised value — at 1% to 3% rental cap rates — vs last year.
The CA Feb Housing Data…What “Durable Recovery with Escape Velocity”? I see a market bouncing along the bottom, muddling through.
The data in this report fly in the face of loudest drumbeat of one-way consensus opinion and hyperbole since David Lereah was pounding the table on CNBC several times a month from 2006 to 2007 telling everybody there was “nothing to see here” and inciting short squeezes in doomed stocks that would blow your short book apart.
– First double drop…lower MoM and YoY — sales volume since 2008
– First Feb MoM CA sales volume drop since 2008
– First Feb YoY drop in 2 years
– Only the 2nd YoY drop (of any month) since July 2011
– Largest YoY drop (-3.1%) since 2010
– Mix-Shift no longer a tailwind
– “Median” house prices back to Sept levels — down 4% — after peaking for this cycle in Dec (odd month to peak but housing went straight until Dec on the “mix-shift effect”)
1) Feb CA House Sales – FLAT for 5-years. Still “bouncing along the bottom”.
If one were to look at the chart below knowing nothing about the US housing condition they would definitely say “the market crashed, bounced, and has been bouncing along the bottom for 5 years”. But that’s not what consensus believes or what is priced into sector stocks…far from it.
2) Feb Total House Sales (blue) vs. Distressed (red) vs. Organic (green)
Total house sales bouncing along the bottom (blue), distressed is plunging (red) artificially, and organic (green) is increasing; the latter a certain positive on a relative basis. Then again, organic sales down 57% from 2005 is a testament to just how structurally damaged this housing market really is and how the only cure for it is lots and lots of years of de-leveraging. On a YoY basis organic sales look great…but on an absolute basis the number is horrifying.
Bottom line: After almost 6-years of ZIRP, 4-years of QE, and 3 years of blowing a mortgage mod bubble larger in size than the entire pool of Subprime loans in existence in 2007 organic sales remain down 57% from 2005. This highlights — in Zombie color — the structural chaos from 60%+ mortgage’d homeowners in the state of CA either underwater, “effectively” underwater, or lacking the credit or income needed to get a mortgage loan…and how much de-leveraging still needs to occur.
The menacing problem here is that organics lack the firepower to really ratchet up demand. Thus, when investors and first-timers go away — the hangover begins — support for this housing market will be far thinner than it ever has before.
another look at CA Feb organic sales by itself. On a YoY basis this chart is great. But on an absolute basis it is horrifying.
When looking at this chart on an absolute basis the structural damage is obvious. I see a CA housing market in which 450k houses transact per year up only 8k house sales per month from the worst February on record. This is still down 57% from 2005. Or viewed another way, a Feb organic sales number only 1,100 sales greater than the past 5 year average of organic sales.
3) House Prices…Mix-Shift is no longer a tailwind; in 2013 mix-shift turns into “mix-shaft”.
Median house prices are highly influenced by the “mix-shift” as shown in the chart below. The correlation is perfection. But now with foreclosures at an (artificial) pre-crisis low due to the mortgage mod bubble and foreclosure outlawing the “mix-shift” is no longer a tailwind. In fact, due to “investor” burning out — on the verge of becoming a headline story on rental price cutting wars and far lower cap rates than any had modeled — the days of bidding 10% to 20% over appraised value looking solely at the yield are ending quickly. This headwind will have significant consequences for house prices.
4) A look at CA Feb house prices back to 2005.
Yes, the 2013 YoY jump in median prices is impressive but the absolute level not so much. It always very important to keep housing analysis in the context of “post-crash” in order to seek out trends.
The price increase shown below is almost exclusively due to three “transitory” factors…
1) a 15% increase in house purchasing power was created in 2012 over 2011 from the Twist plunge in rates (5.25% vs 3.5% on Twist) from the 72% of buyers who use a mortgage loan. The problem here is that in 2013 there is no increase in purchasing power over 2012...this is a huge headwind to house prices and sales volume.
2) New-era Wall Street landlord investors deploying other people’s money without any regard for “list price” or “appraised value”. These “investors” look exclusively at the rental return and pay cash…so an house valuation “appraisal” and “list price” mean little. It is common for these new-era, Wall Street landlords to pay 10% to 20% OVER appraised value and/or purchase price. But this can’t last forever…in fact, already in leading indicator regions we follow rents and subsequently the pervasive over-bids have retracted sharply. This is another huge sales volume and house price headwind for 2013.
3) Banks and the gov’t originating 8 million new-vintage, higher-leverage, worse-than-Subprime loans in the past 3 years in order to abate foreclosures. This last headwind is one nobody tracks. I think that the new Subprime loan bubble — disguised as “mortgage mods” that help homeowners and that is LARGER than the original Subprime loan bubble — and the perpetual lengthening of the foreclosure timeline are huge risks to house prices. This is where all the “Shadow Inventory” went…into the Great Mortgage Mod Bubble.
Bottom line: Unless rates drop below the level of last year, households get a huge tailwind of income or lower taxes/expenses, new-era investors get comfortable with sub 2% rental cap rates, or we get a swift wave of immigration from those will pockets full of cash then the next step for CA median house prices is retracement.
Work ups of other “recovery” regions such as Arizona and Nevada look eerily similar.
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