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Tuesday, February 19, 2013

Knock, Knock, Knocking On Reality's Door

The residential construction market is definitively off its lows, but a little bit of restraint to the euphoria is warranted:

The situation is improving, but by any realistic standard, US housing remains in a depression and clearly will for years to come. It is worth noting that the NAHB index took a slight wrong turn in February, dropping from 47 in January to 46. Of more concern is that the present sales index component fell a bit from 52 to 51, and the traffic component fell to 32 from 36. Expectations for future sales remained high.When current indicators are worsening, expectations mean less. This despite the NE boost from Sandy!

That we should remain at these levels, despite staggeringly low mortgage rates, is a rather frightening prospect. Mortgage rates will go no lower. If anything, risk premiums on mortgages will rise, and interest rates are apt to rise somewhat. That will tend to exert downward pressure on home prices.

The problem obviously is lack of money in the homebuying prospective population. There will be no quick fix for that. Downpayments, even at the 3.5% FHA level, plus any sort of reasonable debt-to-income levels, mean that the US economy must age out of this depression. The younger people who have gotten jobs have to pay off their student loans and accumulate some cash. The only thing that's going to fix this RE market is first-time buyers.

I am not convinced that all is well due to the approximately 5 months of supply on listed homes, because home vacancy rates are still at staggeringly high levels compared to history:


That's got to come down to at least 2.2 before you can see big new construction gains. We have years to go! I do not believe the NAR stats, to be honest.

Still, I think it is very fair to say that new residential construction is no longer a drag on the US. That's a big plus. I don't know how some of the administration economic forecasts are projecting 4% GDP growth rates for the 2015/2016 years. I think there is some irrational exuberance involved. Or major drinking. Or recreational drugs. The US could not possibly see growth rates like that until home construction returns to more normal levels, and that can't happen until mortgage delinquency rates return to more normal levels:
 This is not going to be a quick recovery.

What will determine the longer term future for the domestic housing segment will be the growth of at least full-time employment. You do not fund a home purchase from part-time employment, but from full-time employment with benefits. We are seeing improvement in this measure, but it is slow going:


As younger people begin to get better jobs, they will then need years to get themselves in a fiscal position to contemplate homeownership.

Comments:
Couple of observations.
The remodel index showed no bounce from Sandy.
More importantly there will be a lot of boomer liquidation of housing as they reach retirement so the "vacancy" rate is not going down for a very long time.
 
Rob - without the influx of first-time buyers, the actual occupancy trend is down.

We have backed up household formation, but older people already tend to have houses and the depressed incomes and higher student debt levels of the younger crowd will be a factor for years to come.

Also, coming retirees will have lower incomes and higher expenses, so I think they will be less likely to maintain two homes.
 
Starting smaller families later life doesn't bode well
for housing or consumer consumption in general. Look
for "immigration reform" to really take off with the Chamber
of Commerce pushing cheap labor and consumption to the
detriment of American workers.

Sporkfed

 
Hasn't that already happened? It seems to me that's been the strategy for over a decade, and that it just keeps intensifying.

Certainly the low birth rates associated with this economic downturn aren't going to change the equation. You would think that our labor slack would, but really even for tech hires, the companies would rather hire younger foreigners than 50ish US boomers. God help you if you are 60 and hunting.
 
That's why I believe nothing gets better until we change
The tax code and trade policies. If a lower standard of
living is in the cards, let's at least put in place policies that
favor US workers. P
Sporkfed
 
I think that new home construction will be stagnant. PE buying bulk foreclosures and getting paid to hold the property for 5 years will allow for vacancy rates to drop..

The PE purchases of real estate is much bigger than let on. The fed is backing a rentier nation...an American reit....
 
honestcreditguy, that's interesting. I started looking around to see what you might be talking about and found this link.
http://www.usatoday.com/story/money/business/2012/10/21/investors-single-family-homes/1634689/
I'd like to know more about where you are coming from here. Can you suggest other sources? Thanks
Ed
 
Another factor could be the latest residential building codes. Sprinkler system are now required in single-family homes built after 2011.

If you have a hard enough time coming up with the downpayment, now you have another 7K expense to finance.
 
Honestcreditguy - Uh-huh. In some areas that are doing well, they are snapping new listings up with cash sales before most prospective homebuyers can even bid on them. It's really happening.

They also have been out there for well over a year making deals on foreclosure batches with banks.

Hey, Einstein would say that if you do the same thing, you'll get the same result. There is no doubt that rising home prices in some areas are due to PE investment. The stock market is somewhat oversold, bonds are quite unattractive, and belief in $200 a barrel oil is failing.

85 billion a month in bond buys has to go SOMEWHERE.
 

So after 5 years, Bernanke's helicopters have finally hit the mark? Astounding.

Too bad all that money destroyed middle-class incomes in the process.

 
Neil - this is a big part of what they have been trying to accomplish, but it couldn't happen until prices had corrected substantially. PE investors will rarely start buying until the market has at least come close to bottoming. They make money when they buy, not when they sell.

Now in a couple of years we will begin to see risks related to these purchases.

Still, we'll remain off the bottom on housing, but it is also possible that real first-time buyers may take another hit from a deeper recession.

I think the US is in recession now because of the price corrections I see in stores. It LOOKS very recessionary. But I don't think it's deep recession.

A more severe recession could occur if MV sales start to drop out. That depends on lending. I'm dubious. I think MV sales may have peaked. The types of ads I am hearing for used cars etc seem to show that it slack, but part of that may be tax returns. Dealerships amp up this time of year to try to get their chunk of people's tax refunds.

In late February and in March the retail environment gets better due to low-income tax refunds, and that will be strongly felt this year. After that, it's a crapshoot. I'm reading through the Bundesbank February monthly report, and while they are stopping short of ritual disembowelment, the tone is definitely Erdaemmerung.
 

You mean markets can't be supported by the printing press until after they've bottomed anyway? Say it ain't so!

Too bad the Fed doesn't know about such things.

 
MoM,

Subprime credit lending in ABS paper is crazy! The Govt. opened up the spigots via Ally. The old Gmac..they not only lowered credit underwriting standards for the GM and Chrysler brands, they went out into the secondary market to capture more dealers other than their captives GM and Chrysler. The fallout is other secondary lenders had to tweak their underwriting to keep volume share on abs paper. A virtuous circle we have seen somewhere before.

Forced to move metal, what better to have a subprime lending program to back that metal..

The used car bubble is almost at peak..we all could have bought trucks and SUV's in 08-09 and made some great profit..who would have thought..not me and I'm in the space....

The repositories are also changing thier score algos to compensate for the credit score destruction over last 5 years...

crazy times..
 
Ed,
here ya go

http://realtormag.realtor.org/daily-news/2013/02/14/billionaire-goes-home-buying-spree?om_rid=AAClPO&om_mid=_BRHSZjB8w3x95i&om_ntype=RMODaily

http://www.azcentral.com/arizonarepublic/business/articles/2012/07/27/20120727mystery-buyer-snaps-up-foreclosure-homes.html?nclick_check=1#ixzz221tkEgdY

http://www.reuters.com/article/2012/03/20/us-usa-foreclosures-investors-idUSBRE82J12M20120320

http://www.businessweek.com/articles/2012-07-26/private-equity-bets-billions-on-foreclosures

there are tons of articles...the same people whom create the bubble are now buying the homes for pennies on the dollar....

Pottersville is real!
 
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