The housing market is quickly becoming the focal point of the market tug-of-war. Many pundits and analysts are arguing that the housing market has bottomed, but recent data points to potential potholes in this idea. As regular readers know, I believe the strength in housing has been mostly due to seasonal factors and the first time home buyers tax credit. I still believe housing is in a long-term secular bear market and that future performance is likely to be very similar to past bubbles. I.e., flat:
In an effort to reflect both sides of the coin David Rosenberg brings us these excellent points from both the bulls and the bears:
But the bulls will point to the fact that:
- Sales are up five months in a row;
- Sales have reached an 11-month high;
- Sales are up 30% from the January trough;
- Inventories have collapsed to their lowest level since Nov/92;
- The unsold inventory backlog is down to 7.3 months’ supply from 7.6 in July and the 12.4 MS peak at the turn of the year.
The bears will point to:
- Sales were all in the West as builders rapidly unwind inventories — up 12.2% in one region; the rest of the country posted a 3.0% decline. So, hardly a broad-based pickup.
- Sales were driven by massive deflation — median new prices collapsed 9.5% MoM to $195,200 — the lowest since October 2003.
- A growing share of homes are being priced below $150k — a 29% share of all sales; barely over 2% of sales are now comprised of homes priced over $750k. Thank you first-time buyers, but what happens when the tax credits expire?
- It took the builders of median of 12.9 months to find a buyer for their completed homes … a record: a year ago it took them 9 months to unload the property.
- While home sales have now managed to stabilize on a year-over-year basis, all of the growth is on plan or “spec” — sales of finished product are down more than 20%
Perhaps most overlooked in the housing story is the shadow inventory. As with all bubbles, we have the early buyers (in this case the first time home buyers) who come out to nibble when they believe prices have stabilized. Unfortunately, the laws of supply and demand always reassert themselves and take prices sideways or lower for years to come. The shadow inventory will be the primary culprit on the supply side of the equation over the coming years. Rosenberg elaborates:
The Shadow Inventory Is Still Huge:
The bulls had a field day with the “improved” housing inventory data in the August reports, but what they can’t explain is why it is that prices continued to deflate. That can only mean that at the last price point, there were still more sellers (supply) than buyers (demand). Indeed, the “shadow’” inventory that does not show up in the official data is closer to 7 million housing units (equivalent to two years of supply!) when you add up all the current foreclosures, the homes entering into the foreclosure process and the number of mortgage borrowers who have not made a payment in the past year.
Let’s examine the data:
- As of July, there were 1.2 million loans that had just entered the foreclosure process.
- There are an additional 1.5 million existing units making their way through the foreclosure process.
- And, a further 217,000 homes in which the borrower has not made a mortgage payment in the past year, but the lender has yet to file notice. In other words, 17% of the homes that are a year past due or more are not yet in foreclosure, up from 8% a year ago.
This inventory has yet to hit the market, but it will. So pundits that get excited about two or three months of Case-Shiller data are spending too much time looking out the back window. More deflation is coming in residential real estate — this bear market in housing ain’t over yet. Remember, homes that are foreclosed typically go on to the market at discounts ranging between 10% and 50%.
Perhaps my favorite piece of classic bubble data is this ad from Hovnanian. They are not only calling the bottom but predicting a “bounce”. If this doesn’t stink of a suckers bet then I don’t know what does. Classic bubble mentality….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.