A Stand-Alone Newsbite:
Housing data showing rising prices released over the past week has inspired a chorus of cheers.
(*ROLLING MY EYES*)
"The housing market is beginning to find its footing again," exulted CNBC.
"The free fall appears to be over for both sales and prices." The New York Times echoed, "The housing market is starting to recover. Prices are rising. Sales are increasing."
And the skies are clearing. And the sun is shining. And all is going to be well with the world. At least in the same fantasy land that suggests there was ever a glimmer of economic recovery in the first place.
(*SNORT FOLLOWED BY A RUEFUL CHUCKLE*)
The reality is that we are not at the bottom of this housing bust. And this is important to understand because the economy is not going to recover until housing prices are at their bottom, with toxic housing debt cleared off the balance sheets of households, financial institutions, and the federal government's bailout bucket.
The fact is that the same short-sightedness that led these sun-is-shining pundits to miss the dangers of the housing bubble the first time around, is causing them to wax ecstatic now that housing has allegedly bottomed out. However, they are focusing on short-term data and ignoring long-term trends, which tell a very different story.
It is true that all 20 cities that are tracked by the S&P/Case-Shiller index, a widely recognized measure of housing prices, saw home values increase in June by an average of 2.3%.
The National Association of Realtors also reports that existing home sales in July grew 9.4% year-over-year.
And Census Bureau data shows new home sales jumped an eye popping 26% in July from the previous year's numbers.
YES, INDEED - "BUT..."
...such short-term increases have happened before, without leading to a full-blown housing recovery.
For instance, the same Case-Shiller index saw increases from May 2009 to May 2010, only to resume its previous free fall with a vengeance. This period too was hailed as the bottoming out of the housing market. But the optimists failed to account for the effects of the First-Time Homebuyers Tax Credit that gave up to $8,000 to households as incentive to buy a home, pulling demand from the future into the present. Once that credit expired in mid-2010, prices began to fall again past the previous low.
This time around the cause of the uptick is that there were fewer foreclosures being processed over the past year which, thanks in part to the robo-signing scandal, has effectively taken existing housing supply off the market. But millions of these delinquent properties will be going through foreclosure and be coming on the market at some point, reversing the price trend currently enjoyed.
As the financial markets insider blog ZeroHedge has pointed out, the robo-signing scandal that broke in late-2010 slowed the pace of foreclosure activity by roughly a third. RealtyTrac data suggests a 1.6 million home foreclosure backlog at present. Add this to the roughly 2 million foreclosures currently in progress, according to Barclay's Capital research, the 1.5 million to 4 million homes that are at least three months behind on their payments, and the 10 million mortgages that remain underwater and candidates for defaulting down the road, and you get headwinds of several different storms coming together to create a potential foreclosure hurricane headed right for the shores of today's supposedly bottoming out housing market.
Optimists counter that distressed home sales where homeowners want quick access to cash have slowed considerably, indicating that the foreclosure inventory is not that deep. In Phoenix, one of the hardest hit markets in the country, distressed sales have declined 65% from May 2011 to May 2012. If this trend continues it means the foreclosure wave may be more of a strong storm than hurricane because the foreclosures won't be all concentrated in the second half of 2012 and early 2013. However, the downside of this is that several years of foreclosures means homes perpetually dripping into the housing supply and putting downward pressure on home prices.
OK. HERE'S WHERE THE AUTHOR GOES OFF THE RAILS. THING IS... DOWNWARD PRESSURE ON HOME PRICES IS GOOD! THE REASON HOUSING PRICES MUST GO DOWN IS THAT THEY'RE STILL TOO HIGH TODAY! FORGET THIS "UPSIDE DOWN" NONSENSE! THAT ONLY MATTERS IF YOU'VE GOTTA ABSOLUTELY SELL RIGHT AWAY AND YOU HAVE NO CUSHION TO ABSORB THE LOSS.
AND BEYOND THAT, EVEN THIS ONLY MATTERS IF GOVERNMENT IS GONNA USE MY MONEY - AND YOURS - TO BAIL THESE PEOPLE OR THEIR CREDITORS OUT!
And this slow wearing down on the housing market will do just as much damage to housing prices as a full force hurricane of foreclosures, crushing the market over the next few months.
NO. FORGET "DAMAGE TO THE HOUSING MARKET." WHAT TRULY DAMAGES AMERICAN SOCIETY IS WHEN THERE'S A DISCONNECT BETWEEN WHAT PEOPLE CAN REALISTICALLY AFFORD TO PAY FOR HOUSING AND LIVING EXPENSES AND SAVING VS. THEIR INCOME! AGAIN... HOUSING IS TOO EXPENSIVE EVEN NOW!
Eventually those foreclosures in the system will have to work their way through the pipeline adding to the supply of housing and putting downward pressure on prices.
GOOD! CONGRATS TO THE GENERATION COMING OF AGE AND SEEKING THEIR OWN HOUSING!
The housing supply problem could get even worse if investors decide to dump the homes they've been buying up into this market of rising prices.
DON'T... LET... THEM... DUMP...!!!
MAKE 'EM STAND BY SALES/PURCHASE CONTRACTS!
In 2011, 27% of all home sales were to investors rather than families looking to live in the homes.
AND HERE LAYS THE PROBLEM! THESE PEOPLE SHOULDN'T BE ALLOWED TO SIMPLY "BAIL OUT" (AND BE BAILED OUT!) WHEN THEIR BETS DON'T GO THEIR WAY.
These investors will be looking at the surge in housing prices and trying to time the best place to sell and turn a profit. If they decide to dump all these properties at once it could put serious downward pressure on prices in certain areas and add to that potential foreclosure hurricane. Alternatively, they could slowly sell these properties over time like foreclosures slowly dripping into the market, adding to that perpetual downward pressure on housing prices.
If excessive housing supply is going to depress home prices, lower than usual demand is to going to sink them.
EXCESSIVE... HOUSING... SUPPLY...
SUPPLY AND DEMAND, FOLKS! LET'S ACCEPT - AND REJOICE - IN ACKNOWLEDGING THAT THIS SHOULD BE THE DETERMINING FACTOR IN HOUSING STARTS AND SALES!
Usually younger people replace seniors as homeowners. But young folks coming of age at a time of declining housing prices, unstable markets, frustrating employment prospects, and stagnating income are wary of buying. Not only have aggregate homeownership rates fallen to levels last seen in the mid-1990s, but the 25-and-under cohort has already seen declining home purchase participation over the past two years relative to what it has typically been in the past.
SO... WHAT...?!?! IT'S CALLED RECOGNIZING REALITY! IT'S CALLED PRUDENT DECISION MAKING! THIS... IS... GOOD...!!!
This cohort usually represents a small percentage of overall home-ownership levels, so the immediate impact of this is limited. However, the trend suggests that when these individuals reach the age cohorts that are the predominant home buying group, they will already be less likely to be interested in buying a home.
AND...?!?! SO...?!?! ARTIFICIALLY SPURRED DEMAND IS NOT THE ANSWER - IT'S THE PROBLEM! IT'S WHAT CAUSES ECONOMIC BUBBLES IN THE FIRST PLACE! HAVE WE LEARNED NOTHING...?!?!
The nature of household balance sheets will be another factor impacting demand levels. Household debt is only de-leveraging slowly and this will limit the ability to take on new mortgages...
THANK GOD HOUSEHOLD DEBT IS DECLINING! THIS... IS... GOOD...!!!
Down payments have grown (appropriately) higher and are likely to remain that way...
AGAIN... GOOD...!!! G*O*O*D...!!!
Unemployment continues to be a problem; and incomes are stagnant.
ACTUALLY... INCOMES ARE DECLINING RELATIVE TO INFLATION. (AND I'M TALKING RELATIVE TO "OFFICIAL" INFLATION - WHICH IS DELIBERATELY UNDERSTATED.)
What's more, even the current level of housing demand might be unsustainable in the future. Mortgage rates are at historic lows - but they can't remain that way forever.
LET'S HOPE THE AUTHOR IS CORRECT! (SOMEONE TELL BERNANKE!)
The Federal Reserve has promised to keep the federal funds rate a zero until at least 2014, and is considering buying more mortgage-backed securities to put even more downward pressure on long-term mortgage rates.
ADDING FUEL TO THE INEVITABLE FIRE...
SERIOUSLY, FOLKS... THE FED IS OUT OF CONTROL.
But eventually interest rates have to rise.
The average 30-year fixed rate mortgage hit 3.53% this week and could fall further - but not much further.
(At a certain point, it is not worth it for a bank to lend money for 30-years and only get paid 2% for taking on the interest rate risk.)
When mortgage rates do increase they will lower housing prices even more. The "bottom" right now is a false bottom created by these artificially low interest rates. And that bottom will drop further. Exactly where and when the market will bottom out depends on many factors - including what policy makers do related to: underwater mortgages, interest rates, and the mortgage giants Fannie Mae and Freddie Mac that are still being run by the government four years after essentially being nationalized.
We are currently in a drifting cycle where pressures to prop up housing have the market only slowly trending downward with occasional upward price swells like we are experiencing now, only to trend back down again. The ideal scenario would be that housing prices reach a multi-month long stretch of stability, but without the risk of interest rate hikes or a foreclosure tsunami threatening to drag the market further down. And then once household debt has de-leveraged and the labor market is back on a stronger footing...
JUST CURIOUS... WHERE ARE ALL THESE JOBS GONNA COME FROM? (SERIOUS QUESTION!)
...we'll be in a better position to determine whether we've reached a bottom of the housing market.
Only then can policymakers clearly determine the right steps for making sure they don't get in the way of or derail a recovery.
ANOTHER QUESTION: IF THESE... er... "POLICYMAKERS" HAD/HAVE WHAT IT TAKES TO "DETERMINE THE RIGHT STEPS," THEN HOW ARE WE NOW IN THE SHAPE WE'RE IN WHEN "THEY" WERE RUNNING THINGS ALL ALONG...???
GOOD QUESTION... RIGHT?
Mr. Randazzo was kind enough to email me the following note...
Mr. Randazzo was kind enough to email me the following note...
Thanks for sending along the link Bill. It appears you misunderstood the tone of my piece. I happen to agree with everyone one of your points. If you look at this list of papers, op-eds, and blog post you'll find that for the past several years I've argued (and testified in Congress) that we want low housing prices not high prices.
If you're interested in directing your readers to other papers that support your view, I'd [suggest] this paper and the following quote:
"However, higher house prices are not a good thing in and of themselves. Typically we associate an increase in quality and a decrease in price a sign of innovative growth, and the same should be said for housing. Indeed, an increase in nominal housing prices is only “good” if housing is viewed as a pure investment asset. In contrast, lower housing prices increase the affordability of home ownership. (You don’t hear many people complaining that the price of gas has fallen; that’s because the majority of people don’t own gas as an investment asset.)"
Most of my piece was merely observation, like the fact that there will be fewer young people buying homes, not a desire to see that change necessarily or want the government to do something about it. Pointing out that a slow drip of foreclosures will put downward pressure on housing prices and hit them just as much as a hurricane force at once is not taking a policy position whether that is good or bad.
I happen to think we need prices to fall further and that is a good thing, but it appears you added context to what I was just highlighting.
You'll note my last line was about policymakers making sure they "don't get in the way" or "derail;" very specifically worded to not suggest I want them to do anything in the first place.
We're on the same side here.
Also see [the following].
I very much appreciate Mr. Randazzo's clarification and apologize for the original misunderstanding of his position on my part!