A: Bill over at Calculated Risk is a must read for anyone addicted to the financial/connected blogosphere. This comes about a week after Barry Ritholtz discussed his latest thoughts on housing. And now we got Manhattan appraisal giant Jonathan Miller’s take on Bill’s ‘housing bottom’ call yesterday. Lots of mixed views here so lets discuss some broader housing trends today and take a break from micro-analyzing Manhattan; a market that has been in a world of its own over the last three years.
Lets go in time order here…first Ritholtz discussed housing with Blodget on Yahoo Finance’s Daily Ticker as the “housing bottom” bandwagon starts to grow:
Barry Ritholtz of The Big Picture: “No evidence of a bottom, prices continue to fall, volumes are anemic..despite record low interest rates…the data is pretty explicit, year over year prices are lower and we are just about back to fair value if u look at things like median income or % of GDP, but if this is the bottom than this would be the first time that a major boom & bust hasn’t careened past fair value into deeply oversold conditions..you don’t just mean revert back to fair value.” Then we saw Bill from Calculated Risk make his call yesterday with the following important notes to consider.
Bill McBride of CR: There have been some recent articles arguing the “housing bottom is nowhere in sight”. That isn’t my view.
First there are two bottoms for housing. The first is for new home sales, housing starts and residential investment. The second bottom is for prices. Sometimes these bottoms can happen years apart.
For the economy and jobs, the bottom for housing starts and new home sales is more important than the bottom for prices. However individual homeowners and potential home buyers are naturally more interested in prices. So when we discuss a “bottom” for housing, we need to be clear on what we mean. For new home sales and housing starts, it appears the bottom is in, and I expect an increase in both starts and sales in 2012.
And it now appears we can look for the bottom in prices. My guess is that nominal house prices, using the national repeat sales indexes and not seasonally adjusted, will bottom in March 2012.
There are several reasons I think that house prices are close to a bottom. First prices are close to normal looking at the price-to-rent ratio and real prices . Second the large decline in listed inventory means less downward pressure on house prices, and third, I think that several policy initiatives will lessen the pressure from distressed sales.
And this doesn’t mean prices will increase significantly any time soon. Usually towards the end of a housing bust, nominal prices mostly move sideways for a few years, and real prices (adjusted for inflation) could even decline for another 2 or 3 years. Finally, we got Jonathan Miller with his reaction to Bill’s call.
Jonathan Miller of Matrix: To be clear, Bill’s forecast is based on prices of the key housing indices i.e. Case Shiller and CoreLogic without seasonal or inflation adjustments. He is very clear about the definition of a housing bottom which is key to the argument – in fact, there are two housing bottoms.
He provides a logical argument but I think he’s missing a key ingredient in the logic – how will the market be impacted by distressed properties and how they will impact the price trend:
— 2M additional foreclosures in 2012-2013 per RealtyTrac — Falling inventory is masking significant shadow inventory built-up during the credit crunch. Inventory is declining to more manageable levels, not because there are fewer homes to sell, but because sellers are holding back until conditions improve – big difference.
In other words, the call of a bottom is missing a huge element front the equation – supply. The forecast of a housing bottom could certainly be right in the short term, and housing prices could bottom in March temporarily, but there is a lot of excess supply to be dealt with and I suspect that prices will begin to slide as REO activity begins to slowly enter the market. It simply has to – there is too much of it. All great stuff. My gut is to talk about one psychological element that is not so easy to track but that we all know means everything when it comes to housing: BUYER CONFIDENCE!
Lets face it, not even record low mortgage rates of 3.87% & a 20% rise in equities over the last six months can stimulate buyers to rush into new home purchases!! What does that tell you?
It tells me that record low rates, engineered by our Fed to combat extreme debt deflationary forces, are indicative of broader economic conditions that are still strongly tilted to the negative. Lets face it:
a) Consumers don’t look at housing as an asset class the same. The damage was done from the bust cycle and it will take years before faith in housing on a mass level returns to the marketplace. I’m not talking Manhattan here, think nationwide markets.
b) Consumer are already debt-laden and continuing to deleverage and repair their own balance sheets. Put simply, the consumer is in repair mode and not in a “leverage to the hilt” mode. Some may want to, but banks won’t let you..which brings us to….
c) Banks don’t want to lend to a consumer with deteriorating credit in a high unemployment environment when they are still recapitalizing themselves! Why do you think Excess Reserves of Depository Institutions are in excess of $1.5 Trillion right now? Banks aren’t lending they are hoarding cash and riding the fed engineered reflationary wave to slowly recapitalize so that one day they will be able to sustainably lend — hopefully that day will be when consumer credit quality is on the rise and our economy is sustainably producing more than 250K jobs a month. A much better environment for our fractional reserve banking system to start behaving like its meant to. In the meantime, the M1 Money Multiplier is still way down. Banks exist to create credit and multiply deposits – $10,000 of deposited money is meant to be multiplied by the banks to a $100,000 of new credit – this process is stalled because banks are not lending and money is not circulating!
You can’t force borrowers to borrow and you cant force banks to lend! The Fed can flood the system with liquidity but they can’t control where that money ends up! Crazy market moves will happen when you force investors to take on risk and chase higher yields – hence the term “unintended consequences”.
Right now, Greece’s bond markets are screeching default with 1YR yields soaring to over 528%! 528%!!! Can you even imagine? Something is going to happen there and all the EU bigs are praying that this will be a non-event from being strung along for so many years; wall street reacts much worse to surprise events, not something that has been in the headlines for years and everybody preparing for the inevitable. Its inevitable that Greek defaults – the question is what kind of structure the default will take and if it triggers a credit event on CDS. The worry is a contagion across EU, hitting Portugal, Spain, and Italy next.
We will see no sustained uptrend in broader housing conditions if we have another round of equity weakness ahead of us as EU conditions play out. The current environment is still too uncertain that not even a 20% rise in equity indexes over the last 6 months PLUS record low mortgage rates of 3.87% can stimulate new loan demand. 10YR Treasury yields are still below 2%, confirming this uncertainty. Low rates are great, but they are low for a reason. The housing market boomed with rates way way higher than they are today so we should actually look forward to the day that rates rise because that likely means the foundation for a sustainable economic recovery may be in place.
I’ll take 5.5% mortgage rates and an improving a) economy, b) consumer balance sheet, c) bank lending over 3.87% rates and uncertainty that we see right now any day of the week and twice on Sunday! The bottom may be in but a true reversal in real prices I think is still a few years away.