Housing recovery?

Once again there is great fanfare as the media is declaring a housing bottom and predicting that the housing market will, at long last, resume its stratospheric rise from 2006 levels. More sober analystsshrug this off and think it will be another lackluster year. Here is Mark Hanson's take (thestimulus he's referring to is the intervention of the Fed into the mortgage-backed securities market, about $40 billion in purchases every month, to keep down mortgage interest rates):


The overarching problem in residential housingis that it takes massive direct stimulus in order for it to respond…. This time around thesector only respondedafter they pushed mortgage rates to levels that made it prohibitive NOT to borrow and buy and inventory to levels not seen in a decade. They literallyhad to eradicate foreclosures andre-lever millions of bad borrowers into more exotic and toxic loansthan [those] from which they defaulted from in the first place through "modifications and workouts" in order to set a stage in which housing would not drop.

So in short, we have a housing market almost exclusively dependent on rates stimulus and supply suppression.They rigged the market creatingabsolutely unsustainable supply and demand conditions ... and still residential housing could not reach escape velocity in 2012 andthe YoYCase-Shiller did not even come within a country mile ofthe 15% increase in purchasing power (on flat incomes)buyers enjoyed from the30%YoY drop in rates.

The reason escape velocity was not reached is becauseall along they haven’tthought this through well enough. As with the6-yearperma ZIRP and QE stimulus policies –theythought would be short term intrusions that lit the market on fire from which a self-perpetuating recovery wouldoccur — it’s not turning out this way. That’s because everything inhousing and mortgage markets’ boneswants to de-lever, which takes "decades" not "years". And the constant re-leveraging effortsonly serve to lengthen the time it takes to truly de-lever.

Note that deleveragemeans simply to let something jacked up, or inflated, come down or deflate. Releverage is to reinflate or to jack up again.

Hanson does not mention the shadow inventory of 20 million potential sellers who cannot sell and move on with their lives (or buy another house) because they are in negative equity, owing more than the house is worth, or so near to negative equity that they cannot sell and buy because the transaction costs of selling (about 10 percent) will wipe out their equity and they won't have the money for a 5 percent downpayment or for closing costs. These 20 million homeowners are trapped in their homes and cannot sell, so this also suppresses the supply on the market.

Another factor Hanson did not touch on is that, on a national level, the upsurge in activity has been partly due to bulk investors: Wall Street firms are buying up mostly foreclosed properties (even here in the Valley) and creating bundled securities for wealthy investors that draw on the rental income of the properties (sound familiar?). This is unprecedented as they are even buying single-family homes and shutting ordinary homebuyers out of the market in places like Phoenix and Florida and parts of California (up to 50 percent of sales in some devastated markets!). This has clearly skewed the national statistics. (See Ramsey Suon bulk buyers.)

Who knows what this means for housing down the road, or for the creation of a new invisible landlord class.

To sum up, without (1) the Fed's aggressive intervention driving down interest rates, (2) the suppression of supply by the federal and state governments and the banks, and by the shadow inventory of homeowners in negative equity, and (3) Wall St. investors buying up properties with cash, without these three factors, the real estate market would look very different today. No one would be talking about a recovery.

Yes, the market "in its bones wants to delever". If the market were allowed to delever (to find the level it would be if it were not artificially jacked up), we would see home prices come down to much more affordable levels. But don't hold your breath waiting for that to happen! There are too many interests vested in prices staying inflated.

I guess this is the more pertinent question for a homebuyer: Do you really want to buy into this rigged market?

David Hopkins 2013