Tag Archives: U.S. Housing Market

DrHousing: The Good, the Bad, and the Ugly aspects of the American housing market

The Good, the Bad, and the Ugly aspects of the American housing market: Key indicators of the 2013 real estate market.

The US housing market is massive.  You would expect this from a nation of 315,000,000+ people spanning over 50 states.  So it is important to understand the various dynamics occurring over many states.  In regards to single family home buyers, in most of the United States home prices are very reasonable.  This is hard for some in the coastal regions to digest or even comprehend.  When you look at certain markets in high priced areas, many people have a hard time penciling out the financial details.  Yet with such a large number of investors purchasing with cash, a new market has been created.  But if we are to take the US market and make a wide-eyed observation, we will find some good, bad, and ugly aspects of the current housing market.  Whereas in 2008 through 2010, the market was dominated by the bad, ugly, and grotesque.  What can we say about the current US housing market?

The Good

One good aspect of the market is overall, affordability is back in line to historical trends:

housing affordable

Price-to-rent ratios are back in line in many parts of the country.  In fact, this is the big push from the all cash buyers in places like Arizona, Nevada, and Florida.  The one thing I would be cautious about is in places like Arizona, you have over 50 percent of buyers coming from the investment bunch and when you look at rental prices, they are weak and vacancies are very common.  But with such a high number of investors buying, you basically have investors selling to other investors thinking they will produce higher yields.  However, for non-investors in most US markets prices are now affordable thanks to the big drop in prices but also the Fed’s tantalizingly low interest rates.  Sure, the Fed’s balance sheet is well over $3 trillion but that is an issue for another day.

If you follow the mainstream press and use this as a barometer of what most Americans see as their primary source of information, then the Federal Reserve might as well be nuclear physics because it is never discussed or even explained.  So most people are driven by the monthly nut psychology.  Low rates have boosted affordability dramatically.  Americans are horrible savers.  Something like 50 percent of Americans do not have a retirement account.

I was having a conversation with someone and their mentality is similar to many coastal folks.  “Good luck finding a property in the US for less than $300,000 in a safe area!”  Of course, it is hard for some to understand that in many states, homes can be had for $100,000 in good areas and a $200,000 home will buy you a very nice spot.  Heck, even in the Inland Empire in California you can find a great place for $300,000.  Of course this person is obsessed with buying in prime Pasadena so good luck on that one when you have limited inventory and many other clones with similar thinking.

The Bad

While not as good as it should be, household formation is now picking back up:

household formation

Funny how in 2005 when all you needed was a pulse for credit, household formation was up to a blistering 1.8 million per year.  The crash brought on the “move in with mom, dad, or friends” trend and you can see this in 2008 where household formation was at a stunningly low 400,000.  This is also another reason why the housing market is now picking up nationwide.  From 2011 to 2012 household formation went from around 600,000 to a healthier 1,000,000.  That is a big jump.

The one element I see getting in the way of this is the massive student debt in the market now above $1 trillion.  Many younger Americans are still financially strapped so it is hard to see this improving anytime soon.  Although we are nowhere close to the boom days, household formation does seem to be on an upward trend and this is a positive for housing in general.

The Ugly

The housing market is still a mess when it comes to distressed properties:

bad loans

Over 5,000,000+ Americans are in one of the following:

1,927,000 properties that are 30 or more days, and less than 90 days past due, but not in foreclosure.

1,483,000 properties that are 90 or more days delinquent, but not in foreclosure.

1,694,000 loans in foreclosure process.

The market is full of bad loans but the number is going down.  Many investors buying in bulk have connections that allow them to purchase many of these properties at auction before they even hit the MLS for the regular Joe and Jane.  So the low inventory is simply a manifestation of banks leaking out properties at their own pace and to select individuals.

In most parts of the US, the housing market is fairly normal based on price and financing options.  However, in places like California good luck buying a home when many in the industry think prices will keep going up and bidding wars are now fairly common.  Get your PowerPoint presentation ready and your heart wrenching story (and wallet out) to make a bid in many prime markets.  California is a boom and bust market and we’re currently in the boom phase.  It is interesting how many e-mails I get where the person is actually sad and emotionally troubled that they got out bid on an $800,000 or even $1,000,000 home.  Obviously you can only get so much from an e-mail but some people seem miserable because they can’t spend $1 million on a home!  I got an e-mail like this from someone in San Francisco.  You know what my recommendation was?  Go ahead and buy because you seem absolutely miserable!

For most Americans, the decision to buy is fairly simple in today’s market.  In other markets, there are definite manic like behaviors.  We’re seeing some mania in California.  Buying a home is a big decision yet some are willing to drop $700,000 (i.e., finance 80+ percent of the purchase) and treat this as if they were buying a car. Buying a home is a 30 year commitment for most.  Many sell within 7 to 10 years but that is assuming prices keep going up.  Some that bought in 2005 are still underwater today (8 years later).  You want to know what was going on 30 years ago?  Ronald Reagan was President, we were in the Cold War, The Red Hot Chili Peppers launched their first self-titled album, and a fixed rate mortgage was 13.4 percent.

There are good, bad, and ugly things in today’s housing market.  The scope of each of these really depends on where you live in the US.

Leave a comment

Filed under Housing

PRAGCAP: Home Prices – Is the Boom Back?

Home Prices – Is the Boom Back?

02/06/2013

If you’re looking for things I’ve been wrong about recently you can chalk housing up on the list.  Last year I said I expected housing’s downside was fairly limited and said that long-term buyers shouldn’t hesitate to buy, but that the market was likely to muddle through in a classic post-bubble workout period.  Now, it might be a bit too early to declare a new boom, but the latest data from CoreLogic certainly looks very positive and has to have us all asking the question – is the next boom already beginning?

More via CoreLogic:

Home prices nationwide, including distressed sales, increased on a year-over-year basis by 8.3 percent in December 2012 compared to December 2011. This change represents the biggest increase since May 2006 and the 10th consecutive monthly increase in home prices nationally.

“December marked 10 consecutive months of year-over-year home price improvements, and the strongest growth since the height of the last housing boom more than six years ago,” said Mark Fleming, chief economist for CoreLogic. “We expect price growth to continue in January as our Pending HPI shows strong year-over-year appreciation.”

“We are heading into 2013 with home prices on the rebound,” said Anand Nallathambi, president and CEO of CoreLogic. “The upward trend in home prices in 2012 was broad based with 46 of 50 states registering gains for the year. All signals point to a continued improvement in the fundamentals underpinning the U.S. housing market recovery.”

clogic Home Prices   Is the Boom Back?

Leave a comment

Filed under Home Sales, Housing

What constitutes a healthy housing market? — Dr. Housing Bubble

What constitutes a healthy housing market? 7 charts Examining where we are today in the housing market. Will the current housing rebound continue into 2013?

Perceptions are guided by recent events.  History is easily forgotten and our hardwiring makes us prone to trend following.  The housing boom that started in 2012 is still the story today.  In 2012 I noticed on various forums that new housing related shows were on the uptick.  The headlines were largely positive.  It is hard to see how the pace of appreciation can continue without a similar underlying real growth in household wages or a continued flood of investor money.  Yet in markets were investors dominate, local families are outbid by global money and big funds.  What makes up a healthy housing market?  Today we’ll examine seven charts and try to put this current housing market into a longer-term perspective.

Normal housing market

There are many factors to examine when it comes to a normal housing market.  I would argue that it is more important to focus on having a healthy economy and allowing housing to follow instead of focusing on housing and expecting the economy to follow.  For over a decade the focus has been on housing and the Fed with QE3 is not disrupting that trend.  Trulia has an interesting barometer on a few key housing metrics:

normal housng market

Source:  Trulia

According to the above barometer, a normal market would have 1.5 million construction starts.  We are at 861k.  We’re making progress here but still a good distance from 1.5 million.  The next item is existing home sales.  We’re at 5.04 million whereas a more normal market would be at 5.5 million.  On this metric we are inching closer to a more normal market.  The number of mortgages in some sort of distress is up to 10.63 percent.  This is still very high compared to the normal rate of 5.25 percent.

Low inventory

The number of homes for sales is extremely low:

national housing inventory

While existing home sales are still short from a more normal level (not by much) housing inventory on the other hand is down by record levels.  At a certain point you would expect this to carry over into housing starts and we are seeing this occur.

Housing starts

Housing starts are definitely on their way up.  This should be expected given the very low inventory.  Yet as we have discussed in previous articles, many younger Americans are saddled with high levels of college debt and are looking for lower priced housing options.  In 2012 31 percent of housing starts were for multi-unit properties.  Stronger rental demand but also, the new clientele base is likely pushing this trend.

30 year fixed rate mortgage

The drop in interest rates is truly historical:

30 year mortgage rate

People calmly talk about this as if we have a historical reference point for this.  We do not.  The Fed now has a balance sheet that is well over $3 trillion.  This is not normal either:

Fed total balance sheet

Fed’s balance sheet as of 1/16/13 (source: FRB)

Prior to the recession, the Fed balance sheet was well under $1 trillion.  We are a very long way from that and the Fed with QE3 is basically eating up MBS from the market.  It is interesting that some would like to discount this activity yet the Fed is dictating interest rates and is the major player in the mortgage market.  In other words, the Fed is the housing market.

Construction jobs

Now this is a trend that I found interesting.  While housing starts are up, construction jobs are still lagging:

construction jobs

What is going on here?  Is it because multi-unit properties require less labor?  I doubt it.  Are construction crews making due with less?  That could be one reason.  This is probably one of the more interesting trends here.  In this category we are also very far away from a normal market.

China wages

In a global system inflation can be exported.  While US wage growth is anemic and inflation adjusted household income is now back to levels last seen in the 1990s, wage growth in China is definitely occurring:

china and us wages

It should come as no surprise then that money is rushing back into places like California and Canadapropping up prices in select areas.  Foreign demand is incredibly strong as the wealthy class rises abroad.  In an open market, money can travel as it sees fit.  Inflationary pressure is charging back in.

Part-time workers

Another trend we are facing is the growth of a permanent part-time workforce.  Many workers now work under contracts or projects.  This is another reason why we have seen the U6 unemployment figure remain high:

us part-time and U6

This is unlikely to be positive for wage growth but does help companies earn more as they slash costs.  It also makes a tougher case for sustained home value growth.  The last few years have seen a large amount of buying come from investors.  Nearly one third of all sales were investor based.  This is incredibly high.  It is hard to find historical data on a normal figure here but I would venture to guess that it is around the 10 percent range for the nation.  In California, foreign demand makes up this portion alone:

“(OC Register) The National Association of Realtors estimated that foreign buyers accounted for 11 percent of California home sales.

The California Association of Realtors, however, pegged foreign sales at 5.8 percent of the state’s transactions. Of those, 39 percent of the buyers come from China, followed by buyers from Canada (13 percent), and from India and Mexico (8.7 percent each), CAR reported.”

Last month over 33 percent of buyers in Southern California paid all cash for their purchases, tying a previous historical record set a few months ago.  The monthly average since 2000 is closer to 17 percent so we are nearly double that.

The above trends show that we really are in a different housing market today.  Will these trends continue into 2013

Leave a comment

Filed under Economy, Housing

Read of the Day: Merrill Lynch on Housing and Construction Employment

Merrill Lynch on Housing and Construction Employment

by Bill McBride on 12/11/2012  

We are still waiting for a strong increase in construction employment, but we know it is coming (I expect construction employment will be revised up in the annual revision).

Michelle Meyer at Merrill Lynch wrote about this today (and more on housing): The housing market in 2013

We believe 2012 will go down in history as a year of transition for the housing market. Housing starts are on track to be up 25% and home prices are set to rise 5% over 2012. We believe the recovery will continue into 2013 for several reasons. Most importantly, household formation has started to turn higher, reflecting the shortfall of household creation over the prior five years. In addition, listed inventory is low, owing to extraordinarily slow construction and only a gradual reduction of the distressed pipeline. And specifically for prices, there has been a shift toward short sales as a means of disposing distressed properties. Moreover, investor demand is strong, particularly for distressed inventory.

We forecast housing starts to increase another 25% to an average of 975,000 and home prices to increase 3% in 2013.

The housing market is turning into an engine of growth once again. Housing construction will likely add 0.3pp to GDP growth in 2012 and 0.4pp to 2013 growth. … The gain in homebuilding will support related sectors such as furniture, building material sales and financial companies. Moreover, construction jobs will finally come back, allowing some of the 2 million people who lost construction jobs to find employment in the field again.

There will also be a jolt to the economy from the gain in home prices. An increase in home values lifts household net worth and boosts consumer confidence. If consumers perceive the gain in wealth to be permanent, they will increase their current consumption. But the rise in home prices can do something even more vital for the economy – it can spur credit creation, which then fuels housing demand and reinforces the gain in home prices. We are seeing the very early stages of a positive feedback loop between the housing market, credit market and real economy, which can be quite powerful in time.

I’ve wrote about the positive impact of prices early this year, see The economic impact of stabilizing house prices?

We are probably already seeing the impact of stabilizing prices on housing inventory. If potential sellers think prices will fall further, then they will rush to sell and list their homes right away. But if potential sellers think prices are stabilizing, and may even increase, they are more willing to wait for a better market or to sell when it is most convenient. I think we are seeing that right now.

More importantly, I think stabilizing prices will give hope to some “underwater” homeowners and we will probably see mortgage default rates fall quicker. And over time, buyers will gain confidence that prices have stopped falling, and I expect demand to increase – and also for more private lenders to reenter the mortgage market and help support that demand.

And this demand will also boost homebuilding and new home sales – since homebuilders will have a better idea of the pricing needed to compete in a market (falling prices makes it hard to plan).

And on construction employment: Back to work we go

There are several ways that the recovery in the housing market multiplies through the economy. One of the key channels is to create jobs in the construction industry and related fields. However, despite the 25% gain in housing starts this year, the construction sector has not added workers. Looking back at prior cycles, it appears that it is normal for construction jobs to lag output by about a year. We think we are on the verge of construction hiring.

As demand for housing continues to improve, construction companies will likely become more comfortable expanding their workforce. In addition, construction workers do not just focus on new construction; they can also find employment for renovations. Renovation spending has been on the rise and will likely receive a boost from Hurricane Sandy rebuilding. We think the future looks brighter for construction workers.

I also expect a pickup in construction employment in 2013.

Read more at http://www.calculatedriskblog.com/2012/12/merrill-lynch-on-housing-and.html#ALyJVyoHjgyg758m.99

Leave a comment

Filed under Construction, Housing

Builder Confidence Continues Rise in November

Builder Confidence Continues Rise in November

by David Crowe — Eye on Housing 

The NAHB/Wells Fargo Housing Market Index rose another five points to a 6-year high of 46 in November. The component measuring traffic remained unchanged at 35; the component measuring current sales rose 8 points to 49 while the component measuring future demand rose two points to 53. The expectation component has been above the tipping point of 50 for three consecutive months (above 50 being the point where more builders see a better market ahead than see a poorer market).
Regional three-month moving average index levels also rose two to four points, Northeast to 31, Midwest to 45, South to 43 and West to 47. The Northeast index is the only region that has hesitated in the last several months, remaining in a narrow band of 29 to 31 for six months. Single-family permits have behaved similarly, running between 40,000 and 45,000 since March 2012. The FHFA price index changes for the two divisions within the Northeast region have been among the lowest recently. The Northeast is the only region with a higher unemployment rate now than one year ago and in two months ago.
Builders report continued difficulties with buyers qualifying for mortgages and low appraisals below the contract price. But the source of the increasing optimism centers on improved buyers’ attitudes. Builders report buyers who are able to obtain a mortgage are ready to buy after postponing their purchase for years. Low inventory or the wrong inventory in the existing home market has also benefited home builders. Over the past year, new home sales have increased 27% while existing home sales have increase 11% as the available and appropriate inventory of existing homes dries up.
The new home inventory is also very low but builders are able to respond to orders, at least as the market begins to recover. Lot inventory is low and in some markets will soon become a limiting factor to continued expansion. Material prices, particularly lumber and wood products, have risen and in a few markets construction labor and subcontractor availability has begun to worry builders. A continued home building expansion will require attracting the resources, materials, labor and land, from their current usage and that will likely mean a rise in home prices.

Leave a comment

Filed under Builder Confidence Index

Buy vs. Rent and Home Prices vs. Income Favor Buyers

Buy vs. Rent and Home Prices vs. Income Favor Buyers.

Comparisons of the costs of buying a home to renting a home favor buying, though not by a huge margin currently.  The first chart shows the ratio of the S&P/Case-Shiller 10-City Home Price Index to the Consumer Price Index for Renting a primary residence.  The ratio is scaled so that the average value over the 1987-2012 period is 100.  When the ratio is above 100, home prices compared to rents are higher than average and renting is preferable; when the ratio is under 100, buy is favored.  The boom and bust from about 2003 to 2009 stands out on the chart.  Even with the sharp drop in prices, buying is less favored over renting today than in the mid-late 1990s.   Recently there have been several news reports of rising rents, suggesting that even if home prices continue their recovery, buying could still be favored over renting.

 One measure of how much home prices have moved is to compare them to disposable personal income per capita. “Disposable” means after taxes and “per capita” means that the aggregate personal income in the economy is divided by population so that income is seen to rise merely because the population rises.  There is no right number for this ratio but it can be compared to its average over several years to see if it is high or low currently.  The chart shows this ratio — S&P/Case-Shiller 10-city Home Price Index divided by Disposable Personal Income per capita. The scale is calculated so that the average of the 1987-2012 period is 100. As shown there, home prices are currently low compared to incomes, suggesting that the current market favors buyers over sellers.

Source: S&P Dow Jones Incies and US Bureau of Economic Analysis

Leave a comment

Filed under Economy, Home Sales

US Housing Inventory at a Post-crisis Low — PragCap

US Housing Inventory at a Post-crisis Low

Here’s an important statistic that’s been getting a lot of attention lately in housing circles – the decline in inventory.   I’ve been pretty vocal about the fact that I do not think there’s much downside in housing from here, but that I believe it would be extremely abnormal for a post-bubble turnaround to occur.  Generally, these post-bubble eras end up working off excesses for a very long time.  And I think this is a pertinent detail.  As you’ll see below, inventory has come way down.  But let’s not lose perspective.  We’re only back to the 2006 levels when, by pre-crisis standards, this level would have been considered well above normal.  I expect more working off to be done….Our friends at Sober Look have the details:

As discussed earlier the US housing recovery is progressing, albeit quite gradually, as the unsold inventory of homes continues to decline.

Barclays Capital: – We continue to see conditions in the existing home market as putting downward pressure on inventories and as supportive of a gradual cleansing of shadow inventory. Our view is that housing is in a recovery phase, but one that will be restrained by the availability of credit, pace of improvement in labor market conditions, and overhang from distressed and foreclosed properties.

Source: Barclays Capital

Leave a comment

Filed under Home Sales