Mish Calls Double Sticks–2011–Housing’s Pricing Bottom
It is Mike “Mish” Shedlock’s theory that as regards housing, all parabolas are created equal.
His post yesterday – “Housing Update: How Far to the Bottom?” — is a latter-day, chart-candied manifesto that says among other things, no matter what title Ben Bernanke has, he shouldn’t be trusted. Another takeaway from the post is this conclusion: Mish has been spot-on in every way since March 2005, whereas much more vaunted “experts” were speaking in self-interest, self-delusion, and self-service as they pronounced that fundamental positives would outweigh pesky negatives in the housing economy.
Click to enlarge. Courtesy of "Mish" blog.
At any rate, what you might care most about is that the fellow who’s been right all along is saying that 2011 is where home prices should bottom out.
His lead chart is Japan’s “lost decade” of the 1990s, which actually extends to 14 years. To give us a back-pat of encouragement, Mish grants that the pace of the U.S. meltdown is double that of Japan’s, which would mean we’ll ”cross the zero line” by 2011.
That’s roughly what a fair number of other folks are saying about home prices (nationally), although what many in real estate care about more right now are sales transactions.
A greater volume means a shift in two big areas that will preceed a home price bottom by several months to a year: 1) The doability factor, which means that prospective buyers can get financing in what will continue to be a risk-averse lending environment and consider the moment opportune to act on a home purchase; and 2) The psychology factor, which will indicate that a some level (unknown as yet) people won’t feel as if it’s an idiotic thing to do to buy the biggest ticket item of their current life and go on to regret it within 60 days.
Those are important differences that need to occur well before a house price bottom. “The bid,” if it’s in earnest will negotiate hard. “The ask,” will have fewer and fewer options but to cede.
The good news about more volume is an eventual stabilization in comps and a reduction in volatility indices, which are part of what make people so scared. Would you rather comp to one of two real estate deals, or one of 100?
The other good news is that we can all look forward to another year of quotes Mish will extract to illustrate just how wrong others can be, while he can plot new red arrows on the fever chart to show how he has predicted precisely what would happen all along. It’s reassuring to know that this ol’ world can fool some of the people all of the time, and all of the people some of the time…
S&P Downgrades Take Wind out of Housing’s Sails
CNBC’s interview with Alpine analyst Stephen Kim typifies Wall Street sentiment about a next leg downward for housing. Standard & Poor’s yesterday raised the bar for expected losses from risky loans underarching mortgage backed securities, signaling anticipation for a new wave of irrecoverable dollars invested in residential real estate bonds.
Failing home loans that lead to a tidal wave of foreclosures depress home prices and cause the feeback loop to repeat in a worsening viscious circle. Despite tiny signs, anecdotal evidence, and great hopes that Spring 2009 marked the end of the worst times for housing, it’s clear the pain shall continue through the end of the current year, reaching into 2010.
S&P Clouds Stock Resilience with Downgrades
It’s Monday in what feels eerily as if it should be a holiday-shortened week, but it’s not. Stocks eked out a show of resiliency by the end of the day, even as geopolitical violence shook China, and data points gave investors little to thrill about save a defensive play or two.
Then, to wind up the day, another salvo of bad news for residential real estate.
Per a post-market close post from investment blog Calculated Risk, this news from Reuters:
Standard & Poor’s on Monday boosted its expectations for losses on risky loans backing U.S. mortgage securities to as much as 40 percent, suggesting a darkened outlook for the troubled housing market.
The more dire assessment will likely “significantly impact” bonds originally carrying AAA ratings, S&P said in a report.
Increased assumptions for total losses on subprime and Alt-A residential mortgage-backed securities come amid declines in market value of the debt and a surge in the inventory of bank-owned properties, S&P said.
It is another blow to investors who are already suffering from downgrades to their portfolios over the past two years as the housing market fell to the weakest levels since the 1930s. Many bonds are trading for cents on the dollar as investors value them based only on remaining interest payments that may be received.
We’ll post more on this tomorrow. It’s a reaction on the part of the ratings agency to a reality that is no surprise. But what it effectively means is that V for value is still MIA, an untradeable, given investors’ newly prescribed diets, which have no tolerance for risk.
Case-Shiller Price by Market Map–Flash Envy
The Wall Street Journal has an enviable Flash infographics group.
Here’s their latest treat, an interactive map of Case-Shiller price data by market.
Click image to access Wall Street Journal interactive map.
Will Home Prices Bottom Soon?
CNBC’s Diana Olick reports on today’s S&P/Case-Shiller home price data:
The Treasury Department’s stress test scenarios–both baseline and more adverse–call for continued but shallower declines through the end of 2010. Calculated Risk plots actual S&P/Case-Shiller data against the two Treasury Department scenarios.
His conclusion:
So far prices are tracking between the two stress test scenarios.
Position A for Case-Shiller Home Prices Story
It’s the lead story in the Wall Street Journal.
U.S. home prices continued their multiyear tumble in April, according to the S&P Case-Shiller home-price indexes, although the indexes showed their third-straight month of slightly smaller declines.
Seventeen of 20 major metropolitan areas posted price declines of more than 10% from a year earlier, with the Sun Belt continuing to be hit hardest. Nationally, home prices are at levels similar to the middle of 2003.
David M. Blitzer, chairman of S&P’s index committee, said the pace of residential real-estate decline slowed in April. “While one month’s data cannot determine if a turnaround has begun, it seems that some stabilization may be appearing in some of the regions.”
Here’s the Standard & Poors monthly release.
Calculated Risk charts up the data in three ways to get insight. Here’s a dramatic one on peak-to-date declines in the 20 Case-Shiller cities.
Click to access Calculated Risk post on Case-Shiller data.
Importantly for an understanding of the relationship between housing and the broader economy, Calculated Risk will show current home price declines in comparison to the Treasury Department’s stress test scenarios to gauge the relative health of the banks.
Since last month’s home price declines were already at or worse than the the “baseline” scenarios projected by the U.S. Treasury, this month’s will clearly show that the stress test was not stressful enough to reality check banks.
Still, second-derivative improvement may be as good news as we’ll get for some months to come, and we’ll have to learn to make the most of it. At any rate, it beats Madoff day two stories by a longshot.
Here’s S&P’s David Blitzer on CNBC with toplines on Case-Shiller’s April data:
Existing Home Sales Miss Street by a Nose
Looks like those who bet the “under” on exsiting home sales win.
Per the NAR May 2009 release (with guidance from Calculated Risk’s post):
- Existing home sales (SAAR) for May 2009 4.77 million, a 2.4% sequential increase
- Not seasonally adjusted, sales are 3.6% off May 2008 NAS levels
- Median price for an existing home fell 16.8% year-on-year to $173,000
- NAR says about one-third of sales were foreclosure sales or short sales
- Inventory of existing homes for sale decreased to 3.8 million, which for May is unusual
- Months’ supply of existing home inventory decresed to 9.6 months (normal is about 6 months)
Here’s a key observation from Calculated Risk on the NAR report today.
It is important to watch inventory levels very carefully. If you look at the 2005 inventory data, instead of staying flat for most of the year (like the previous bubble years), inventory continued to increase all year. That was one of the key signs that led me to call the top in the housing market!
Here’s the good-news, bad-news headline and report in the Wall Street Journal.
- Home Resales Up From Previous Month, as Prices Fall
Existing-home sales rose a second month in a row during May, but prices again fell sharply, threatening a delay to a housing sector recovery.
The Big Picture’s Barry Ritholz wants to set everybody straight on the proper headline.
In a note from Citi’s housing analyst Josh Levin, he focuses on an issue that has arisen in earlier posts by Big Builder editor Sarah Yaussi.
NAR Cites Appraisals as Growing Problem – In its press release the NAR notes that in the past month stories of appraisal problems have been “snowballing from across the country” with many contracts falling through at the last moment. We assume that such problems stem from the Home Valuation Code of Conduct, which went into effect 5/1. To the extent that this problem is in fact wide spread, we would expect that it may: (1) depress EHS going forward and (2) could cause the historical relationship between pending home sales and EHS to decouple.
Read to the end of Barry Ritholz’s post for the verbal hide-tanning of NAR economist Lawrence Yun. Barry may have been busy hawking his book lately, but this is the vitriol of Ritholz with which we’ve come to know and love.
Here’s a 6-minute CNBC video on existing home sales analysis from real estate correspondent Diana Olick and IHS Global Insight’s Patrick Newport.
Tomorrow, we get new home sales data. UBS is forecasting a 3.9% month-to-month increase over April 2009’s level, from 360,000 units to 370,000. A faint pulse, but a pulse nonetheless.
Housing Data Points Every Which Way
A good morning to litmus test your theory on where the housing juggernaut is heading.
This morning’s Wall Street Journal headline is limbo in 36-point type.
- Markets Await Housing Reports
Worries about the potential for an economic recovery dragged U.S. stocks to their worst one-day decline in two months Monday. The Dow Jones Industrial Average fell 201 points while the S&P 500 slid below the 900 level and turned negative for the year to date.
In addition to concern about the potential for an economic recovery, heavy stock selling by corporate insiders has also weighed on the markets. Insiders of S&P 500 companies have been net sellers for 14 consecutive weeks, according to InsiderScore.com, the longest stretch since June 2007.
At 10 a.m., the National Association of Realtors will report on May sales of existing homes and the Federal Housing Finance Agency will release home-price data for April.
Wall Street analyst consensus calls for a 2.6% month to month increase to 4.8 million home sales. UBS Homebuilding research analyst David Goldberg expects actuals to slightly eclipse the Street. He’s citing a gust of seasonal tailwinds, “still below year ago levels.”
Further, as defaults rise through the back half of 2009, we expec t further pressure on existing home prices.
Also at 10 this morning, the FHFA House Price Index is due. Covering home sales exclusively with conforming loan financing, the HPI has shown none of the volatility nor dramatic cliff diving that the S&P/Case-Shiller Index shows.
The Street consensus calls for a decline in HPI of -0.3% sequentially. UBS notches it down a bit worse, at -0.4%.
Also under lots of scrutiny among housing players will be the FOMC meeting for the Fed’s stance on interest rates and quantitative easing.
What’s your over under on existing homes data just minutes before the release?
CNBC’s Diana Olick on Pending Home Sales
Here’s the briefing on the National Association of Realtors data on pending home sales from CNBC’s Diana Olick.
Then, there’s what to make of the data. Calculated Risk always helps with the so-what perspective.
This suggests a further decline in existing home sales for the March report (January was the most recent report). Note: there still might be a slight increase in existing home sales in February based on the December Pending Home Sales report.
Note: Existing home sales are reported at the close of escrow, pending home sales are reported when contracts are signed. The Pending Home Sales index leads existing home sales by about 45 days, so the January report suggests existing home sales will decrease from February to March.Finally, ignore the “affordability index”. That really just tells us that interest rates are low – something we already know.
Still, “something we already know” may be overly dismissive.
What we’ll begin to see is a relationship between revert-to-mean home pricing and the psychological conviction among home buyers that they won’t lose money by buying. That’s the inflection point where private sector bid and ask behavior will trump government policy.
The Boom Gloom Factor
Face it. A lot of this might be Baby Boomers’ fault. We’d like to credit “the big troubles” to subprime borrowers who wanted to waltz into homeownership without the financial necessaries.
Not so fast.
What about Baby Boomers, 78 million highly entitled adults who’d begun to believe that scrimping and saving was an “old hat” anachronism? Many of them thought they could ride the 401K Express to retirement, with the bonus of home appreciation to add extravagance to their Golden Age. Short cuts are us. The Golden Age, by the way, would never end because rock and roll and boomers will never die.
News flash.
Comeuppance is not pretty.
Here’s a CNBC article that’s like a lightbulb going on for those who may have needed a wake up call. The government and entrenched Wall Street establishmentarians are locked in a fierce school yard scrap, and that leaves a population that thought it would have its nest feathered featherless, spectators who’ve bought tickets to the rumble.
Check out a blog post from a real estate pro/radio host who’s been hearing it from Boomers who’ve slammed up against painful reality as their hasty home-appreciation retirement strategy gets drawn into the home price give-back.
Essentially, these callers are all asking the same sorts of questions: Is now a good time to sell my home? Should I sell my house and trade down to something smaller and less expensive? Will I have to keep working to afford the mortgage on a property I would have sold to help fund my retirement?
What these Baby Boomers have begun to realize is that when a market has stalled, it stalls for pretty much everyone, not just a few souls here or there.
Sure, some houses are selling. But in October 2008, around 45 percent of existing homes sold were bank-owned foreclosures, according to data from the National Association of Realtors. That means just 55 percent of homes were sold by homeowners (with or without agents) to buyers.
As the economy continues to slog through the current recession, the news won’t be good anytime soon for sellers who are looking to get out from under their adjustable rate mortgages (ARMs).
HousingCrisis.com sister brand, Builderonline.com last week analyzed recently released data from the Center for Economic and Policy Research that attempts to tally the dollar impact of the downturn on Boomers’ wealth.
The median wealth of 55 to 64 year olds in 2004 was $315,400. CEPR projects that this wealth will fall to $168,800 in 2009, or to $143,200 in the worst-case scenario. The average wealth drop would be 29% to $708,000. Even at the top wealth quintile, the average falloff is projected to be 25% from $3.8 million.
The 45 to 54 year old group is generally less affluent to begin with, so the hit it has taken from the downturn in the housing market is starker. The study projects the median wealth of this group will erode by 41% to $101,800 in 2009. In the worst-case scenario, the decline would be more than 45%. This group’s average wealth will decline 36% to $408,500, with the losses in scenarios two and three notably larger. For example, in the second scenario, median net wealth in 2009 is $94,200 (a drop of 45 percent) and the average net wealth is $387,900 (a drop of 39 percent).
This age group’s median equity in real estate was $83,600 in 2004, but that’s fallen drastically since. For instance, in the first scenario, median real estate equity in 2009 is projected to be $27,100—a drop of 68%—while in the third, median equity is projected to be only $6,600, or a loss of 92%. The projected decline for 55 to 64 year olds from their 2004 equity median of $142,000 will range from 47% to 63% in 2009.
The wealth of baby boomers could be further compromised when they are trying to sell their houses. The CEPR study states that only 2.6% of 45 to 54 year olds had less than 6% equity in their primary residences, meaning they’d have to bring cash to a closing when selling their homes in 2004. This year, however, 17% to 28% of each wealth quintile (depending on which they fall into) would need to bring cash to close a resale in 2009. Even households at the top of the wealth ladder won’t be immune: In 2004, no households in the top quintile of the survey had less than 6% equity in their primary residences. By 2009, between 10% and 20% of the most affluent households in this age group would need to bring cash to a closing.
Obviously, an owner’s wealth exposure magnifies if his or her house is worth less than the mortgage. The study projects that between 23% and 38% of homeowners in this age group with negative equity would need to bring cash to close a resale in 2009, versus only 3% in 2004.
Boomers can only take heart in knowing that if and when home prices revert to their century old mean, it’s more likely that their kids might be able to afford one of the suckers. It’s a be careful what you wish for thing, as in a bridge to what otherwise would be Generation Gap No. 358.