Let's start by taking a look at a chart from Zillow that shows the percentage of single family homes that have negative equity(underwater) in various parts of the country where housing is struggling:
My Take:
It's always good to look at the worst markets when you are looking for a recovery because recoveries always begin in the areas that are hardest hit.
The bottom line here folks is the numbers above are flat out ugly across the board. Vegas is still getting crushed with 80% of their houses sitting underwater. 8 out of 10! Unbelievable!
Florida is actually showing signs of rapid detioration this past quarter which is amazing when you think about it because home prices fell 50% or more in most markets in 2008 after the bubble burst.
These steep "discounts"created a mini house flipping foreclosure boom for awhile after the crash. Remember all of those ads that you saw inviting you down to come down to Florida and take a "foreclosure bus tour"?
Many of these knife catchers in the sunshine state obviously took a beatdown because the negative equity percentages are up significantly which signals that prices need to drop further before bottoming.
House flipping isn't very profitable if you buy a house at a 50% reduction if it takes an 80% reduction in order to sell it.
You can be rest assured that the only flippers you will see after the housing crisis is over will be on a dolphin!
The one area that is showing some signs of life is California but the improvement is far from impressive. Housing markets aren't exactly "stable" when 60% of them are underwater. But Hey....I guess its better than 70%!
The Bottom Line
Turn off CNBC when they start talking about a housing recovery because there isn't one! Things are still deteriorating in some of the worst hit areas which tells you that we haven't yet reached a bottom.
Talk to me about housing recoveries when the percentage of houses with underwater mortgages gets to zero. Anyone claiming to see a turn around in housing at this point is insane!
It should also be noted that we still continue to do bad loans via FHA. Letting people buy homes with 3% down and a 650 credit score is idiocy at its finest because these are not good loans! Many of these buyers will end up defaulting just like the suprimers did which will only exacerbate the housing problem.
A banker friend of mine predicts that FHA will be another Fannie/Freddie within the next few years because the lending standards are so bad.
Also adding to the housing problem is the expiration of the homebuyer tax credit. Imagine what home prices are going to look like now that this program is gone.
This is going to kill the only part of the housing market that has somewhat recovered which is the 100-300k low end of the market.
The tax credit was very effective in getting first time buyers "in the game". I prefer to call it "committing financial suicide" but that's beside the point.
However, the tax credit didn't help the higher end of the market because an $8,000 stimulus is "chump change" when you are paying $800,000 for a house. It's only 1% of the value which makes it irrelevant from an incentive standpoint.
I expect to see another leg down in the housing market as the tax credit disappears. The problem with all of these government programs is you are pulling forward demand that you would have had down the road.
The tax credit program really did nothing but create short term demand and guarantee that we will see pain down the line because we pulled forward demand today via stimulus that we would have had down the road.
It also helped further delay the correction in home prices that must take place. Selling homes at prices where buyers cannot afford them is a business model that GUARANTEES failure.
The charade is now over folks and now its payback time!
Housing prices will continue to spiral downward now that the "money spigot" has been turned off.
When will the government realize that kicking the can down the road is not the answer to our problems?
It would be much more productive to "take the pain" NOW and let housing prices crash to where people can afford them. This is the recipe from which REAL recoveries are made.
Hopefully we will see this cleansing take place now that the government stimulus is out of the picture. If you are a buyer I would stay on the sidelines. Prices are only heading one way from here and that is downward.
Disclosure: No new positions at the time of publication.
21 comments:
Good stuff!
C-T, You, and me need to meet up and formulate a plan. How hard can that be!
Related,
I remember when Calculated Risk was poitning to a high % of "investor sales" as a trouble spot for the housing bubble, now CR highlights investor buys as a sign of recovery. OK.
Thanks Get!
Yeah I just don't see it. Bubbles that burst never reinflate this quickly.
John Paulson is saying the same thing that CR is. I have a lot of respect for both so who knows.
One thing that I wanted to add in there is the fact that FHA is still doing bad lending.
3% down and a 650 credit score are not good loans. These buyers will default just like the subrimers did because they aren't solid borrowers.
A banker friend of mine thinks FHA will be another Freddie/Fannie within a few years.
I don't think housing will ever see its previous highs in our lifetime.
"Talk to me about housing recoveries when the percentage of houses with underwater mortgages gets to zero. Anyone claiming to see a turn around in housing at this point is insane!"
Well I dont know about all that. When an area goes from 70% underwater to 60% underwater is it not "recovering"? At 50%? At 40% at 30%. Seems to me that whole time it is "recovering".
If you wait til the percent of people underwater is zero, then that means it has "recovered" and you went in far too late. If anything, you could be buying near a peak in that case (i.e. the last time the % of people underwater was zero was 2006).
Just sayin.
If you accept the premise that another significant leg down in housing is on its way, then you also have to accept the premise the elliott wavers are right, and we're about to see a massive deflationary collapse in the price of everything from homes to wages to food to gold.
Doesn't it seem like the path of least resistance (given Ben B's promise and follow through on printing at all costs to avoid deflation) would be a stagflationary squeeze on the US? That home prices are actually pretty much at a bottom in nominal dollars but will fall in inflation adjusted dollars?
I don't disagree with you, but I have a hard time swallowing they'll let all this fine printing and quantitative easing be for naught. If anything they'll go thelma and louise, hit the gas, and pray for a safe trip across the canyon.
I can see that deflation eventually happening, but not just yet, IMO. We've been playing this game of chicken with the wheel of black swans and it just seems a bit early to say the wheel is done spinning.
Hey Jeff, speaking of housing, remember this gem of yours late last year:
"The Fed's treasury purchases are just about done, and the MBS QE purchases should be completed by March in my estimate. When this buying binge ends in the spring the market is in for a VERY rude awakening.
I predict interest rates are going to soar as the world's appetite for treasuries disappears once they realize the Fed is no longer a buyer!"
Hmm, a "rude awakening", wow sounds scary. Also, rates are not just going to rise but SOAR. YIKES!!! So how did that one work out for you? Here let me help...
Interest rates plummet as investors seek safety (AP) The yield on the 10-year Treasury note that matures in February 2020 fell to 3.43 percent Friday from 3.53 percent late Thursday.
http://finance.yahoo.com/news/Interest-rates-plummet-as-apf-2855358255.html?x=0
BWAHAHAHAHAHAHAHA!!!!!
Anon,
I too had about the same call as Jeff on mortgae rates/ten year yields. Not looking good so far! Still, there are plenty of foces at work keeping rates down. I think before all is said and done the while "flight to safety" with tat being US bonds will get cracked. The primary dealers are buying the stuff using FED borrowed money, so those auctioins are not quite "real" in a sense. We shall see but for now I do look pretty dumb!
Jason
Fair enough but I define a recovery as at least being above water.
Those numbers would indicate an "improvment" versus a recovery in my eyes.
Hey Flip
Yeah deflation is a huge risk here.
Gold is a tough one here because its being gobbled up as a currency hedge versus pricing in inflation.
I have thought about hedging my metals positions with some shorts but I am afraid Europe could blow up so I will probably wait.
A collapse is guaranteed. The problem is how much printing do we do until we get there.
I don't see home prices rising unless wages rise as well. As unemployment soars I don't see wages rising.
People can only borrow money relative to their wages so until someone has an answer to that one I vote that housing goes down the tubes.
I think deflation is on the way which will be followed by massive inflation.
Tough market.
Anon
OK and the 10- year dropped to 2.4% following the QE announcement and then rose to as high as 4.6% later on.
This makes me wrong how?
You should expect the yields on the 10 year to drop when Europe is on the verge of blowing up.
Gotta love the Monday morning quarterbacks.
Also regarding the end of QE.
It has only been one month since they ended it. They can play this game for now as Money flies over here from Europe.
Talk to me in 6 months when the world realizes we are nothing more than another Greece.
Home prices never stopped sliding.
They were propped up artificially for a while by an artificial government stimulus program, but now the rubber is back to meeting the road.
Things may not have turned out exactly as we may have seen them at the time, but you can mark my words, we are just as screwed.
Get, you, Jeff and I think amazingly alike.
"jeff said...
Anon
OK and the 10- year dropped to 2.4% following the QE announcement and then rose to as high as 4.6% later on.
This makes me wrong how?"
Yep, your right Jeff. How could I have doubted you. The infallibility continues. Another home run, dear leader!!!!!
Heres an exercise in intellectual honesty - ready?
At the time, you said the SPRING market was in for a very rude awakening - not 6 months from now, the spring.
Was it a "very rude awakening"? Yes or no???
Anon
I don't know what to tell you. This is a macro economic blog.
Timing this market has been almost impossible. I am wrong based on those statements yes.
I think everyone is surprised at what lengths the government has gone to keep the music going.
The Fed bought 80% of the MBS paper when they were doing their QE. It cost them over a trillion dollars in doing so.
I think you are crazy if you think think the private sector has the ability to replace a buyer that was buying 80% of the market.
Whats even worse is the private sector doesn't even want to own this stuff because its garbage.
Obviosly all of this is being done to keep the music going.
However, it is unsustainable and the tide will turn. Predicting when in times of desperation like we see today is becoming extremely difficult.
"Predicting when in times of desperation like we see today is becoming extremely difficult."
Of course it is. I agree it all goes to hell at some point - its inevitable.
Still, that difficulty in no way precludes you from making bold statements like "very rude awakening" in the "spring", as if you really have any idea that THIS is the BIG ONE.
The fact of the matter is, it may all go to hell on Monday, or it may all go to hell 10 years after all of us here are dead.
Heres my only advice to you. You consistently have been very early on predictions. Your natural instinct is to think this or that is going to be "immediate" or "very soon" when reality is much of it is alot longer term than that. Next time you predict when something will happen, take that time and double, or triple it, and you will likely improve your accuracy.
Anon, can we have your predictions?
LOL
Anon has no predictions. This is what Monday morning QB's do.
They don't have the balls to make predictions.
He would rather play god and tell us how wrong we are months later.
They all tend to forget about the times any one blogging are right.
PIMCO was calling for a 100 basis point rise in mortgage rates after the Fed stopped buying MBS.
I guess the smartest firm on the street are idiots too?
Uhhh...A strange world we live in.
Sounds about right. Is it almost Monday already????
Anon, can we have your predictions?
1. The US will implode eventually - a 50/50 shot it happens in my lifetime.
2. The road to eventual implosion will not be a straight line down. Sometimes, things go up for months or years as things head toward their eventual implosion.
3. As its been for the past year, whiffing on one of the biggest percentage runups in market history, this site will continually believe each and every data point is a compelling case for the "straight line down" hypothesis.
Dude got out at the top. Still looking down at anyone that stayed in the whole time by 30+%.
I trade 10% of my account tops. Did very well in bonds during the runup. Pimco was my largest holding and they were up 18%. I didn't miss anything because I didn't have to chase to get my losses back. Look at the older posts on here. Its all chronicled. Best of luck
"I didn't miss anything because I didn't have to chase to get my losses back."
You missed plenty of things. Most notably:
"The Fed's treasury purchases are just about done, and the MBS QE purchases should be completed by March in my estimate. When this buying binge ends in the spring the market is in for a VERY rude awakening.
I predict interest rates are going to soar as the world's appetite for treasuries disappears once they realize the Fed is no longer a buyer!"
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