Tuesday, October 23, 2012

Today's links

1--Disproving the housing bulls, OC Housing

From Mark Hanson report:  Each month we tear apart the monthly housing resale and new home sales data in search of items consistent or inconsistent with the consensus view that US housing is experiencing a “full blown, durable recovery with escape velocity and v-bottom that will last for years...

I will quickly review the data that has me looking looking elsewhere than “recovery” for answers and should have perma housing bulls overweight this sector looking at a hedge or three.
Data Overview
  • Housing Demand by Buyer Cohort…very forward looking. Points to significant demand slowing here and now
  • A Serious Negative...Investors volume NEGATIVE YoY
  • A closer look at the Demand equation…First Timers and Investors Flat to Lower / Repeats driving this market until they go away as well in the off season
  • Builder Sales – Not as “Robust as Headlines would have you believe
  • Santa Clara County…past 7-years pending sales. Closing in on record lows
This one caught my attention because it demonstrates that withholding supply may cause prices to go up, but it also causes sales volumes to plummet....

  • Record Low Supply…a function of never ending foreclosure process delays and 6 million mortgage mods created in the past 2.5 years, which in structure, are worse than Subprime loans ever were; and 50% of all mortgage’d homeowners being zombies.
  • House price gains…a function of the Fed Twist Ops plunge in rates of 150bps YoY increasing “purchasing power” by 15%
  • The one bright spot…but it’s transitory – Organic Repeat Buyers will go away as quickly as they came
  • Item 1) Housing Demand by Buyer Cohort…very forward looking. Points to significant demand slowing here and now
    a) First-Timer demand went flat in May and have remained there for months. Shows house prices already out of whack with flat incomes of first timers...

    b) Investor demand DOWN YoY in August. This cohort won’t come back until Foreclosures start churning back up. Remember, if Foreclosures triple I will be bullish housing.
    This is a big deal. The big hedge funds pulled out of Phoenix as they’ve already driven prices up about 30% off the bottom, and the returns don’t make sense any more. They will return if prices drop, but I foresee a big decline in Phoenix area sales until the first-time homebuyer demand comes back. I expect to see a strong increase in prices in Las Vegas over the next year or two until prices there reach the same investor return thresholds where the hedge funds lose interest.
    c) Repeat Buyers carrying this market…a temporary phenomenon. Low rates and ample supply at mid-to-high end has drawn out years of pent-up supply. But this cohort is thin and weak relative to any time before in history, as over 50% do not have the equity in their present house to sell and rebuy or the credit to get a loan....
    Bottom line, the August Existing Home Sales consensus ‘beat’ came exclusively from a late season surge in “repeat” buyer ‘closings’. This is unsustainable…they are a seasonal cohort. Moreover, I think much of this has to do with short sales closing not only ahead of the school year but the Bush 2007 Mortgage Relief Act fiscal cliff.
    2--CFPB Mortgage Rule Said to Give Lenders More Protection, Bloomberg

    U.S. lenders may get strong protections from lawsuits over most government-backed mortgages under rules being weighed by the Consumer Financial Protection Bureau, according to two people briefed on the policy.
    The so-called qualified mortgage regulations would give banks including JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC)safeguards against legal action arising from the underwriting process, according to the people who spoke on condition of anonymity because the discussions aren’t public. Protections would cover loans issued at prime interest rates to borrowers whose total debt-to-income ratio doesn’t exceed 43 percent. 

    3--The big money moves into housing, Dr Housing Bubble

    There is little doubt that big money is now in the housing game. I love the title of this Bloomberg story: Phoenix Picked Clean, Private Equity Descends on Atlanta:
    “(Bloomberg) Wall Street has got billions and billions of dollars they need to place and it has been determined they want to come into this segment. There are only handful of markets that that’s going to go into. This is one of them that has not seen the appreciation. If I had another chance to go back to Phoenix and wind the clock back 12 months, that’s what I think this is.”..
    In Phoenix investor purchases have been hovering around 50 percent for almost three years. Investors are understanding this is unsustainable and are pulling out of markets and going to other places like Atlanta that saw home prices crash on a later trajectory compared to places like Arizona. At the peak some 20,000 homes were selling each month. For the latest month of data we have 8,979 homes sold, a drop of 4 percent from the last year.
    Mind you that the median home price went from $118,000 to $154,000 so it is unlikely to break many investors unless they over leverage or simply purchase in weaker areas. Yet many are going in with all cash. It is also interesting noting the large number of FHA insured buyers in the mix.

    4--The median price in Phoenix is up over 30 percent year over year. , Dr Housing Bubble

     You read correctly, the year over year median price is up by 30 percent. Did incomes go up by this much? Of course not. For years you have nearly half of all properties being bought in this market going to investors. Rent prices have surged while banks leisurely leak out inventory while shelling out the best deals to other financial institutions with deep wallets. In other words all the bailouts were to create another bubble and crowd out the typical buyer and also, squeeze the wallets of many renters who probably are not able to buy.
    Going back to the paragraphs above, the fact that investors are bidding prices up by $75,000 to $100,000 over market valuations in this current economy is very reminiscent to a mania. If you view the world through the lens of a hammer everything looks like a nail. These bulk investors are diving in head first here and entry level buyers are competing against large funds. This bubble is different. During the early 2000s you were basically competing against anyone with a pulse. Today you are competing with big pocket investors, hedge funds, flippers, and large real estate investment funds.

    5--Where is all this distressed supply, CNBC

    So where is all this distressed supply, given that there are still 5.45 million homes with mortgages that are either delinquent or in the foreclosure process (per LPS Applied Analytics)?...

    The biggest problem is that regular home sellers are not putting their homes on the market at a high enough rate to offset the drop in distressed volumes. Why? Part of it is still a lack of confidence in the market, but most of it that, as of August, about 15 million homeowners still owed more on their mortgages than their homes were worth, according to Zillow. That’s 31 percent of homes with a mortgage. Negative equity and near negative equity is largely what is holding the market back now, even as distressed homes slowly move out of the system.

    Given the huge drops in sales and inventory out West, which had been driving much of the gains in the overall market, some analysts predict deeper sales drops in the coming months. While sales of higher priced homes are up considerably from a year ago, they still make up a very small share of the total market. About 65 percent of the market is made up of homes priced lower than $250,000. These are a lot of numbers to digest, but they add up to a still bumpy recovery ahead for housing
    the problem is more clear when you look at sales figures by price range. sales of homes under 100k were down across the nation but down 47% out west your over year where investors have really cleaned out the market.
    9--Defining a ‘qualified’ mortgage, Mark Zandi, WA Post
    The study finds Dodd-Frank’s ban on loans with the highest risk of default—for example, those with prepayment penalties or no income documentation—fixes the bad underwriting that caused the housing crisis. Adding a down-payment threshold set by the federal government would do little to reduce defaults relative to the large number of creditworthy home buyers it would push from the market. These findings are particularly significant because the stalled housing market has been a key obstacle to economic recovery

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