Nothing But the Facts

All we want are the facts, ma'am.
--"Sergeant Joe Friday" (actor Jack Webb) in the TV series, Dragnet

Like most people, I prefer good times to bad. Even though I correctly anticipated that the imbalances and excesses of the past would lead to an unhappy ending, it is not something I wanted to happen. In fact, I've often said that I wish I'd been wrong. I have friends and family who've been hurt by the events of recent years and who may suffer even more as the Great Unraveling continues to play out.

Still, that doesn't make me suddenly want to close my eyes and imagine I can see things that aren't there. In the end, it doesn't do me or anybody else any good to paint a picture of the kind of world that exists in the minds of permabulls and certain TV pundits. Instead, it is better to try and see things for what they are, warts and all. With that in mind, it's hard to disagree with the facts or conclusion presented by my friend Barry Ritholtz, in a post at his Big Picture log entitled "7 Reasons Why Housing Isn’t Bottoming Yet":

Yesterday, I posted this chart and wondered why “Some people were calling for a housing bottom.” That generated a ton of emails asking about for further clarification.

The people I referred to were the usual happy talk TV suspects (and Cramer) who have been perpetually wrong about Housing for nigh about 3 years. I not only disagree with them, but don’t respect their opinion — essentially headline reading gut instinct big-money-losers. No thanks.

Then there were the slew of MSM who insist each month on reporting that 3% (+/- 11%) is a positive integer. We disposed of that silliness on Friday.

But the crux of the email was over this post. There are a handful of people whom I disagree with, but nonetheless have a great deal of respect for their methodology and process. Over the past year, these have included Doug Kass and Lakshman Achuthan and Bill of Calculated Risk. We may reach different conclusions about a given issue, or disagree on timing, but these are the folks whose opinions force me to sharpen my own.

When I tossed up that chart yesterday,  I had not yet seen Bill’s comments on the subject — but he is one of those people I can respectfully disagree with. We simply have reached different conclusions about the timing and shape of the eventual Housing lows.

There are a plethora of reasons why I believe we are nowhere near a bottom in Housing prices or activity. Here are a few:

• Prices: By just about every measure, Home prices on a national basis remain elevated. They are now far off their highs, but are still remain about ~15% above their historic metrics. I expect prices will continue lower for the next 2-4 quarters, if not longer, and won’t see widespread Real increases for many years after that; Indeed, I don’t expect to see nominal increases for anytime soon;

• Mean Reversion: As prices revert back towards historical means, there is the very high probability that they will careen past the median. This is the pattern we see after extended periods of mispricing. Nearly all overpriced asset classes revert not merely to their historic trend line, but typically collapse far below them. I have no reason to believe Housing will be any different;

• Employment & Wages: The rate of Unemployment is very likely to continue to rise for the next 4-8 quarters, if not longer. This removes an increasing number of people from the total pool of potential home buyers. There is another issue — Wages, and they have been flat for the past decade (negative in Real terms), crimping the potential for families to trade up to larger houses — a big source of Real Estate activity.  Plus, more unemployment means more . . .

• Foreclosures: We likely have not seen the peak in defaults, delinquencies and foreclosures. Many more foreclosures — which are healthy in the long run but wrenching during the process of dislocation — are very likely.  These will pressure prices yet lower. And Loan Mods are not working — they are redefaulting in less than a year  between 50-80%, depending upon the mod conditions themselves.

• Inventory: There is a substantial supply of “Shadow Inventory” out there which will postpone a recovery in Home prices for a significant period of time. These are the flippers, speculators, builders and financers that are sitting with properties that they do not want to bring back to market yet. Given the extent of the speculative activity during the boom years (2002-06), and the number of foreclosures so far, my back of the envelope estimates are there are anywhere from 1.5 million to as many as 3 million additional homes that could come to market if prices were more advantageous.

• Psychology: The investing and home owning public are shell shocked following the twin market crashes and the Housing collapse. First the dot com collapse (2000-03) saw the Nasdaq drop about 80%, then the Credit Crisis of 2008 saw the unprecedented near halving of the market in about a year. Last, Homes nationally have lost about a third of their value since the 2005-06 peak. Total losses to the family balance sheet of these three events are about $25 trillion dollars. These losses not only crimp the ability to make bigger purchases, it dramatically curtails the willingness to take on more debt and leverage. Speaking of which . ..

• Debt Service/Down Payment:  Far too many Americans do not have 20% to put down on a home, have poor credit scores, and way too much debt. All of these things act as an impediment to buying a home. At the same time, to get approved for a mortgage, banks are tightening standards, including 1) requiring higher Loan to Values for purchases; 2) better credit scores to get approved for a mortgages; 3) Lower levels of overall debt servicing relative to income for applicants. Yes, the NAR Home Affordability Index shows houses as “more affordable,” but it conveniently ignores these real world factors.

• Deleveraging: For the first time in decades, the American consumer is in the process of saving money and deleveraging their balance sheets. After a 40 year credit binge, its long overdue. The process is likely to go on for years, as a new generation is losing confidence in the stock market, Corporate America and their government. Think back to the post-Depression generation that were big savers, modest consumers, who eschewed credit and borrowing.  The damage is going to take a while to repair.

There are more reasons I expect the Real Estate market to remain punk for many years, but these are a good place to start when considering the question.

The Housing Boom & Bust, and the 2002-07 credit bubble created massive excesses. More than anything, it is going to take time to resolve them.

Comments

[Tyrone]

From a Kalifornya perspective, I liked this article by Dr. Housing Bubble. He's been optimistically saying housing will bottom in 2011. Here is his support for 2013, which is much more likely in my opinion.

http://www.doctorhousingbubble.com/the-elusive-california-housing-bottom-the-relationship-between-unemployment-and-housing-prices-market-conditions-point-to-a-2013-market-bottom/

[chrisanthemama]

"...banks are tightening standards, including 1) requiring higher Loan to Values for purchases..."

I think you meant to say: LOWER loan-to-values.

[HSpencer]

This is a very good post with lots of up to date information especially about housing. I think common sense can answer a lot of questions about whether the "housing" crisis will decline, or improve, or just what will happen. Consider this:

(1). What is the median income for a family of four in the United States?

Answer:_______________(fill in the blank)

(2). What is the median price for a 3 br, 2 ba house in the United States?

Answer:_______________(fill in the blank)

(3). Will the median income for a family of four in the United States, support the payments on a Median Priced house in the United States? ANSWER: NO.

(4). What size McMansion can be purchased with the Median Income for a family of four in the United States?

Answer:_________________________(fill in the blank)

The above is common sense approach to figuring out the "housing" crisis.

[dearieme]

"Nearly all overpriced asset classes revert not merely to their historic trend line, but typically collapse far below them": if falling prices didn't cross the trend line, then it wouldn't be the trend line.

[thesevenscholars]

Strong argument. It has amazed me the extent to which the financial markets of the world, from government bonds to commodities, have registered a false expectation of inflation.

Retail prices have been falling in the US for the first time in more than 4 decades. Depressed wage levels, falling prices, and rising unemployment are real indicators that point to deflation. As the impact of fiscal stimulus dissipates, I think the actual state of the economy will reveal itself in continued credit contraction in the private sector.

This all spells trouble for the housing market, which is no where near a bottom. The worldwide deleveraging which some have called "The Great Unraveling" will put continued downward pressure on real estate prices.

Anyways, I have enjoyed reading this blog lately. I've recently started my own blog (macro perspective on finance mainly) and was curious where it was possible you could link me in your blogroll (and vice versa). The blog is: www.thesevenscholars.com