Still Shaky

While it is always possible that the housing market has seen its lows, there’s still plenty of evidence that suggests otherwise; among other things:

Potential supply is significantly larger than what is currently for sale

“What Housing Recovery? Distressed Sales Still High, Shadow Inventory Massive”(Forbes)

Housing markets seemed to have turned a corner, with Tuesday’s Case-Shiller data adding to the optimism.  Home prices have risen for a second consecutive month for the first time since the summer of 2010, but much of this is a consequence of the falling percentage of distressed sales, while prices are still more than 31% of their peaks and may take years to recover.  With 11.4 million, or 23.7%, of all residential properties with a mortgage under water, and a shadow inventory worth $246 billion, according to CoreLogic, a true housing recovery is far away.

The market is being bolstered by temporary factors

“Michael Olenick: Still Looking for a Housing Bottom” (Naked Capitalism)

Every day a growing crescendo of housing cheerleaders posit the end of the foreclosure crisis. We’re flipping our way out of the mess that we flipped ourselves into, is their usual line of reasoning. I’ve looked at national data, local data, and even data on my own block here in Florida. I tried to make the evidence prove the market has found a genuine, sustainable bottom. There are clearly gimmicks giving a temporary boost, a great PR campaign that may or may not be coordinated, and some foreclosure flippers that may do well, until they don’t. But the evidence is overwhelming: home prices are anything but stable.

For background, a chorus of the same people that created the housing crisis have been predicting a housing bottom every year or so. They’ve always been right for anywhere from a few days to a few months, then the cycle of foreclosures and lowered home values restarts and causes prices to spiral downwards. This time though, especially in certain micro-markets, there does seem to be measured home price appreciation.

Two trends are apparent. One is that banks are delaying foreclosures, or not foreclosing at all despite long-term delinquencies. The other is that private equity firms – flush with cash thanks to Tim Geithner’s religious devotion to trickle-down economics and the resulting cascade of corporate welfare – have been bidding up and holding foreclosed houses off the market. These two factors have artificially limited supply and, combined with cheap mortgages rates, driven up prices. While we can debate whether these strategies represent the best public policy, these policies are obviously not long-term sustainable.

The raw data is less favorable than the headline statistics suggest

“Spot The Housing Bottom: New Homes For Sale Drop To Lowest Ever; Average New Home Price Plunges To 2012 Lows” (Zero Hedge)

Looking at the headline number in the just released New Home Sales data one would be left with the impression that the tepid “recovery” in housing may be chugging along: after all with a seasonally adjusted annualized 372,000 new homes sold in July, this was an improvement to the revised 359K in June (ignoring that the US housing market at best continues to drag along the bottom). This impression, however, promptly changes when one looks at the underlying data. The reality: the actual number of new homes sold in July was 34,000, the same as in June, and the lowest since March. Of this, a massive 3,000 (yes, three thousand) homes were sold in the Northeast in the entire month. Where things get worse is when one looks at the number of new homes for sale. At 142,000 (of which just 38,000 actually completed), this was the lowest number. EVER.

Two key drivers are less-than-supportive

“Is This the End of the Housing Bust? Not So Fast, Says Shiller” (Total Return)

Many indicators are pointing to a bottom forming in the housing market. New-home inventories are at historic lows. Home-builder sentiment has finally turned the corner. And finally, home prices have ticked up for four months in a row on a seasonally-adjusted basis.

All that might make it tempting to call the “all clear” once and for all. But one of the earliest experts to identify the real-estate bubble, Yale University professor Robert Shiller, isn’t convinced we’ve crossed into safe territory just yet.

His reasoning? The home-price rebound, if that’s what it is, doesn’t yet have momentum – which Shiller’s research has found is the most powerful driver of home prices.

Momentum is the tendency for prices to keep moving in the same direction. It exists, but is a relatively weak force, in the stock market. In the housing market, though, it’s proven to be a reliable predictor of where prices will go in the future.

That’s in part because of what Shiller calls “feedback loops.” When someone makes a lot of money off of home-price increases, his friends hear about it and maybe the media takes note. Others who hear those stories decide to take their chances buying a home themselves. That leads to further price increases and more success stories, and the loop continues.

Feedback loops can help home prices – as they did during the housing boom – or hurt them, as they have with all the bad real-estate news over the last few years.

With several successive months of price increases, you’d think that momentum would finally be in the real-estate market’s favor. But Shiller says he stills sees reason to be skeptical.

“It could be [a bottom]. It’s a real possibility. I just don’t know,” he says.

Among the reasons to be wary, according to Shiller: a large overhang of homes that are either in foreclosure or near it. If those homes flooded the market, it could push prices down even further.

And though momentum is the No. 1 driver of home prices, the No. 2 driver, the unemployment rate, is still well over 8%.

Unusual seasonal influences paint an overly positive picture of current conditions

“Home Prices Rise Slightly, But Not in the Philadelphia Area” (Philly.com)

Michael Feder, CEO of RadarLogic, a New York firm that provides data analysis for real estate, said that although the data exhibited more strength to date in 2012 than they have over the same period in the preceding three years, “this does not necessarily indicate that home prices have hit a bottom.”

Feder and other experts said the mild winter weather temporarily boosted demand.

“Assuming that these buyers would have entered the market later in the buying season under more typical circumstances, the early uptick in housing demand will have come at the expense of weakness in demand later on,” Feder said.

Home prices are not likely to appreciate on a sustained and meaningful basis, Feder said.

“Rather, short-term appreciation will paradoxically short-circuit long-term appreciation and perhaps trigger further declines,” he said.

Activity is being distorted by credit-related factors

“Jonathan Miller: Don’t Buy The Hype About A Housing Recovery” (Business Insider)

Much of the housing recovery you’ve been hearing about is still just hype, says Jonathan Miller of Manhattan-based real estate appraisal company Miller-Samuel.

“We keep throwing the ‘recovery’ word around, but the big numbers are coming from sources being created from the tight market,” he told Business Insider. “Tight credit is causing rents to rise; falling mortgage rates are pushing people to buy.

“There’s this sense that no one really has a sense of where we are in the housing market. Recovery is this very generic, undefined term. Maybe that’s a good thing, not one extreme or the other.”

Ultimately, it depends where you are.

“When you say ‘recovery’ you’re implying that things are going to go up,” Samuel continued. “In certain markets you might see that, but in some you won’t.”

So what does the seasoned appraiser think consumers will see in the market over the next five years?

“A sideways orientation,” he said. “For now, it may make lenders more comfortable and help turn prices around, but I guess I take offense to it because I think when people hear it, deep down they don’t trust the message either. All it does is create more confusion.”