First of all, I know there’s cool Q1 news out there and coming soon from companies I’m keeping track of. But I’m at the T3 Summit today, so look for the Q1 updates next week.
In the meantime, I thought I would take notice of something… a bit odd.
My friend Mike Simonsen of Altos Research recently put up an excellent post explaining why he thinks the housing inventory levels remain so low. Read the whole thing, since Mike is one of the sharpest guys in the industry, and he uses data that the other analysts often do not.
In summary, Mike thinks that lack of new construction, the “reverse shadow inventory dynamic”, and government policy are keeping homes off the market.
I think his explanation makes sense, but still, I end up with questions.
I figured I’d share them with you all and we can speculate further together. Of course, I hope Mike will swing by and share his thoughts as well.
Housing is back! So says the media and Lawrence Yun of NAR.
872,000 new housing starts in September. Prices are up some 11.7% in September. And Lawrence Yun is projecting 15% increase in home values over the next three years.
So… what the hell is going on over at the FHA?
The Federal Housing Agency, which has played a critical role in stabilizing the housing market, said it ended September with $16.3 billion in projected losses — a possible prelude to a taxpayer bailout.
The precarious financial situation could force the FHA, which has been self-funded through mortgage insurance premiums since it was created during the Great Depression, to tap the U.S. Treasury to stay afloat.
The agency said a determination on whether it needs a bailout won’t come until next year.
The FHA is required to maintain enough cash reserves to cover losses on the mortgages it insures. But in its annual actuarial report to Congress, the FHA said a slower-than-anticipated housing market recovery has led its reserves to fall $16.3 billion below anticipated losses.
The FHA’s cash reserves aren’t supposed to drop below 2% of projected losses. They ended the 2012 fiscal year at -1.44%, down from the seriously low level of 0.24% at the end of 2011.
It appears that the FHA, which guarantees mortgages, has a delinquency problem: 11.14% in September. (Although, that’s an improvement from the 11.89% in June, and 12.09% in 2011.) However, the seriously delinquent category (more than 90 days past due) is up year-over-year from 8.39% in 2011 to 8.54% in 2012. After the “housing is back!” market of 2012. Huh?
Since FHA insures some 16% of home purchases (in 2010, that was 19.1%), a crisis at the FHA is gonna be a pretty big problem for real estate brokers.
I’ve pledged to be more positive and upbeat, but there’s an unsettling feeling at the pit of my stomach.
So what do you make of this divergence in narrative? On the one hand, housing is back! And on the other hand, FHA needs a bailout. Right in the middle of a “fiscal cliff” negotiation, after 2012 saw strong gains in housing market. What the…
Paging economists! Dr. Yun, please call the front desk.
-rsh
I am not an economist, and I don’t play one on TV, and I didn’t stay at a Holiday Inn Express last night… but I kinda look like one. Plus, Seth Price of Placester isn’t an economist either as far as I know, although he’s a good friend who is not only brilliant but good looking to boot. So I figure, I’m gonna have some fun with a blogpost one of his guys (Colin Ryan, who also doesn’t appear to be an economist) recently wrote on the Placester blog (BTW, Placester is our web designer for HearItDirect). Think of it as sending them linklove with some fun economic/politics debates.
Colin thinks that QE3 — the plan by the Federal Reserve to buy $40B worth of mortgage bonds every month for the foreseeable future — is a wonderful thing for the housing market. He writes:
[I]f we’ve learned anything from all the measures the Fed and the government have taken to mitigate this recession, it’s that recovery will come not immediately, but gradually. As far as that goes, the Fed’s plans come with promises to extend near-zero interest rates well into 2015 and continue buying bonds aggressively until recovery is “well established.”
These promises say two important things to consumers. First, the kinds of assets that caused the housing collapse in the first place, long labeled toxic, are safe again. Indeed, by buying mortgage-backed securities the Fed—an authority when it comes to risk—is suggesting that they’re not only safe, but valuable.
Second, by committing to the long haul, the Fed is providing a safety net that will encourage optimism, coaxing consumers out of hiding. “Go ahead,” the Fed is saying, “buy/sell/build that home. We’ll be here to support you.”
So, in the short-term, this buying-up-of-bonds won’t necessarily have an effect on housing, but in the long run, Colin believes that the Fed will stimulate the housing market.
Where to begin… Well, let’s begin at the beginning.
The loss looks ugly, but Realogy is getting healthy, y'all...
Last year, I wrote that Realogy’s numbers looked pretty good to me, despite the fact that Realogy had lost $237m in Q1 of 2011. I figured I might as well dip back into that water since I’m interested in my old corporate home (I started my real estate career at Coldwell Banker Commercial), and well… I guess I’m kinda strange in enjoying looking at financial statements.
So Realogy lost $192m in Q1 of 2012. Sounds bad, right? Well, I know a lot of folks like to point to the big loss number and claim that Realogy is screwed, but… after these results, saying such a thing just exposes you as someone who doesn’t actually read financial reports.
Let’s take a look at a few signs of health that I find very interesting. I did read through the 10-Q, but I think this presentation for the investor call contains enough detail.
Home Prices, 1970-2011 in Gold
I’m on the road so don’t have a ton of time to be doing a long post, but a reader emailed me a post by Barry Ritholtz of the Big Picture Blog that was an Op/Ed in the Washington Post. It’s worth reading in full, so go check it out here.
I thought I’d try to add one tiny little piece of data to a specific point that Ritholtz raises:
Regardless of the asset class — stocks, bonds, commodities, houses, etc. — assets do not merely stabilize. We have never seen a stock market run up into bubble territory and then revert to fair value. Instead, we careen wildly past that level, to deeply undersold and exceedingly cheap.
That is the marvelous mechanism of markets. It is how assets are repriced, distressed holdings liquidated, capital markets stabilized, fools revealed, speculators punished — and money returned to its rightful owner, the prudent investor.
For a lasting recovery, we need to see houses cheap enough that they fall into “good hands” — long-term owners who can afford their mortgage payments.
First of all, I happen to agree with Ritholtz 100% on this point. No asset bubble inflates and then simply reverts to the mean. It goes deep into negative territory, and then bounces back to the mean (i.e., “fair value”).
But I do wonder if we haven’t hit that point of housing being deeply undersold and exceedingly cheap. I suppose the definition of cheap depends on the buyer’s perspective, but the graph above is one from a post I wrote a while back looking at the price of housing in terms of gold — that ultimate holder of value, the non-fiat money in this world of fiat currency.
According to that chart, housing prices in 2011 were down to 1980 levels at least in terms of gold. 1980 was the absolute depths of the Jimmy Carter Malaise, when annual inflation was 13.5% and mortgage interest rates were around 18%. (Reagan didn’t take office until January of 1981, and you can see home prices recovering by 1982.)
The question is whether 1980 price levels are “deeply undersold and exceedingly cheap”, especially when rates are at historic lows thanks to the printing presses of the Fed going full speed. If you have the cash or the gilt-edged credit to get a mortgage in today’s environment, it may just be that prices have tumbled to “exceedingly cheap” levels thanks to unreported devaluation of the dollar.
I’ll have more speculating to do later on Ritholtz’s fantastic series on housing, but I did want to add this little tidbit for now.
-rsh
Courtesy of NAR Research — one of the more valuable things on Facebook — comes this CNBC article on how investors are flooding the residential real estate market:
The number of homes sold to investors more than doubled last year, as rising rents and low-priced distressed properties fueled demand. Investors, half of them using no mortgage, bought 1.23 million homes in 2011, a 65 percent jump from 2010, according to the National Association of Realtors. Half of the homes purchased were distressed properties, that is, foreclosures or short sales (when the bank allows the home to be sold for less than the value of the mortgage). [Emphasis added]
The video above references this explosion in investor interest as well, but goes well beyond that.
This new information from NAR, which the CNBC story references, answers a couple of questions for me on the hot housing market of the past couple of months. As a result, I’m not ready to call the bottom on housing, nor do I think that Renter Nation will pass us by.
Quite a few of my friends in real estate have already called the bottom, and are embarking on a round of marketing to consumers that this is a once-in-a-lifetime opportunity to buy real estate. I would urge them to tap the brakes just a little bit, since credibility is the coin of the trustworthiness realm.
Shiny happy people!
Real estate people are some of the most optimistic people I know. They have to be in order to work a business in which they don’t make a penny without a transaction getting done, and the driving motivation for the consumer is a dream: The American Dream, the Dream of Homeownership, Your Dream Home. Real estate, to some extent, is about dreams, hopes, and visions of white picket fences, kids playing in the backyard, and tasteful interior design reflecting your success in life.
So I generally do not fault real estate agents when they put forth honest opinions that perhaps we have finally hit bottom in this historically ugly housing crash. They’re not being disingenuous; they’re simply optimists.
At the same time, in the current market/environment, I believe a professional has to caveat every positive and be extremely wary of false signals. We’ve already had one false signal when the First Time Homebuyer Tax Credit artificially shifted demand forward, thereby leading some people to claim we’d seen the bottom of the market. Of course, when all that demand dried up, the housing market continued its downward slide.
Jim Walberg, and Ira Serkes, both exemplary professionals with years and years of experience, who know their local markets, and analyze the sales data personally, recently suggested that some markets are turning around. And yes, since every market is different, every market is local, you should call your REALTOR for more information or whatever it is that the NAR commercial says. So please don’t bother commenting/protesting that trends don’t mean anything in your particular local market: I know.
Nonetheless, any reasoned analysis of calling the bottom has to take at least the following factors into account, at the very least as a risk.
On my 7DS blog, and on AOL, I wrote about the phenomenon of super-rich people paying cash for expensive ($5m plus) homes in California. And I wondered what it is that they knew that the rest of us didn’t. Here’s the post on 7DS, and here’s the one on AOL.
Well, turns out, the rich do know things we don’t. The largest bond fund in the world, PIMCO, is dumping U.S. government bonds:
Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., eliminated government-related debt from his flagship fund last month as the U.S. projected record budget deficits.
Apparently, Bill Gross thinks the interest rate is too low on Treasuries given the risks. Risks? Aren’t US Treasuries supposed to be “risk-free”?
Not when you’re running monthly deficits in excess of $220 billion and printing money to deal with it.
Turns out, what Gross is expecting is inflation. He is quoted in a March 4th radio interview on Bloomberg as follows:
Gains in so-called headline inflation matter more for the U.S. economy than Fed Chairman Ben S. Bernanke suggests and rising oil prices may cut U.S. gross domestic product by a quarter to half a percentage point, Gross said March 4 in a radio interview on “Bloomberg Surveillance” with Tom Keene.
“Bernanke tends to think this doesn’t matter — at least in terms of headline versus the core — we do,” Gross said.
I speculated that the reason why the rich were paying cash was that they were expecting significant inflation. The super-rich are far more likely to have access to people like Bill Gross than you and I. Higher interest rates would be the result, and declining value of cash. Since mortgage rates (like all bonds) track US Treasuries, we all can expect higher rates at some point in the near-ish future to compensate for the effect of real inflation.
Turns out, now IS a great time to buy a house. But only with fixed rate loans or with cash. Failing that, gold, ammunition, canned food, and anti-biotics.
Cheers!
-rsh
Do you accept... CASH for this 5BR/4BA Colonial?
The recent news out of California, that cash buyers have set a record in home purchases, is the kind of news that makes me go Hmmmm. I wrote about it on AOL briefly, but wanted to dive into a bit more detail here.
First, the news from the LA Times (h/t: Calculated Risk):
All-cash buyers grabbed a record 30.9% share of the Golden State’s houses and condos in January as low prices lured investors and others, according to San Diego research firm DataQuick Information Systems.
Cash activity has been brisk for months in foreclosure-ridden areas such as Riverside and San Bernardino. But now, the cash buyer has become a major player in Southern California’s most expensive communities, where cash deals account for as much as two-thirds of home sales.
The trend is being driven by several factors, analysts say, including the difficulty of getting a “jumbo” loan from lenders still stinging from the mortgage meltdown. It also reflects speculation by wealthy investors who believe home prices are at or near a bottom.
“A lot of people think housing will outperform other financial investments,” said Andrew LePage, a DataQuick analyst. “This is just a place to park their money.” (Emphasis mine)
There are some tantalizing hints in the full article, but the above is somewhere we can start.
I think this is the tip of the iceberg in which the real estate market — like every other market — is about to feel the effects of real inflation, not yet reported in the official CPI figures.