Wednesday, January 19, 2011

More Doom For The Housing Market

Note: My vision may be doomy and gloomy, but it is not seeded in pessimism and negativity - rather it is a product of realism and a desire to understand the truth.  The truth is our only hope for salvation.  After all, the truth is the agent of purification...

I find it amusing that everyone with whom I discuss the housing market seems to understand how bad the market is everywhere except in their own area.  I was chatting with someone a couple days ago about Denver area real estate who is expecting a bounce in the Denver market and remarked that Denver seemed to be in better shape than most big cities.  I agreed that Denver's economy is strong on a relative basis but then I pointed out to her that I saw a list published last week of the top-10 cities for the rate of foreclosures and Denver was 10th on that list.  Hmmm...and the foreclosure situation will get a LOT worse this year:  OOPS

That metric leads nicely into this blog post I came across this morning which describes one of the fundamental problems with the housing market - and one to which I have pointed for a couple years:   almost everyone who wanted to, or could, buy a house has already bought a house over the last 10 years and the pool of available homebuyers is drying up.  And to make matters worse, many of those buyers are now in some stage of mortgage default.  With foreclosures piling up and home-ownership rates declining, the pool of actual buyers is rapidly declining, especially relative to real inventory (real inventory = Govt/industry-reported inventory PLUS shadow inventory, where "shadow inventory" is defined as those who want to sell plus all the homes in default/foreclosure but not included in bank REO).  This blog post discusses the declining pool of homebuyers, LINK.  A post of mine earlier this month (or maybe late last month) better quantifies the shadow inventory metrics.

The mortgage bankers association's weekly mortgage application index was released today and showed further deterioration in the purchase index.  Clearly, with interest rates beginning to trend higher and the housing market in a seasonally "soft" period in terms of demand (I'm seeing "price reduced" signs on top of "for sale" signs all over Denver), you would think that anyone thinking about buying a home would want to lock in the current mortgage rates - and take advantage of "price reduced" deals - and that on a seasonally-adjusted basis, the purchase index would at worst be flat.  Historically, the behavioral statistics for the housing market show that buying activity spikes when interest rates start to rise.  We are not seeing this in the numbers this time.

Which leads me to my final point.  By now everyone knows that the latest numbers show that China (and Russia) unloaded some of their Treasury bond holdings in November (the data has a 2 month lag).  This is not good news for interest rates in this country if that becomes a trend, even if the Fed continues to fill in for the declining demand for - and  rapidly expanding supply of - Treasuries in order to make sure Treasury auctions get funded.  And there's no doubt in my mind that the Fed will do this.  Even after the Fed announced QE2, bond prices at the longer end of the curve (10-30 years) started to drop and interest rates rose.  Expect this trend to continue and expect mortgage finance rates to climb and expect even greater weakness in the housing market this year than is expected by most.


  1. I am wondering how much longer western power can kick the can and hold the current system together.

    Joe M.

  2. Probably for a few years longer than we are willing to believe is possible. I've stopped putting timeframes on my views. I thought were we are now is where we would be by 2005 when i first starting really looking at all this in 1999

    These guys are smart and have better informaition and they have power - Orwellian power - with which to keep playing the right kind of Orwellian/Randian music to the mass of lemmings in this country. Roughly 90% of the people in this country fall into the lemming category, per Nietzsche's insightful observations on the human condition...

  3. Anecdotal evidence, so take this with a grain of salt:

    Here on the west side of Puget Sound, yesterday evening I became engaged in a conversation with a Home Depot employee. We debated whether or not the economy is actually improving (which, theoretically should help the housing market); both of us concurred that despite the ‘happy talk’ coming from the news media, nobody we know seems to truly believe it is.

    And then she made the comment, “There is a million-dollar house just down the street from where I live, and it is for sale now for $200K.”
    No – that is not a million-dollar house, nor is it even a $200K house, since apparently the buyers do not seem to feel it is worth that amount.


  4. Mammoth, I know of at least two homes like that in the Cherry Hills 'hood of Denver. Multimillion dollar homes that went into contract for 1) less than $2mm, 2) less than $1mm

  5. The invisible foot of the market can really cause havoc on time-sensitive predictions.


  6. don't forgot that starting either this year or next we have the first of the 'baby boomers' entering their retirement years. As people get older (and more and more are) they will be looking to sell their houses. This also bodes poorly for overall consumer demand as you get older (I noticed it starting at age 46) you need less and less stuff either b/c you already have it or realize you don't need it.


    In silver, the contango was hit hard about 3 AM this morning with 2 year futures coming in as much as 15 cents relative to spot. The Z11/Z12 futures spread settled 21.40 yesterday and the market today is 13/15. The H/Z futures spread settled 19.2 The market today is 9/11.

    Last time we saw a contango move this significant was in 1997 before Warren Buffet took delivery.

  8. Hi

    Thank you always for good reads.

    A question about Europes talk of partial debt write offs - how would that effect precious metals?

    How I see it - it certainly would scare me out of debt and into another asset class!! Which one?

    Thanks for your thoughts - Regards

  9. anonymous - let's see if how the debt is dealt with. but it won't matter. every western country is still running spending deficits.

    at some point, the world will flee their debt holdings and rush into gold/silver. it will be spectacular if you are long the metals!

  10. House prices will eventually fall to a level that sounds science-fiction to most Americans today. I'm guessing as low as 20% of their peak value. By then, "homeowners" will be so demoralized that they won't even care anymore. Last week, some analyst was saying we're in the 7th inning of this housing mess. lol. I think we're still in the top of the 2nd, and it could go into extra innings.

  11. D'accordo - I agree! Not sure what inning we're in, but 10-20% of peak value sounds right and the game will go into extra innings LOL

    I guess there's a chance the Chinese may start coming over here and buying 2nd homes and thay may cushion the blow somewhat. But then again our Govt might close the borders to that eventually.

    At the high end, a lot of homes have been trading for 20% of peak value. I've seen a couple do that in Denver (multi-million dollar nouveau-riche Mcmansions) and I know homes in FLA are doing that.

  12. Where are the buyers going to come from?

    We've had decades of misallocation of capital building houses with borrowed credit. Once that credit is gone, who's going to be buying all these homes?

    Once we got rid of the manufacturing base in America, we got rid of the real buyers. House prices should have fallen, but the Chinese started pumping us back up with their money. Once the foreign aid is gone, it's lights out for the housing market.

    I think you're going to see these homes demolished and scraped, and then the land will be turned into farm land in order to produce the ever increasing commodities many won't be able to afford.

    You're already seeing banks walk away from their properties in Chicago and other areas. The banks can't make enough money to foreclose. The legal costs are too high, and there are no buyers, even for a cheap house. So the banks walk away from the property.

    Can you imagine how many buyers there's going to be for these houses when people have to spend 75% of their income on food so they don't starve?

    The real crises hasn't even started yet.