Housing: Look Out Below

The July employment and unemployment numbers published today, August 3rd, were worthless and likely misleading.  What has been done in the last couple of decades to the reporting methodologies for monthly labor data, compounded by distortions introduced into the system from the economic collapse of the last five years, has left the heavily-followed employment and unemployment series seriously impaired as to significance, and potentially subject to direct political manipulation  - John Williams, Shadow Statistics

I thought I would briefly summarize where I think we stand with the housing market.  This will be conceptual, but conceptual based on links and data I have presented on this blog, and specifically data and trends so far this year.  If I make any claims that need empirical back-up in your mind, please search the archives for 2012.

An ongoing debate in the media this year has been over whether or not the housing market has bottomed and is poised to move higher.  This "debate" is largely skewed to toward the "bottom is in, blue skies ahead" camp, as that is the overwhelming editorial bias of the U.S. media at large. Unfortunately, the mass perception of anything economic is formed by looking at headlines and hearing sound bytes.  And the sound bytes have been bullishly optimistic.

The truth is that, yes, there has been a slight bounce in home sales this year and slight bounce in prices.  Please accept that this is nothing more than a proverbial "dead cat" bounce.  After all, markets never go straight down to their eventual bottom - there's always a counter-trend "bounce" before the next leg down reasserts its ugly head.  Housing is no different, especially when you factor in the trillions of dollars printed up and borrowed in order to keep the banks from collapsing and giving them room to "reload" on housing debt - albeit under much more stringent credit guard rails than the first time around.

In addition, record low mortgage finance rates, plunging home prices and a shortage in apartment inventory has fueled an investor binge on "investment rental" properties, which has created an illusion of "organic" home sales.  Furthermore, the Government, using your tax money, has been subsidizing the cost of mortgages for those who refi, subsidizing the mortgage principal reduction programs designed to keep people in their homes and subsidizing the transfer of a massive amount of foreclosed homes from FNM/FRE to rental investors.  This dynamic, combined with the massive foreclosure moratorium for most of 2011, has created the dangerous illusion of growth in home sales and low inventory. 

Meanwhile, we have seen a big bounce in housing starts over the past year, fueled primarily by an usually large number of starts in multi-family units.  This of course is the market adjusting to the shortage in apartment inventory.  Over the next six months, this "shortage" will swing back to oversupply, as new apartment inventory competes with a large inventory of rental homes on the market.  Interestingly, in driving around downtown Denver this past weekend, plus perusing the rental listings in craigslist, I have noticed that apartment rental prices has already started to soften up again.

Lower apartment rent will once again start another "negative feedback" cycle which will take house rental rates lower and ultimately force home prices lower.  Oh ya, one more point on housing prices.  Because of the nature of statistical measurement error, the claim that housing prices are actually rising is quite questionable.  The various surveys have shown slight month-to-month increases during 2012.  But, as anyone who has taken Statistics 101 knows (and being a U of Chicago grad, I had to suffer through some rigorous statistics courses), it is more accurate to characterize small changes over short periods of time as being attributable to data sample "noise" - measurement errors and the general nature of random sampling not necessarily being "random." 

Therefore, what has been characterized as "rising prices" by the media, Wall Street and the Government is more likely to be some sideways bouncing along a tenuous level of support which was put in place with a couple trillion dollars in Fed/Government stimulus programs.

So what next?  We are already seeing a significant acceleration in the number of foreclosures this year.  I have posted a couple links recently which show this.  Fannie and Freddie specifically unloaded inventory in order to make room for another big round of foreclosures.  Big banks sitting on a massive number of McMansions in default are now being forced to start foreclosing.  I have seen this in several high-end neighborhoods in Denver and personally know a couple people who have been tossed out of their big homes.  In other words the "shadow" inventory of homes is starting to transition into real inventory.  Not coincidentally, I have noticed a lot "for sale" signs popping up this month.  Ironically, we are transitioning into a seasonally slower period for real estate sales.  It will be interesting to see what the affect on prices will be by the end of this year by what I believe is going to be a large increase in "for sale/for rent" inventory.

Finally, to tie in the quote at the top from John Williams on unemployment, it is completely useless to even think about discussing a bottom for the housing market until this country figures out a way to fix the unemployment and joblessness problem.  How can we possibly have true, organic demand for housing when the size of the labor force - the amount of people who are actually working - continues to shrink?  Did I miss something magical about the demand for housing not being dependent on the number of people who can actually afford to buy a home?