Monday, August 13, 2012

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?


  1. Criminalizing Dissent

    Mayer stressed this point in the court Wednesday when he cited the sedition convictions of peace activists during World War I who distributed leaflets calling to end the war by halting the manufacturing of munitions. Mayer quoted Justice Oliver Wendell Holmes’ dissenting 1919 opinion. We need to “be eternally vigilant against attempts to check the expression of opinions that we loathe,” the justice wrote.

    Assistant U.S. Attorney Benjamin Torrance argued in court that the government already has the authority to strip citizens of their constitutional rights. He cited the execution of Nazi saboteur Richard Quirin during World War II, saying the case was “completely within the Constitution.” He then drew a connection between that case and the AUMF, which the Obama White House argues permits the government to detain and assassinate U.S. citizens they deem to be terrorists. Torrance told the court that judicial interpretation of the AUMF made it identical to the NDAA, which led the judge to ask him why it was necessary for the government to defend the NDAA if that was indeed the case. Torrance, who fumbled for answers before the judge’s questioning, added that the United States does not differentiate under which law it holds military detainees. Judge Forrest, looking incredulous, said that if this was actually true the government could be found in contempt of court for violating orders prohibiting any detention under the NDAA.

    Forrest quoted to the court Alexander Hamilton, who argued that judges must place “the power of the people” over legislative will.

    Contrast this crucial debate in a federal court with the empty campaign rhetoric and chatter that saturate the airwaves. The cant of our political theater, the ridiculous obsessions over vice presidential picks or celebrity gossip that dominate the news industry, effectively masks the march toward corporate totalitarianism. The corporate state has convinced the masses, in essence, to clamor for their own enslavement. There is, in reality, no daylight between Mitt Romney and Obama about the inner workings of the corporate state. They each support this section within the NDAA and the widespread extinguishing of civil liberties.

  2. One-on-One with Professor William Black

    Professor William Black is an outspoken critic of Wall Street. Black, a former bank regulator and professor of law and economics, says, “Outright fraud caused the great recession, and they are able to do it now with impunity.” Not a single financial elite that caused the crisis has gone to jail. Because laws are not enforced and crooked bankers are allowed to do whatever they wish, Black says, “Each crisis is getting bigger by an order of magnitude.”

  3. Hey Dave...

    Bank of America drills open customer safe deposit box and removes contents. | Deadly Clear