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Haefling on Housing

Posted By Barry Ritholtz On June 30, 2006 @ 6:34 am In Economy,Real Estate | Comments Disabled

Carl Haefling is a portfolio manager in Bainbridge Island. He is a deep value player in small and micro cap stocks, biotech and medical devices; he and often takes a very long term view. Carl is often a contrarian — recently, he has been accumulating shares of Jet Blue (JBLU).

He also has a sharp eye for the Macro-environment, and I often find his take on events intriguing. Following the recent data releases on Housing, he recently observed:

I believe the stock market is predictive — not reactive — except for relatively short periods of time. 

Housing stocks topped out in Dec and are now down up to 50% in numerous cases from those highs. It will take a couple of years at least for this scenario to complete itself.  A significant decline in the housing market over the next 2 to 6 years is being predicted by housing stocks.

It takes time for the housing market to fully unravel, we are in the early stages of stage 1.  Stage 1 is where the market begins to recognize that prices have reached levels that reduce affordability and thus the number of possible buyers. Sellers, who have been holding back selling for fear of not selling at the top, begin posting signs advertising their home, usually at prices that reflect the highest paid for a similar home, and suddenly the inventory of homes foresale explodes. This has already happened in many parts of the country. This stage may take one to three years to fully unfold. 

Stage 2 is price cuts by those who are becoming convinced that the market has softened if they want to sell their home they better cut prices.  Once those "reduced" signs start appearing, buyers start reducing offers, even on properties that have been already reduced.  Prices will drop far lower then anyone thinks possible in stage 2. 

Stage 3 is the exhaustive phase.  Buyers are afraid to buy, investors have no liquidity, mortgage requirements demand a high down payment and supporting cash flow, and the press is filled with articles claiming real estate is a terrible investment. (which happens to be true in the previous 5 years).

There are serious other problems that will contribute to this cycle, including a decline in the buying power of the middle class, tilting demographics which will reduce the number of possible buyers beginning about 2010 for real estate and possible shifts in values of owning vs. renting.  There remain other problems that are related to real estate but not thought of as being directly connected.  A decline in the value of the dollar may force foreign owners of commercial and residential real estate to try and liquefy.  Higher interest rates because of inflation or stagflation  also  impact real estate prices. 

And one of the unseen values will be the desire to downsize as the cost of insurance (in some high risk hurricane states you cannot get homeowners insurance except through the state at 3 times previous cost) explodes, the cost to heat and air-condition accelerates, and the cost of maintenance become detriments to ownership. 

A house may go from being something that we take pride in, to becoming a burden.

Interesting stuff –thanks Carl.

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