The Distressing Gap
click for ginormous graphic
Chart via Calculated Risk


Yesterday, I posted a chart showing how weak New Home Sales were relative to existing home sales.

Mark Hanson wanted to flash some color on that — here is his 3 part explanation as to why the Builders are having such a difficult time:

1) No Flippers: The reason that New Home Sales is still down 60% from the peak while existing is only down 25% is due to the new-era private and institutional “buy to flip/rent” investor. They don’t call Hovnanian for buy to flip or rent opps.

This shows how powerful a force new-era investors — driven by the QE inspired quest for yield — really ‘were’. I say ‘were’ because at 2.5% on the 10s a house yielding 3% doesn’t look as good as it did with 10s at 1.5%. If institutional investors leave this housing market Existing Sales and prices will look a lot like they did after the 2010 Tax Credit sunset and the 18 month stimulus “hangover” ensued.

And with Foreclosures/short sales down up to 70% in the most popular legacy “Bubble Years”/new-era “recovery” regions I think it’s safe to say that investors will turn into net sellers soon, if they not already are.

2) EHS Double Count Flipping: Moreover, it is very important to note that “flipping” is at a high meaning Existing Home Sales are being counted TWICE in a year in many cases…the first time when the bank REO or short sale is done. And the second 3 to 12 months later after it’s been rehabbed/remodeled. This could be boosting Existing Home Sales by 3-5% per month. When you “flip-adjust” the past year of Existing Sales they are not so spectacular either…pretty flat in the context of “post-crash”.

3) Overcounting Distressed Market Values: Lastly, counter intuitively the distressed market — now at 6 YEAR LOWS in terms of volume (due to OVER 6 MILLION “new-vintage, higher-leverage, worse-than-Subprime loans AKA: loan mods) — was responsible for an outside percentage of the Existing house price “appreciation” we are seeing. That’s because when I buy a dump for $150k, put $50k into it (cost basis $200k) and resell for $230k, the popular price indices — included Case-Shiller if owned over 6 months by the investor — pick it up as $80k “appreciation” when in fact it’s only $30k…and a suspect $30k at that.

Bottom line, the distressed market was “the” housing market for years. It’s what everybody wanted. It has been absolutely responsible for the short squeeze in housing over the past 18 months and a large percent of house price gains (of course, the 30-year fixed mortgage rate being forced down in QE3 from 5% to 3.5% was worth 15% to house prices as well). And the artificial lack of distressed due to loan mods, new anti-foreclosure laws, and perma foreclosure timeline extending — coupled with rates back to pre-QE3 levels — will be responsible for “Hangover 2″ that follows.

There you have it, from Mark Hanson.


Category: Credit, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

12 Responses to “Homebuilders Hurt by Housing Hangover”

  1. The lead time is long to get a lot ready to build (known as entitlement), Having buildable land in the right place is just the first step, they then need to plan the community, get the roads built and then get the lots entitled.

    When I flew into Vegas a few months ago there was a lot of new building because there was a lot of leftover entitled lots from the boom. This wouldn’t be the case everywhere and I’m thinking the lack of new home builder sales is more a result of lag time to get to market more then anything.

  2. PeterR says:

    On a related note re: apartment rental market, it appears that some large builders are renting new units at below market value just to fill the new projects. Does the paper loss show up as a charge on the companies’ books? Is the occupancy rate adjusted at all for this? Sooner or later the truth would have to surface either in the companies’ P&L or industry/government reports IMO.

    Or will this obfuscation simply be part of Hangover 2 per the comment at the bottom of the article above?

  3. beaufou says:

    “And with Foreclosures/short sales down up to 70% in the most popular legacy”
    Maybe it is the language barrier, i’m not getting this “down up” thing.

  4. rj chicago says:

    Gotta love M. Hanson!!!

  5. BenE says:

    It’s not as complicated as that. The ratio of house prices to median income is still elevated and mortgage rates although they seem low are not low enough. I am 32yo and would like to buy a house soon but when I calculate what I need to put away for retirement, there is not much left for houses or other things.

    My house is not the biggest purchase I will do in my life, it is only second to my retirement savings which at their peak should be almost five time the value of my house.

    Low returns on investments affects my budget more negatively than low mortgage rates would affect it positively if I had a house.

    Because of that, when expected returns and interest rates drop by similar amounts as they often do, I end up with a smaller amount of spending money.

    Mortgage rates would have to drop significantly more than long term expected investment returns for it to makes sense for me to buy a house. The zero lower bound seems to be preventing rates from dropping low enough. Otherwise house prices should be bellow their long term average or I should have access to an affordable defined benefit pension plan.

    My parents, having to save only 5% to 10% of their income for retirement and given a good defined benefit plan, bought their first house on a single blue collar income at 27yo with a 60% down payment they were able to accumulate in two years. This looks like utopia for people of my generation.

    The student debt issue is a red herring. My wife has $50000 in student debt. We have a long time to pay it and it’s very small compared to the amount we need for catching up on retirement savings.

    • Angryman1 says:

      You mean real interest rates are not low enough.

      This is the opposite problem of the 70′s which started with the BW’s collapse that COULD have been easily avoided by the Nixon admin if they just raised nominal interest rates high enough where the real rate could have stopped the run on gold, triggering a double dip recession. But they didn’t do that because the “left” was at a political height, the prospect of Nixon losing was a no go. After that, the Trilateral Commission begin the resurrection of capitalist power and the influence on the Carter Admin was quite noticeable.

      The problem now is getting inflation high enough and rates stable enough, where the real rate goes negative enough to clear the market. The current orthodoxy believes they can “muddle” through due to the recovery gaining some steam since 2010, leading toward another “great moderation”.

      • BenE says:

        I agree, the solution would be to temporarily overshoot the inflation target. The current timid central bank strategy results in an economic gridlock that does an incredible amount of damage. The situation is especially dire in Europe.

    • capitalistic says:

      It depends on what you mean by “low investment returns”. Counter-intuitively, this is a great market to take risks. But since rates are low, there isn’t a propensity for risk taking. You should consider an index fund and let it ride. If you believe in the long term returns of stocks, you should be fine.

      You can always buy a home and a home shouldn’t be viewed as an investment…

    • sgetz says:


      I am with you bud. Have about 200K in student debt, just starting to able to save and make real money at 39yo. Living in Chicago with high real estate prices, no growth in real estate value, very high real estate tax burden and having to save for retirement, buying home seems a poor use of limited resources.

      I expect housing prices to further stagnate after QE with shadow inventory, rising interest rates and downsizing boomers. Given the high carrying costs, a home must appreciate in this area to not be a gigantic drain on earnings and I just don’t see enough organic economic growth to overcome the myriad head winds which bend against home price appreciation.

      The constant drum beat of the “buy home” cheerleaders remain largely unrebutted.

  6. Greg0658 says:

    if the community will allow ? I’m thinking along the lines of a T&T B&B
    (Tent & Toast Bed & Breakfest) .. hvac climate with all the recreational amenities
    cheap comfortable living for that last 1/3 of the baby boomer J6Ps
    and the kids (if they like the right music :-)

    • WKWV says:

      Greg, I’ve wondered why there isn’t a Woodstock equivalent of Branson, Missouri. Take the VW bus and camp out and buy Bob Weir T shirts, Steve Stills coffee mugs, and tickets to whoever is in town that week.

  7. barbacoa666 says:

    I started buying and renting out homes in late 2009. I intend to hold each home 3-5 years, but could go longer or shorter.

    #1. In my town, an existing home typically only costs 65% to 80% of a brand new one. That makes it hard for home builders to compete. But I could turn a decent profit purchasing new homes and renting them out.

    I don’t think investors will necessarily see fit to sell. The low mortgage rates I am paying, and high transaction fees incentivize holding. The desire to “harvest” equity and redeploy it incentivize selling (I have enough profit in some of the homes I purchased to fund 2 or 3 down payments on future homes). But the lack of good deals (people are often paying too much for “fixer uppers) also incentivize holding.

    #2. Seems correct

    #3. There is something to what he says. But for example, if I put down $30k, invest $20K, and walk away with $60k, that is a nice profit margin. And the other homes in the community rise in value. On the other hand, as far as I can tell, it only makes sense to flip houses if you are a realtor, or own a remodeling business (or can do it yourself. Otherwise, flips rarely appear profitable. But if you purchased low, held a few years, then sold, it’s a lot easier.