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Source: Despite Falling Prices, Housing Sector Is Recovering. Really.

Source: The American Dream Of Buying A Home May Be Over: Karl Case

I have been hearing this tired line since 2006. Its time to retire it as a misleading foolish bit of money-losing misdirection.

Lets take a look at the full price index — 1987 to 2012 — and I have boxed off the section I want to focus on:

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If we were to zoom in on that box covering the peak downwards, it looks like this:

click for ginormous version

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Its pretty self-evident that claiming a data series is 2 months old during a 72 month slide borders on insanity. The overall trend has been devastating, the entire 60 day lag down . . .

What about prices and homes sales stabilizing?

Well, not exactly — even that bottom scraping that looks like stabilization is the result of a massive concerted effort between multiple bailouts, fed actions and tax credits:

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Source Street Talk Live by way of Charles Smith

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Previously:
Closer Look at the Housing Recovery Meme in 5 Parts (April 17th, 2012)

1. Debunking the Housing Recovery Story: Shadow Inventory.
2. Home Affordability Reality Check: Can Buyers Afford Homes?.
3. The Problem With Home Prices (Still too high).
4. Foreclosures: A Decade Long Overhang.
5. Fear of Buying: The Psychology of Renting.

Case Shiller Home Price Indices for February 2012, showed annual declines of 3.6% and 3.5% for the 10- and 20-City Composites, respectively. This is an improvement over the annual rates posted for the month of January, -4.1% and -3.9%, respectively.

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Click to enlarge:

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Source:
S&P Indices
Press Release
New York, April 24, 2012

This is a draft from Josh Rosner; I am quite sympatico to much of his analysis:

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Reproduced with permission

The past two weeks, we looked at the Housing Recovery theme, in 5 parts. We sought to challenge the arguments and assumptions of many of the Residential Real Estate bulls.

Here are the distinct parts:

1. Shadow Inventory.

2. Can Buyers Afford Homes.

3. Problem With Home Prices.

4. Foreclosures: A Decade Long Overhang.

5. Fear of Buying: The Psychology of Renting.

Its a broad topic, and this series lays out my views

Spring brings signs of hope and renewal — except in the housing market
Barry Ritholtz
Washington Post
April 7, 10:02 AM

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Ahhh, winter is finally over. Each year about this time, flowers push up through the soil, trees begin to bud — and the stories about a real estate recovery appear.

Am I skeptic? But of course. To understand why, let’s consider a few questions:

What is shadow inventory?

This is important, as lowering the total inventory of houses for sale is how prices stabilize and sales volume moves higher.

Most buyers are familiar with ordinary inventory — houses listed for sale with real estate agents or by owners. Unfortunately, shadow inventory adds to the backlog. It includes bank-owned real estate, distressed houses not yet for sale, short sales and delinquencies that have not yet defaulted. Foreclosure properties are also in the shadow inventory.

These houses will eventually become part of the total supply for sale. Although there is no official count, estimates of potential shadow inventory run as high as 10 million.

That’s not all. There’s also a huge overhang of underwater homeowners — whose houses are worth as much as 25 percent less than what is owed. The owners don’t qualify for a mortgage modification. They may be delinquent but aren’t in default.

Two-thirds of all U.S. houses have mortgages. Of those, an estimated 21 to 29 percent of the mortgages are underwater, or up to 16 million houses. When prices finally do rise, we can expect many of these no-longer-underwater owners to put their houses up for sale. If only one in three do, that is another 5 million homes in inventory.

Are houses affordable?

Here’s where every discussion of affordability seems to start: the National Association of Realtors Home Affordability Index. In my view, it’s worthless.

Why did I come to such a harsh conclusion? The index offers little insight into how affordable housing actually is. In the biggest run up in housing prices in American history, the index never dipped into the level of unaffordable. Imagine that.

As ridiculous as that sounds, it’s even more absurd when we look at the NAR methodology, which ignores factors such as family savings rates, cash assets, consumer credit, indebtedness, credit servicing obligations, inflation and income gains.

The affordability index looks at the wrong things and ignores the important ones. The correct question is not whether the houses are affordable in theory. Rather, it’s whether potential buyers can afford to buy them.

Why does this matter?

In the real world, buyers have to be able to meet two key financial factors: down payments and mortgages.

Today, most families are cash poor and debt rich. They are deleveraging, not building up savings. Most simply do not have the $40,000 to put 20 percent down on a median priced house.

If you happen to have a down payment, there’s another hurdle: Qualifying for a mortgage. You must have a good credit score, not too much debt, a steady income, good employment history, etc.

The simple truth: House prices are down 35 percent from their peaks and mortgage rates are at record lows, but for those lacking the down payment and /or ability to access mortgage credit, houses are only theoretically affordable — but not for them.

Are the prices cheap?

Few had forecast the steep drop in median house prices.

Some regions that were excessively frothy during the boom — California, Las Vegas, South Florida and Arizona — have seen much greater price drops. Other areas had laws (Texas) or financial conventions (New York City) that mandated significant down payments and other prudent requirements and avoided much of the bloodshed.

The conventional wisdom seems to be that prices have stabilized and are overdue to start rising. The data, however, suggest something else. The most recent Standard & Poor’s / Case-Shiller index of national prices (January) shows prices are still falling, about 4 percent year-over-year.

There are some favorable factors:

• Prices are falling more slowly than they had been earlier.

• Nationally, house prices are back to where they were in 2003.

• The median prices of renting vs. buying now favor buying.

It’s not terrific progress, but it’s a marked improvement over three years ago.

What is the psychology of renting?

As the chart shows, costs of owning vs. renting are back to where they were in 1997, 1988 and 1976. The context is obviously different today. However, this is a favorite metric to show that houses are not all that expensive.

While rentals look less appealing as they go up in price, the other side of the equation is simple mean reversion. By most other metrics, house prices have nearly reverted to the mean.

The relationship between median income and median purchase price is yet another crucial factor, as any buyer who has a down payment and qualifies for a mortgage must earn enough to pay the mortgage.

And therein lies the rub: Real incomes have been mostly flat for a decade. Without real income growth, buying power simply remains flat. As you might imagine, that does not help price recovery in residential real estate.

House prices relative to income have come back down nearly to the mean. The uptick in 2009-10 was based on the first-time buyer tax credit. Once that expired, the prices dropped again.

So prices remain slightly elevated relative to where they have been historically. The variable, of course, is mortgage rates. The Fed’s zero interest rate policy is keeping mortgage rates at unprecedented low levels.

How do asset prices behave following a bubble?

Regardless of the asset class — stocks, bonds, commodities, houses, etc. — assets do not merely stabilize. We have never seen a stock market run up into bubble territory and then revert to fair value. Instead, we careen wildly past that level, to deeply undersold and exceedingly cheap.

That is the marvelous mechanism of markets. It is how assets are repriced, distressed holdings liquidated, capital markets stabilized, fools revealed, speculators punished — and money returned to its rightful owner, the prudent investor.

For a lasting recovery, we need to see houses cheap enough that they fall into “good hands” — long-term owners who can afford their mortgage payments.

Until that happens, houses will stumble along the bottom of the price range. The nation could easily see another 10 percent to the downside — assuming nothing else goes wrong.

This would actually be good news. The government interventions (first-time buyer tax credit, mortgage modifications and foreclosure abatements) have prevented prices from finding their own levels. If they did, houses would be much more affordable, and buyers would come out in droves.

That is how a true housing recovery begins.

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Ritholtz is chief executive of FusionIQ, a quantitative research firm. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture. @Ritholtz

Fantastic graphic from Jonathan Miller working with New York Magazine to figure out precisely how much it costs to move up each floor in a NYC high rise:

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Click for giant graphic:

Source: NY Mag

All last week, we looked at the Housing Recovery theme, challenging the arguments and assumptions of the Residential Real Estate bulls. Last Monday, we began with Debunking the Housing Recovery Story, looking at the huge overhang of Shadow inventory. On Tuesday, it was a Reality Check on Home Affordability. Wednesday, we looked at valuations in the Problem With Home Prices. And on Thursday, we discussed Foreclosures: A Decade Long Overhang.

Today in part 5, we take a closer look at the Psychology of Renting — the factors that have led to a fear of owning homes, and how his may play out in the Housing recovery.

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Way back in 2005, as we were approaching the peak of the Real Estate frenzy, David Leonhardt published an interesting and rather contrarian article, Is It Better to Buy or Rent?. The Pulitzer prize winning business reporter for the New York Times wrote:

“But renting might deserve another look right now. After five years in which rents have barely budged while house prices in New York, Washington, Los Angeles and elsewhere have doubled, renting has become a surprisingly smart option for many people who never would have considered it before.”

That was 2005 — since then, the Real Estate market crashed 35% nationally. Rents have risen dramatically. After under building rental units for a decade or longer, Home builders have been increasing the percentage of multi-unit homes and apartments they are constructing. The Architecture Billings Index has risen. Not owning a home has increasingly become the first choice for many new households.

We have become a Nation of Renters.

Why has this dramatic shift away from the American Dream of home ownership occurred? Some of it is outside of the potential home buyers control — namely, lacking the financial wherewithal of a 20% down payment and/or ability to qualify for a mortgage. But much of it is driven by Psychology — there are very specific fears of ownership that are (at least partially) alleviated by renting:

1. Owning an asset class that is still falling in price;

2. Being stuck with a property you cannot sell;

3. Losing one’s job;

4. Impact of rising Interest Rates on prices;

Despite repeated premature calls of a housing bottom from the likes of savvy investors such as Wilbur Ross and Warren Buffett, we have yet to see prices find much stability. (Premature being the polite word for terribly wrong). What we can legitimately observe is that prices are falling more slowly — but that is not the same as bottoming.

Buyer Psychology plays a huge role in this. When it comes to psychology, we are less concerned with what will actually happen and more focused on potential buyers’ perceptions and concerns of what could happen. That is what drives their behavior.

Falling Prices: Its my opinion that it is very doubtful home prices will fall another 35%; However, buyer psychology is that after a steep drop, the fear of a continuing price slide remains. The prior drop impacts their behavior in such a way that they behave as if a similar fall is likely. We see very similar behavior in equity investors, who after a 50% drop in prices, fear more of the same. Their reaction is to panic and sell out, forming a bottom.

Most people do not want to own an asset class that is still falling in price. The ability to ignore the downside momentum and buy into the fall is beyond many traders — and potential home buyers.

Inability to Sell: If you are a long term owner, the short term price fluctuations are irrelevant. But if you may need to sell your property over the short run — let’s define that as less than 5 years after purchase –  there is a possibility that the home will sell for less than the purchase price. For someone who saved for a decade to build up a down payment, that is a situation to be avoided.

Even worse than the dollar hit is the situation of not being able to sell the house at any price. This is a problem severely underwater owners face. There homes are worth less than their mortgages, and they suffer from a form of economic immobility. Without a banks permission to effect a short sale, they are stuck. The data shows that once a home is more than 25% underwater, the possibility of a WalkAway or voluntary default goes up dramatically. The impact of this default on credit ratings is severe.

Job Insecurity: Some of the Rental Nation psychology also comes from a very legitimate fear of losing one’s income. The mass layoffs during the Great Recession and the inability of many people to get another job of comparable salary is a very credible worry. If one were to lose one’s job, a home mortgage and sale becomes a burden. The thought process seems to be its is its easier to find a cheaper rental than go through the full process of selling the home under duress.

Rising Mortgage Rates: The last element in the fear of buying is probably the one that potential buyers are least concerned with; its also the one that has the greatest potential impact on transaction prices: Rising interest rates.

Purchasers of homes are mostly concerned with their monthly costs — the amount they must pay in interest & principle, insurance taxes and maintenance. Interest rates are presently near record lows. The likelihood of an increase over the next decade is a very high probability. Rising rates are not usually a positive factor in terms of homes prices.

Indeed, from the 1970s to 2004, rates were in a secular downtrend. That was very supportive of higher home prices. As rates fall, one can carry the same house at the same monthly cost with a higher purchase price. For most of the past 3 decades, interest policy of the Fed has been an ally of home ownership. Today, it is likely a future headwind.

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We have seen more than $6 trillion in owner’s equity destroyed since housing peaked in 2006. Look at the Housing market in Japan — its still a mess, more than 2 decades after its 1989 peak.

The negative implications of buyer psychology are still with us. This is a process, one that will take time to heal. A few years of stable prices, an improving economy, and recognition of the many negatives of renting will eventually bring home ownership back into vogue. But that process is ongoing; it may still not resolve itself for any number of years.

We have made some significant progress — but we are not quite there yet.

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See also:
Rent vs Buy Calculator (NYT)

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My Sunday Washington Post Business Section column is out. This morning, we look at the annual premature housing recovery.

The print version had the full headline The eternal optimism of spring — except in housing; the online version had the longer Spring brings signs of hope and renewal — except in the housing market).

Here’s an excerpt from the column:

“Ahhh, winter is finally over. Each year about this time, flowers push up through the soil, trees begin to bud — and the stories about a real estate recovery appear.

Am I skeptic? But of course. To understand why, let’s consider a few questions . . .

Which of course, we do, looking at shadow inventory, affordability, and valuation.

I like the way the Post put heavy emphasis on the Ned Davis Charts in the print edition:
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click for ginormous version of print edition

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Source:
Spring brings signs of hope and renewal — except in the housing market
Barry Ritholtz
Washington Post, April 8 2012
http://www.washingtonpost.com/barry-ritholtz-on-investing-house-prices-are-down-mortgage-rates-are-low-but-is-the-real-estate-market-ready-to-rebound/2012/04/05/gIQAnveZzS_story.html

Washington Post Sunday, April 8 2012 page G6 (PDF)