By Mike Whitney
Have housing prices hit bottom?
Many analysts are saying, “Yes”.
Economist Bill McBride is one of the yea-sayers. Bill runs Calculated Risk, the Number 1 economics’s blog on the Internet. Here’s what McBride said in a post on February 2, 2012:
“There are several reasons I think that house prices are close to a bottom. First prices are close to normal looking at the price-to-rent ratio and real prices…. Second the large decline in listed inventory means less downward pressure on house prices, and third, I think that several policy initiatives will lessen the pressure from distressed sales…
Of course these are national price indexes and there will be significant variability across the country. Areas with a large backlog of distressed properties – especially some states with a judicial foreclosure process – will probably see further price declines.” (“The housing bottom is here”, Calculated Risk)
McBride is a very disciplined analyst who doesn’t make off-the-cuff remarks he can’t back up with facts. He always sifts through the data thoroughly before he draws his conclusions, which is why his observations have to be taken seriously.
The same is true of Hale Bonddad over at The Bonddad Blog, another reliable source of information. In a Wednesday post covering this week’s Case-Shiller Report, Bonddad draws attention to a datapoint that was entirely glossed-over by the media, that housing prices rose in February for the first time since Obama’s $8,000 home-buyer credit in 2010. Bonddad thinks the sudden upturn indicates that we’ve hit the bottom. Of course, he doesn’t base his judgement on the Case Shiller index alone. He also takes a look at the data from Trulia, FHFA, Housing Tracker, the Census Bureau, and Core Logic, after which he concludes that, ”All of the list prices indexes and all but one of the median/mean sales price indexes appear to have bottomed.”
The breadth of Bonddad’s research is impressive and persuasive. (See the whole post here: http://bonddad.blogspot.com/2012/04/housing-overview-part-2-prices.html.)
Ivy Zellman is another market-watcher who thinks we’ve touched bottom. Zellman is CEO of Zellman and Associates. She made a name for herself by calling the housing bubble in 2006, and has been pessimistic about the sector ever since. (Until now, that is.) Here’s what she said in an interview on CNBC earlier in the week:
“It’s been six long years and I believe the fundamentals are now at an inflection point where confidence is really starting to come to fruition…. Inventories are down considerably in a lot of the hottest markets, we’re seeing rapid rent inflation, and consumers are less negative…I think we’re at the beginning of a very admittedly tepid recovery. But we’re coming from such an anemic base that the numbers could actually be pretty big going into 2013. We’re looking for about a 20% increase, and we think that we’ll continue to upward as job growth gets better and household formation continues to rise from very depressed levels.”
Zellman was also asked about the 6 million-plus foreclosures that are expected to flood the market in the next few years. She responded that she did not anticipate a “flood”, but that “investor demand” and a “manageable disposition process” (The banks will drag their feet) will allow the market to continue to improve. She also pointed out that lending standards are beginning to ease again (“40% of mortgages being underwritten are below 650 FICO”… (and) “Today, mortgage companies are underwriting loans at 90% and 95% loan-to-value.” In other words, we’re back to Square 1, where people who are a clear credit risk are able to borrow up to 95 percent of the value of the house. Even so, looser lending standards and low interest rates do suggest that Zellman may be right in calling a bottom.
Finally, there’s this from Bloomberg News in an article titled “Housing Declared Bottoming in U.S.”:
“The U.S. housing market is showing more signs of stabilization as price declines ease and home demand improves, spurring several economists to call a bottom to the worst real estate collapse since the 1930s.
“The crash is over,” Mark Zandi, chief economist for Moody’s Analytics Inc. in West Chester, Pennsylvania, said in a telephone interview yesterday. “Home sales — both new and existing — and housing starts are now off the bottom.”…
U.S. home prices compiled by CoreLogic, a Santa Ana, California-based real estate information service, had month- over-month gains in January and February when sales of distressed properties were excluded, said Fleming, the company’s chief economist.
“It’s just a matter of months before we get positive year-over-year numbers in the overall index,” Fleming said in a telephone interview from Washington. “Our data lags the reality. The turnaround is happening in the March, April and May time frame.” (Bloomberg)
So, there you have it; McBride, Bonddad, Zellman and Zandi, all reputable analysts who follow housing closely and know what they are talking about. But are they right, are prices really as low as they are going to go?
The Big Picture’s Barry Ritholtz doesn’t think so. Here’s what he said in an interview with The Daily Ticker:
“So far there’s no evidence that we’ve hit bottom. Prices continue to fall and volumes are anemic despite record-low interest rates …The data is pretty explicit; year-over-year, prices are lower….And, look, if this is really the bottom, it’ll be the first time in a major boom-and-bust that we didn’t careen past “fair value” to “deeply oversold” condition. The market doesn’t just revert-to-the-mean after a major bubble like the one that just burst.” (In other words, prices should overshoot on the downside)
Ritholtz is also skeptical about the strength of any housing recovery given the “decade long overhang” of foreclosures that will have to be processed and sold and which will presumably push down prices for some time to come. The number of distressed homes in the so called “shadow inventory” is hotly disputed and could be anywhere between 1.6 million to 10.3 million. (Conservative estimates, like BofA, put the number at 6.3 million homes) Obviously, it’s hard to predict a bottom when the amount of supply remains unknown. The whole thing just becomes a guessing game.
Ritholtz is joined by fellow skeptic Robert Shiller who created the benchmark Standard and Poor’s Case-Shiller home-price index, and who predicted both the dot.com bubble and the housing bubble. Here’s an excerpt from an interview with the Princeton professor on The Daily Ticker
Daily Ticker: A lot of people have just called the bottom in the housing market in the United States, and there’s been some okay data recently. Is that your take? That finally housing prices are bottoming?
SHILLER: When people phrase is that way, they say ‘we’ve reached the bottom.’ That suggests that we have the expectation of a major turning point right now. But I don’t see that. I don’t see any reason to think that prices are going to start heading up dramatically now….
But it’s not like we’re overpriced anymore. Now the question is whether we’ll overshoot, which is a common thing that happens after bubble burst….the problem is we’ve never had a bubble of this magnitude before…….
Historically, if you look at it, interest rates don’t seem to matter very much in determining home prices… The big thing in forecasting home prices is momentum. It’s different than the stock market. So if it’s been going up it will continue going up and if it’s been going down it will continue going down. By that model, which is the most successful forecasting model for home prices, prices will keep going down.” (“Robert Shiller: A Housing Bottom? What Are They Thinking?”, The Daily Ticker)
If Shiller is right about momentum, then prices still have a way to go. And that’s what the latest Case-Shiller report seems to indicate. In February prices dropped in most major U.S. cities for a 6th straight month, and in 9 of those cities, prices fell to their lowest levels since the bubble burst. So, there still doesn’t appear to be much light in the tunnel, just a slowdown in the rate of decline. In other words, prices are just falling at a slower pace than before.
And there are other factors that could delay a bottom in housing prices, too, like long-term high unemployment, or the fact that baby boomers are increasingly downsizing as they reach retirement, (and try to sell the family home) or that 42 percent of potential new homebuyers will have to put off the purchase of their first house because of burdensome student loans, or that owning a home has become less desirable in the aftermath of the multi-trillion meltdown which wiped out so many people’s life savings. All of these will probably weigh heavily on future home sales, but not nearly as much as the prodigious backlog of distressed inventory that will eventually have to be dumped on the market. This “pig in the python” is perhaps 4 or 5 times as large as the ”visible” inventory. And, with that much supply, there’s only one way that prices can go…down.
So, how long will the banks be able to keep their stockpile of homes out of view?
Who knows? What we keep hearing from the realtors we’ve talked to is that inventory has virtually dried up over the last year. Now some of this has to do with the robo-signing flap. Many of the banks decided it would be better to slow their foreclosures until a settlement was reached in the case, which is what they did. But that doesn’t explain why inventories have plunged as much as they have. Just take a look at this list of cities from Redfin which records the year-over-year declines in the number of homes for sale in January:
•Denver (Denver County): -47%
•San Francisco (San Francisco County): -42%
•Phoenix (Maricopa County): -40%
•San Diego (San Diego County): -38%
•Portland (Multnomah County): -37%
•Seattle (King County): -32%
•Orange County: -32%
•Washington DC: -28%
•Los Angeles (Los Angeles County): -27%
•Dallas (Dallas County): -27%
•Las Vegas (Clark County): -16%
•Atlanta (Fulton County): -13%
Does that look normal to you or does it look like the banks are deliberately withholding supply to drive up prices and create the illusion of a market turnaround?
Here’s how housing expert Michael Olenick summed it up over at naked capitalism: “Banks are obviously manipulating the housing supply in an attempt to reignite a bubble to hide their losses, a strategy that’s temporarily working.”
Indeed, it is working. The dropoff in inventory has fueled buyer interest and sales appear to be picking up. I’ve gone to a number of open houses in the last two months and the mood has changed dramatically. The realtors I’ve met are increasingly optimistic about the future.
“The market is really getting hot”, they say. “We’re getting multiple offers on many of the homes that are for sale.”
And what they are saying, makes sense, after all, prices have gone down, interest rates are low, it’s easier to get financing,(slightly easier, that is) and there are more buyers for fewer homes. Why wouldn’t prices start to stabilize or even go up a bit?
According to Zillow, prices have gone up already! They say they saw “a 5 percent increase in home prices between February and March, the biggest increase since May 2006.”
So, is this it? Have housing prices finally hit bottom?
No way. It’s just more shenanigans by the banks. The inventory shell game the banks are playing may work for a while, but it doesn’t address the real problem. There’s just too many houses and too few buyers. Eventually, the backlog of distressed homes is going to have to be processed and sold. And when those homes are put on the market, the supply will rise and prices will fall. You can bet on it.
THIS JUST IN: from an article by Abigail Field at Firedog Lake; More proof that the banks are hiding inventory:
”Phoenix: RealtyTrac identifies 6,611 “bank-owned” properties there. An Arizona realty website lists only 275 for sale. Similarly, Yahoo real estate claims there’s over 8,000 foreclosure properties in Phoenix, but Realtor.com lists less than 4,000 homes of any type. AZHomeonline.net lists a bit over 4,000, plus 312 foreclosures and shortsales. So are the foreclosures in Phoenix on the order of 300 or 6,600? Makes a wee bit of difference when the non-”distressed” market is about 4,000, don’t you think?
Phoenix isn’t the only place where banks are holding properties off the market. In Portland, Oregon, banks aren’t selling 80% of the homes they own, The Oregonian reports. All the bank owned inventory statewide represents more than a year and half’s supply of houses all by itself, according to a RealtyTrac executive quoted in the piece. If the housing inventory is that distorted in Oregon, what’s it like in the hardest hit states?