Tag Archives: Case–Shiller index

Housing Bust Is Over! Not So Fast.

The housing experts, Ben Bernanke, the Obama administration, and the Wall Street Journal all want us to believe that the housing market has turned—at last.

 

The next thing out of his mouth will be Quantitative Easing, Round 3.

Headlines like this are in the news this week: “The U.S. finally has moved beyond attention-grabbing predictions from housing “experts” that housing is bottoming. The numbers are now convincing.”

And this: “Nearly seven years after the housing bubble burst, most indexes of house prices are bending up. “We finally saw some rising home prices,” S&P’s David Blitzer said a few weeks ago as he reported the first monthly increase in the slow-moving S&P/Case-Shiller house-price data after seven months of declines.”

Housing starts rose 6.9 percent to a 760,000 annual pace after a revised 711,000 rate in May that was faster than initially estimated, the Commerce Department reported today in Washington. The median forecast of 79 economists surveyed by Bloomberg News called for a 745,000 rate. Which means they were off by 2%. I don’t think this grounds for celebration.

Nearly 10% more existing homes were sold in May than in the same month a year earlier, many purchased by investors who plan to rent them for now and sell them later, an important sign of an inflection point. In something of a surprise, the inventory of existing homes for sale has fallen close to the normal level of six months’ worth despite all the foreclosed homes that lenders own. The fraction of homes for sale that are vacant is at its lowest level since 2006. Which means nothing since the 2006 number was normal, and banks have been holding on to property that they have foreclosed in order to not flood the market and drive up inventory.

In other words, these numbers are completely manipulated by the banking industry in an attempt to normalize the markets.

“Even with the overall economy slowing,” Wells Fargo Securities economists said, cautiously, in a note to clients, “the budding recovery in the housing market appears to be gradually gaining momentum.”

Housing is still far from healthy despite the Federal Reserve’s efforts to resuscitate it by helping to push mortgage rates to extraordinary lows: 3.62% for a 30-year loan, according to Freddie Mac‘s latest survey. Single-family housing starts, though up, remain 60% below the 2002 pre-bubble pace. And, by the way, try qualifying for a mortgage these days. Ha!

Americans‘ equity in homes is $2 trillion, or 25%, less than it was in 2002 and half what it was at the peak, in 2006. More than one in every four mortgage borrowers still has a loan bigger than the value of the house, though rising home prices are reducing that fraction very slightly.

Still, the upturn in housing is a milestone, a particularly welcome one amid a distressing dearth of jobs. For some time, housing has been one of the biggest causes of economic weakness. It has now—barely—moved to the plus side. “A little tail wind is a lot better than a headwind,” says economist Chip Case, the “Case” in Case-Shiller.

 

From here on, housing is unlikely to be the leading drag on the U.S. economy. It will instead reflect the strength or weakness of the overall economy: The more jobs, the more confident Americans are about keeping their jobs, the more they are willing to buy houses. “Manufacturing had led growth and construction had lagged,” JPMorgan Chase economists said last week. “Now the roles are reversed: Manufacturing growth has slowed as private construction comes to life.”

Unfortunately, as we see fewer jobs, all of the new construction will result in a huge inventory of new homes and further bloat an already bloated market.

The biggest threat is that large shadow inventory of unsold homes, homes which owners won’t put on the market because they are underwater, homes that will be foreclosed eventually and homes owned by lenders. Another threat is the holdback that the banks have been managing around homes already in foreclosure, so as to not flood the market. They have been trickling onto the market, slowed in part by government efforts to delay foreclosures; a flood could reverse the recent rise in prices. Or the still-dysfunctional mortgage market could get even worse. 

Don’t believe what you read, folks. The housing bust is far from over.

 


Home Prices Inching Up? What Does It Mean?

Home prices appear to report higher for the third straight month as “sand states” drift away from the crisis. Sand states are Florida, Nevada, Arizona and California. But, what’s really going on is far more interesting.

For the third straight month in April, American home prices twitched a tiny bit higher as values in the “sand states” further firmed while listings in some key northern cities continued to chill, the Case/Shiller survey reported Tuesday.

The Standard & Poor’s/Case Shiller composite index of 20 metropolitan areas showed a year-over-year decrease of 1.9 percent but a 0.7 percent national bump from March to April on a seasonally adjusted basis (1.3 percent non-seasonally adjusted), led by ongoing price rallies in a clump of warm-weather markets beaten up by the housing slump, including Miami, Tampa, Las Vegas and Phoenix.

“I’ve seen (listings here) jumping just like they did back in the day when the banks were approving everything,” said Michelle Tremblay, a Realtor with West USA Realty in Phoenix.

Since last October, home values in Phoenix have inched 12 percent higher, gaining ground during each of the past six months, according to the Case Shiller index.

From Tremblay’s vantage point, however, those loftier home values are akin to steroid-swelled athletes: synthetically pumped prices caused by banks stockpiling foreclosed properties and purposely keeping them off the market until area prices truly soar. Then those same financial institutions can cash in by selling those properties at fatter profits.

“We can see on the street what’s vacant and what’s not. We’re watching these (foreclosed and non-listed) houses just sit and rot,” Tremblay said. “The banks are letting these houses just deteriorate.

“They’re holding them and releasing them slowly to drive the value up.”

Some Realtors in another so-called “sand state,” California, recently have joined that chorus, offering similar, albeit unproven, theories about banks hoarding foreclosures and thus shrinking inventory in most markets.

In three California cities on the Case Shiller index -– Los Angeles, San Diego and San Francisco – home prices have increased during February, March and April.

Fellow “sand state” cities Miami and Tampa each have posted five straight months of home-value gains. Las Vegas, the largest metro area in Nevada – the fourth “sand state” – in April notched its third month in a row of heightened property prices, according to Case Shiller’s survey.

“Realtors across the country are all talking about the same stuff: the banks are the ones in control right now and they know it and they’re going to make the money again – and again and again,” Tremblay said. Not long ago, distressed homes “were selling, I think, too cheaply. And the banks weren’t making the money that they wanted to. So they tightened their inventory.”

Robert J. Shiller, one of the two developers of the monthly index, agreed that “it is an artificial market in that there is a lot of inventory held off.”

But Shiller, an Arthur M. Okun Professor of Economics at Yale University, sees still another hidden reservoir of prospective properties for sale – “a shadow inventory held off by homeowners who might sell if home prices come back up enough.”

Two weeks ago, market analytics service CoreLogic reported that the “residential shadow inventory” – which includes bank-owned homes – had declined to 1.5 million units in April, representing a four-month supply as well as a 14.8 percent drop from the same month one year earlier. In April 2011, the shadow inventory held a six-month supply of homes – roughly the same level as October 2008 when the housing crash began.

Still, with about 90 percent of American mortgages held by Fannie Mae, Freddie Mac and the Federal Housing Authority, “it’s really a government market now,” Shiller said. “So anyone contemplating speculating in housing has to think about what the government is likely to do. And we’re in limbo right now.

“We have a presidential election coming up. We haven’t resolved what were going to do with Fannie and Freddie – presumably something will be done with them afterward.”

Projecting the direction of home prices in several vital northern cities has grown more challenging the past year. In Boston, home prices have dipped during six of the past eight months, according to Case Shiller. In New York, property values have declined for seven consecutive months. Chicago, up a tick in April, has nonetheless posted seven price drops in nine months, the index shows.

Is any of that political and financial uncertainty perhaps fueling some fall-off in home prices those metro areas?

“I guess it is. People are holding off … People are hoping for prices to go back up (in those cities),” Shiller said. “And we’ll see the shadow inventory converted into real inventory if people start to see the prices go back up.”

But in Chicago, where home prices are off 7.2 percent since last August, the Case Shiller index reports, some Realtors are blaming another segment of the home-financing equation.

“The appraisers are keeping the prices low,” said Patrick Hawkins, a broker with Dream Town Realty in Chicago, so buyers can’t get enough financing, and credit is tighter than ever.

The last time Chicago property values were this depleted on the Case Shiller index: November 2000.

“Buyers are willing to spend a little more money right now. Inventory is low. But the appraisers just are reticent to come in with a strong enough number,” Hawkins said.  “What I’m assuming an appraiser would say is: It’s the market conditions, it’s people not having enough jobs, it’s the economy.

“Appraisers – they’re killing the market. The prices have been driven down, beaten to a pulp.”

It would be nice if the numbers supported a shift in the markets, and that the housing slump had hit bottom. But, based on this data, and in spite of what the Obama Administration dreams about, I am afraid we have a long way to go.