The housing inventory is at, or below, where it was in 2003-2005, the peak of the boom era. Around here, the prices are at, or above, what they were during the same period.
Yet people don’t want to sell. Why not? A simple explanation:
The housing needs of baby-boomers have peaked.
In the mid-1990s, boomers were 30 to 50 years old, and coming into their best income-producing years as the previous housing bust was bottoming.
Then we hit the jackpot with the Taxpayer Relief Act of 1997, which allowed those who had lived in their house for two out of the last five years to sell and pocket their gains tax-free (up to $500,000 per couple).
Combine that generous tax relief with baby boomers hitting their peak consuming age, and you have the greatest real-estate boom in history between 1997 and 2005 – this graph shows how tight the inventory was then:
But in spite of the mortgage industry goosing the market with exotic financing, the boom couldn’t last forever at those prices/monthly payments.
Some of the drop-off was caused by baby-boomers already being satisfied. By 2013, boomers are settling down at 50-70 years old:
The kids are gone or close.
Job advancement is unlikely.
Have enough money for now.
No need to move.
Where are you going to go?
We will probably see the inventory shortage last another 5-10 years, until the elderly or their families start the Baby-Boomer Liquidation sales.
There are 77 million boomers working through the cycle, which will likely be strung out for as long as possible – when was the last time you saw a baby-boomer jump up and say, “I feel like moving today!”? Instead, baby-boomers will age-in-place while enjoying their golden years.
For many the golden years won’t be as golden as they thought, but they will delay selling the family home as the last resort.
It will probably be a fortunate thing that the lenders/government allowed defaults to drag out – we will need their REO and short-sale listings now!
Expect the tight inventory to continue until the voracious housing demand is curbed by mortgage rates rising sharply, or by the next recession.
Homesellers should consider the pricing resurgence as a temporary opportunity, and not think that we’re back on track and expect big gains every year. By looking at this graph, it appears that the recent gains are almost entirely attributed to lower mortgage rates.
Here is a look at how the change in rates have impacted this house value index. There was an inflection point in early 2012 where the combination of dropping rates and low home prices reached its ideal mix, and now values have bounced back some to compensate.
But if the rates dropping into the low 3s are what caused the turn-around, then there won’t be much propulsion to keep it going from here except Shiller’s idea of “animal spirits”:
(click on image to enlarge)
Americans are payment shoppers, and don’t mind paying a higher sales price as long as the payment stays about the same. This alone should keep a throttle on rising prices.
Here is an indicator to measure how the market gets started in 2013 – count the new listings.
We have seen how the inventory impacts the buyer mentality. When homes-for-sale are plentiful, buyers are more relaxed and deliberate. When there is a shortage of inventory, the anxiety heightens, and bidding wars ensue.
The first quarter of 2012 looked like the previous two years. But you can see below how the new listings dropped starting in April, and probably contributed to sales jumping in August as nervous buyers scrambled.
Fewer new listings in April-to-July = stronger sales in August-to-October:
NSDCC Detached-Home Monthly Sales Counts:
The shortage of new listings look like they could have been a temporary event – because since August the number of new listings have been fairly similar to previous years. It should be irresistible for potential sellers to flood the market with OPTs in 1Q13. If they do, buyers will grow cautious, and sales could hit the skids.
We’ll know what to expect just by counting the new listings. The January & February 2012 two-month total was 794 houses listed, when in the previous two years it was around 900, only a 12% dip approximately. But the 2012 April-to-July new listings were about 18% lower than the previous year – that’s when we’ll see how 2013 will turn out!
Yesterday we saw that list pricing of San Diego houses had jumped recently, and a reader wanted to scale it down to local markets.
You can see in this Carmel Valley graph that last year the list pricing never picked up any momentum during the prime spring selling season – the average list-price-per-sf was in a downward trend for the first three quarters of the year. But there has been a surge over the last four months, though still well under all of 2010.
Also note that the buyers have stayed under control the last two years – the average sales price stuck right around Carmel Valley’s magical $330/sf , until recently:
Sales during the prime spring/summer selling season weren’t as successful either, staying well below those in 2010. They tapered off early too – the late-summer plunge in sales looked like totals from winter months, even though inventory had been on the rise through June/July.
But it appears that there must have been a lot of market-testers, because the inventory dropped steadily in the second half.
“Consumer attitudes have gotten a lot more negative about long-term commitments, and the No. 1 long-term commitment most people in this country made is buying a house,” David Blitzer, chairman of the S&P Index Committee, told CNBC.
Prices in August were also revised to show a decline of 0.3 percent after originally being reported as unchanged. The index has leveled off in recent months and analysts are hoping the market is at least stabilizing.
“Over the last year home prices in most cities drifted lower,” Blitzer said in a statement.
“The plunging collapse of prices seen in 2007-2009 seems to be behind us. Any chance for a sustained recovery will probably need a stronger economy.”
This was probably the more pertinent comment from the same article:
The number of U.S. homeowners who are underwater on their mortgages decreased modestly in the third quarter, though levels remained high, data analysis company CoreLogic said Tuesday.
The number of properties with so-called negative equity — in which the amount owed on the mortgage exceeds the property’s value — was 10.7 million, or 22.1 percent of all residential properties with a mortgage.
That is a slight decrease from 10.9 million, or 22.5 percent, in the second quarter, CoreLogic said.
“Although slightly down, negative equity remains very high and renders many borrowers vulnerable when negative economic shocks occur, such as job loss or illness,” Mark Fleming, chief economist at CoreLogic, said in a statement.
As the housing market struggles to recover, the large number of underwater homeowners has prompted concerns of more foreclosures to come if borrowers become unable to keep up with their payments or decide to walk away.
MANY of the world’s financial and economic woes since 2008 began with the bursting of the biggest bubble in history. Never before had house prices risen so fast, for so long, in so many countries. Yet the bust has been much less widespread than the boom.
Home prices tumbled by 34% in America from 2006 to their low point earlier this year; in Ireland they plunged by an even more painful 45% from their peak in 2007; and prices have fallen by around 15% in Spain and Denmark. But in most other countries they have dipped by less than 10%, as in Britain and Italy. In some countries, such as Australia, Canada and Sweden, prices wobbled but then surged to new highs. As a result, many property markets are still looking uncomfortably overvalued.
Since American homes now look cheap, are prices set to rebound? Average house prices are 8% undervalued relative to rents, and 22% undervalued relative to income (see chart). Prices may have reached a floor, but this is no guarantee of an imminent bounce. In Britain and Sweden in the mid-1990s, prices undershot fair value by around 35%. Prices in Britain did not really start to rise for almost four years after they bottomed. Some 4m foreclosed homes could come onto America’s market, which may hold down prices.
The second question is whether home prices in markets that are still overvalued are likely to fall. Some economists reject our measures of overvaluation, arguing that lower interest rates justify higher prices because buyers can take out bigger mortgages. There is some truth in this, but interest rates will not always be so low. The recent jump in bond yields in some euro-area countries has raised mortgage rates for new borrowers. And low rates need to be balanced against the fact that tighter credit conditions make it harder for homebuyers to get mortgages.
Another popular argument used to justify sky-high prices in countries such as Australia and Canada is that a rising population pushes up demand. But this should raise both prices and rents, leaving their ratios unchanged.
Prices do not necessarily need to drop sharply to return to fair value. Adjustment could come through higher rents and wages. With low inflation, however, it could take a decade or more before price ratios return to their long-run average in some countries.
American prices fell sharply, even though homes were less overvalued than they were in many other countries, because high-risk mortgages and a surge in unemployment caused distressed sales. In most other countries, lenders avoided the worst excesses of subprime lending, and unemployment rose by less, so there were fewer forced sales dragging prices down. America is also unusual in having non-recourse mortgages that let borrowers walk away with no liability.
An optimist could therefore argue that our gauges overstate the extent to which house prices are overvalued, and that if markets are only a bit too expensive they can adjust gradually without a sharp fall. It is important to remember, however, that lower interest rates and rising populations were used to justify higher prices in America and Ireland before their bubbles burst so spectacularly.
Another concern is that Australia, Britain, Canada, the Netherlands, New Zealand, Spain and Sweden all have even higher household-debt burdens in relation to income than America did at the peak of its bubble. Overvalued prices and large debts leave households vulnerable to a rise in unemployment or higher mortgage rates. A credit crunch or recession could cause house prices to tumble in many more countries.
Mish’s take on this article (he likes it, but thinks that it has some holes):
Mortgage rates are great for now, and if QE2 goes quietly in the night, it could cause some potential buyers to stay engaged for the rest of the year.
Here’s the recent history of monthly detached sales:
We got off to a good start this year, but with the new pendings starting to drift, I think we can expect sales to trend downward for the remainder of 2011 – unless more sellers start drastically reducing their inflated list prices. BTW, July starts next week.
The average pricing has been steady lately:
Generally, I think people are willing to pay these prices, they just want more bang for the buck – are they getting it? It’s hard to measure, but the general consensus among buyers seems to be, “if I have to pay this much, I’m going to be very picky and push for top quality”.
There has been a slight upward trend in average square footage:
If bigger/nicer houses are selling in better-quality locations, but the averages stay about the same, will we notice? Let’s keep breaking down the stats into smaller increments, and see.
As CR pointed out yesterday, there are now several home pricing indicies.
The one developed by FNC attempts to overcome the problems with the repeat-sale measurements – here is their explanation:
One possible approach to address this dilemma is to consistently use all of the housing stock for each period. To do this it is necessary to have a market price for each house in each period.
Since all the properties do not sell, a model must be created to price all of the major attributes of a house (i.e. location, gross living area, age, lot size, bedrooms, bathrooms, etc.) and then compute an estimated market price for each property. The value of each of the attributes is estimated based on the observed properties that do sell over an extended window.
This approach allows all of the properties to be included in the index which then provides a stable broad based index for each period. Models of this type are referred to as hedonic models and have been used for many decades to estimate the value of a property. The limitation to using this approach for an index has been the general lack of availability of characteristic information about residential properties.
FNC has developed a hedonic index based on the data collected from public records and blended with data from appraisals. The addition of the appraisal data provides the physical property characteristic data that is often missing from public records.
Here is their San Diego Residential Price Index, which has a familar shape to it:
Here is an excerpt from Rich Toscano’s November report at the Voice.
Despite somewhat unfavorable supply and demand situation, home prices held their own in November. As measured by the median price per square foot, resale single family home prices were unchanged for the month while resale condo prices leapt by 7.4 percent. The condo increase brought the aggregate of the two price series up by 1.8 percent from October. The median condo price per square foot is quite a bit more volatile, and thus less meaningful, than the single family price, but nonetheless I’d consider November a positive month for home prices on the whole.
Here’s a look (below) at the more accurate, but less timely Case-Shiller index, which is only current through September. That index peaked in July and had dropped by 1.6 percent over the following two months.
Based on the median price data, I am projecting a further drop of about 1 percent for the Case-Shiller index in October, and then a flattening in November. (These projections are not pictured in the chart above).
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