Housing, new construction, mortgage rates, CRE, rentals and and,
ultimately, "value" are all hot topics in both cocktail party chatter
and behind the closed doors of the Federal Reserve. Bona fide data and
relevant information regarding real estate is strewn across an obtuse
landscape blurred by "seasonally adjusted" data and skewed by market
manipulation and meddlesome government policies. We at Banshee Holdings
will attempt to "dig down" through the layers of sedimentary data and
present a "concrete" synopsis of U.S. housing markets.
To understand the idiosyncrasies of "real" real estate, the scope of the market itself must be understood. The latest census report estimates there are 350,000,000 people permanently residing in the United States. The 2012 update of the census indicates 135,000,000 housing "units" shelter our population. 85,000,000 of these units are detached free standing structures with multifamily buildings holding about 40,000,000 people and the remaining 10,000,000 in trailers. This is further broken down by 5,000,000 seasonal residences, 18,000,000 units vacant or for rent and 7,000,000 held off market. All in all about 85% of the existing "units" are occupied. Upstream data can be verified here.....http://www.census.gov/#.....66% of these residences are lived in by their owners, the rest are income, vacant or used seasonally. It should be noted our population has a net increase of over 3,000,000 people a year. The aforementioned numbers form the broad basis from which all reliable US real estate data is contrived. As seen, US housing is a large (NAHB data shows housing and home construction is 18% of GDP ), diverse and growing market.
A market, by definition, is where buyers and sellers convene. To understand the RE market and the final exchange of dollars for property, we must look at the forces that affect the market. In real estate these interacting forces are interest rates, inventories, starts, new home completions and, finally, sales. These dynamics affect both the supply and demand side of the exchange.
As everyone understands, interest rates are historically low. Translating this over to housing, according to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage was a record low 3.35 percent in December 2012. Though correlation is not causation, the charts below indicate that as borrowing costs have declined, both new and existing home sales have risen. The charts indicate a combined sales total of almost 5,000,000 homes in 2012,
It should be noted, 70% credit creation in the United States begins with home mortgage borrowing. The current ZIRP and MBS buyback (bailout) is not only designed to stimulate the economy through dollar (M2) creation but is aimed squarely at this mortgage credit cycle. Bank debt and risk is being lowered, the cost of money has never been cheaper. As the charts indicate, housing is, and should continue to be, a direct beneficiary of the current fiscal and monetary policies.
Understanding low rates are a tailwind, home sales should be further broken down into permits drawn, starts, completions and sales. The chart below tracks this activity over the last 40 years.
As seen, sales are lagging starts and completions, but the market is optimistic and moving up. It should be noted here that the National Association of Realtors report last month stated "Housing starts surged by 12.1% in December proving that the housing recovery is back." Additional hype reported seasonally adjusted December starts: 954,000 (Up 12.1% from November). From the report:
903,000 permits
954,000 starts
686,000 completions
377,000 sales (as of November)
NAR data is annualized from current month data. The actual numbers last year are:
To understand the idiosyncrasies of "real" real estate, the scope of the market itself must be understood. The latest census report estimates there are 350,000,000 people permanently residing in the United States. The 2012 update of the census indicates 135,000,000 housing "units" shelter our population. 85,000,000 of these units are detached free standing structures with multifamily buildings holding about 40,000,000 people and the remaining 10,000,000 in trailers. This is further broken down by 5,000,000 seasonal residences, 18,000,000 units vacant or for rent and 7,000,000 held off market. All in all about 85% of the existing "units" are occupied. Upstream data can be verified here.....http://www.census.gov/#.....66% of these residences are lived in by their owners, the rest are income, vacant or used seasonally. It should be noted our population has a net increase of over 3,000,000 people a year. The aforementioned numbers form the broad basis from which all reliable US real estate data is contrived. As seen, US housing is a large (NAHB data shows housing and home construction is 18% of GDP ), diverse and growing market.
A market, by definition, is where buyers and sellers convene. To understand the RE market and the final exchange of dollars for property, we must look at the forces that affect the market. In real estate these interacting forces are interest rates, inventories, starts, new home completions and, finally, sales. These dynamics affect both the supply and demand side of the exchange.
As everyone understands, interest rates are historically low. Translating this over to housing, according to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage was a record low 3.35 percent in December 2012. Though correlation is not causation, the charts below indicate that as borrowing costs have declined, both new and existing home sales have risen. The charts indicate a combined sales total of almost 5,000,000 homes in 2012,
It should be noted, 70% credit creation in the United States begins with home mortgage borrowing. The current ZIRP and MBS buyback (bailout) is not only designed to stimulate the economy through dollar (M2) creation but is aimed squarely at this mortgage credit cycle. Bank debt and risk is being lowered, the cost of money has never been cheaper. As the charts indicate, housing is, and should continue to be, a direct beneficiary of the current fiscal and monetary policies.
Understanding low rates are a tailwind, home sales should be further broken down into permits drawn, starts, completions and sales. The chart below tracks this activity over the last 40 years.
As seen, sales are lagging starts and completions, but the market is optimistic and moving up. It should be noted here that the National Association of Realtors report last month stated "Housing starts surged by 12.1% in December proving that the housing recovery is back." Additional hype reported seasonally adjusted December starts: 954,000 (Up 12.1% from November). From the report:
903,000 permits
954,000 starts
686,000 completions
377,000 sales (as of November)
NAR data is annualized from current month data. The actual numbers last year are:
804,000 permits
780,000 starts
648000 completions
370,800 sales (as of Dec. 31, 2012)
Two things can be drawn from this comparison. NAR data is purposefully
hyped to entice transaction activity. Permits and starts should be kept
in perspective and are more than double sales. The charts below display
completions and the state of the "new" home market in the U.S.
New homes is not a robust market. However, the gap between completions and sales is shrinking a little.
The decline in new home sales can be understood in terms of ownership rates and rentals.
As seen from the chart below, after climbing to its peak in the mid 1990's, home ownership rates are
declining and rentals are increasing.
Consequentially, many of the "starts" are multi-family.
It should be noted here that US median income is $52000 per household. Historically, houses have sold for 3x median income. The chart below shows the median sales price over time of new homes.
Income adjusted, new houses are over 4x median income. The national median existing-home price3 for all housing types in 2012 was $180,800. This multiple is 19% over the historical mean of 3x income. The housing market is being supported by low rates, not pricing.
Additionally, banks and agents are holding back inventory. Inventories have gone from about 4 million in 2008 to 2 million today.
Consequently time on market has dropped with supply from 12 months to 7 months. From the NAR "Total housing inventory at the end of December fell 8.5 percent to 1.82 million existing homes available for sale, which represents a 4.4-month supply 2 at the current sales pace, down from 4.8 months in November, and is the lowest housing supply since May of 2005 when it was 4.3 months, which was near the peak of the housing boom. Year end inventory is 21.6 percent below a year ago when there was a 6.4-month supply. Raw unsold inventory is at the lowest level since January 2001 when there were 1.78 million homes on the market."
The Housing market is not only being artificially stimulated by low rates, but supply constrains as well.
The conclusion from the above data is summarized by Vance Roberts of Street Talk ;
1."The Status Quo {read Fedral Gvt) plan to reflate the housing market with super-low mortgage rates and down payments has worked to some degree.
2.The financial sector’s plan to boost home prices by limiting supply has also worked.
3.ZIRP has created a “crowded trade” in low-risk investments with attractive yields such as corporate bonds, dividend stocks, and real estate, which is being fueled by a self-reinforcing perception that “the bottom is in”"
At Banshee, we always look for a "bottom line" on which to base our
analysis. The bottom line for US housing is the market is bogus. Low
rates and mortgage buybacks by the federal government coupled with
lenders "holding back" inventory has skewed market forces. Supply has
been held below the recession weakened demand, and prices have begun to
rise pushed by low rates. Consequentially, the market as of February
2013 appears to be stabilizing. But it must be reiterated, this market
is being created by government and bank policies.
Perhaps our thoughts can best be summarized by Bob Shiller (Yale professor Robert Shiller: Case/Shiller) who has spent his life studying housing. Below are exerts from a recent interview with Goldman;
"What’s been driving the improvement in the US housing market over the past six to nine months?
Part of the improvement is just the benefit of the summer season. Summer and early fall have traditionally been periods of increasing home prices. Another factor is the ongoing decline in foreclosures. Foreclosed properties tend to sell at low prices and as the foreclosure rate declines, we might expect to see aggregate home prices increase. I also think that price increases that were likely caused by the decline in foreclosures may have been mistakenly taken by the public as a note of optimism, leading them to react to the thought that home prices might be rising again. Inventories of homes for sale are also low, in part because sellers have been holding off on putting their houses on the market in the hopes of further price increases or because millions of mortgages are still under water so many homeowners feel “stuck” in their homes until/unless prices rise more strongly and they can pay off their mortgage with the proceeds of their sale.
Has the US housing market bottomed?
Maybe, but I still worry about further price declines. There’s no really concrete reason for an upturn now; a recent survey of home buyers didn’t find any sudden change in optimism and there seems to be a souring on the idea of home ownership. That might reverse again as the crisis ends. But I suspect that it’s not easily reversed because the whole idea of proudly owning a home has been tarnished. And now Congress is talking about eliminating the whole mortgage deduction or government support for Fannie and Freddie. These are all clouds on the horizon. That’s why I think home prices may still go down.
And on buying a home now?
People think of housing as a form of investment, but really it’s a consumption good. Houses are built to please you and then they wear out, go out of style, and are expensive to maintain. They have a capital value but capital gains on housing adjusted for inflation over the last century, from 1890 to 1990, was about zero. So housing is not really an investment.
Should every American own a home?
Definitely not. There’s something to be said for
home ownership; it continues to symbolize our detachment from the old
world where landlords lorded over us. That sense of independence is an
important part of our culture and I don’t think it is going away anytime
soon, although it may be diminishing. But the emphasis on the “American
dream” of home ownership was overdone. We were so single-mindedly pursuing home ownership that we allowed our lending practices to deteriorate to a tragic end.
And there are many advantages to renting, which oftentimes allows more
flexibility and more convenience. Renting also allows people to
diversify investments. For many people, buying a home involves tying up
all of their cash into one asset – their home."
Bottom
line.....It is a good time to buy a house from an interest rate
standpoint. Prices are stabilizing here though artificially stimulated.
As an asset class, housing has a high "utility" value. Additionally,
Government support of housing will continue as a majority of credit in
the US originates with housing as collateral. However, as in many
markets today, with government intervention comes increased risk. As is
often said in Real Estate....buyer beware....or at least "aware"....
