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The ‘Steroid’ Housing Recovery

There has been a great deal of discussion in the mainstream media recently about the “housing recovery” that is currently taking place all across the United States. I have been using technical and trend analysis in the stock market for 12 years and began using it in real estate back in 2006. I have been tracking the local and national movements in housing for the past six years by using trend charts that track the irrefutable law of supply and demand for four main indicators and I also use price charts that utilize moving averages on a ten and twenty week basis to determine risk in the local and national housing markets.

Just like the weather, real estate and the stock market move through cycles or stages. The measurement of this movement can be determined by measuring data, which is nothing more than looking at the psychology of markets because people are making decisions that affect price movement in various markets.

With regards to real estate and interest rates for the United States, I use momentum trend charts to determine long term trend changes in the market. The techniques used to create the charts below are used by institutional traders in the stock market in order to make important buy and sell decisions in their portfolios. In most cases what we tend to see is that these trends will move in a sequence with each other as certain aspects of market variables and psychology change.

Just like the stock market the current housing market recovery has been “juiced” by the Federal Reserve and tighter credit conditions that resulted after the 2008 housing meltdown have caused inventory shortages in certain markets because builders were unsure of the true nature of this recovery until recently. This lag in building new inventory along with the Ponzi type manipulation of lowering interest rates by the Federal Reserve and the previous drop in housing prices has given the consumer enormous purchasing power if they can qualify for a loan. In order to achieve this “stimulation” in the form of increasing home prices the Federal Reserve balance sheet has grown from $924 billion in mid-September 2008 to $3.013 trillion in January 2013.

Part of the current housing “recovery” has been driven by large institutional buyers of distressed real estate in the form of public and private REITs. A large amount of money is flowing out of fixed income into REIT funds in order to get access to higher yields than is currently available in the bond market. Many of these REIT funds can offer a 7-8% yield to an investor through the acquisition of distressed properties that are renovated and rented out versus lower yields in the bond market that are susceptible to increasing interest rates and lower bond prices in the future. The Blackstone Group L.P. (BX) bought $2.5 billion worth of U.S. homes or 16,000 units with cash. Colony Capital has purchased 5,500 homes since April 2012 and expects to increase investments by $1.5 billion by the end of this year. Silver Bay Trust Corp. (SBY) raised $245 million in an IPO and plans to get involved with single family residences. Lots of institutional cash increasing demand and reducing supply in the hunt for yield! So like it or not the residential housing market has become an asset class in the eyes of Wall Street.

The trend charts I am about to show you have been extremely accurate in determining the macro market conditions for both my local market, Charleston, SC and the United States. These charts gave me the evidence through the use of data to warn my local market of a housing and credit bubble in September 2006. I also used these charts to perform numerous feasibility studies for developers and investors during the 2006-2009 timeframe in order support the present and future macro conditions of my local market.

U.S. Existing Home Sales

As you can see from the chart below there has been an enormous amount of Quantitative Easing (QE) by the government and the Fed since the housing “meltdown” started in September/October 2008. One very interesting facet of the QE stimulation impact on housing can be seen when the First Time Homebuyer Tax Credit was eliminated in the middle of 2010 and the Market Momentum Reading for Existing Home Sales plummeted from 13.2 in April 2010 all the way down to -16.6 in May 2011. It is my opinion that the Federal Reserve realized how dependent the first time homebuyer was on stimulus and that more innovative QE would be necessary in order to pull housing out of the doldrums into a more consistent recovery. This is evident where mortgage rates were artificially pushed down another 140 basis points after the First Time Home Buyer Tax Credit expired and rates went from 4.8% to 3.4% via QE 2, Operation Twist and QE3. First-time homebuyers accounted for 30% of existing home sales in November 2012 and 35% in November 2011 (Source: National Association of Realtors, December 20, 2012.) It will be interesting to see how this trend plays out with the manipulation of rates and current price increases being experienced in many markets. Will this fragmented supply and demand picture move more first time homebuyers off the sidelines? The answer is yes but the question is what will be the impact years down the road from all this funny newly printed money being pushed into real estate?

The problem that the real estate market has in the form of a true recovery is that millions of homeowners are still trapped in their existing homes and are “underwater” because they were convinced by friends or certain realtors that promoted “It’s A Great Time to Buy” during the 2005-09 time period. The millions who are now trapped in their existing homes are not able to move up or down which takes inventory and buyers out of the equation in this recent Fed induced recovery.

The QE impact can be seen in the whipsaw action of what is supposed to be a slow moving trend where Existing Home Sales went Favorable on September 2009 and then reversed back to Unfavorable status on August 2010.

New Home Building Permits

It is estimated that approximately 20% of the total U.S. economy is tied to real estate construction. Do not think for a minute that Bernanke and the money printers at the Fed are not aware of the impact an improving housing market has on the economy and most importantly their Too Big To Jail (TBTJ) gangster bankster buddies. New homebuilders will pull more building permits when demand increases. What is fascinating about the chart below is how demand for building permits increased after the First Time Homebuyer Tax Credit was initiated in the beginning of 2009 and then ended in the middle of 2010. Upon ending the demand for new homes fell off a cliff from May 2010 until April 2011. The Fed apparently saw this scenario and had a simple plan; let’s make it cheaper to buy versus renting by artificially lowering rates down even further into the 3% range.

Our original Unfavorable Market Alert for building permits came in April 2006, which was very timely. However, the Fed stimulus created two very quick signals in March and July 2010. The February 2012 signal has been very strong and not slowed down yet.

It is my opinion that the destructive forces of the 2008 housing meltdown, which sucked demand out of the housing market due to economic uncertainty and the lukewarm demand signals created by the First Time Homebuyer Tax Credit was not enough for many homebuilders to go all in with an inventory ramp up during those uncertain times. This confusing time period of demand created an enormous void in inventory that many markets are now experiencing with the reduction in price and interest rates. Thus, we find ourselves with severe supply and demand imbalances that are driving up price.

Foreclosure Filings

The analysis of this trend is very self-explanatory. As foreclosures increase and those sales hit the market prices will decline and vice versa. The trend of foreclosure filings will also give a good indication of the health of the local and national economy since this indicator will become unfavorable as more people lose their jobs and have no means to make the mortgage payment. In order to generate this chart I take defaults, auctions and REOs from RealtyTrac on a monthly basis.

The Foreclosure Filings indicator was a disaster and increasing once the economy and housing market imploded. However, we see a steady decline from July 2008 all the way to the point where the trend switched in December 2010. Foreclosures are still a problem but the supply has been reduced for numerous reasons which include modifications, banks holding inventory, and lawsuits. These foreclosures present an important part of the shadow inventory but we can only see what we can see until the banks are more transparent about what is sitting on their books. With housing prices currently rising many banks may be even more reluctant to release distressed inventory on the market if they can stall.

What is interesting is the Foreclosure Momentum Reading switched to favorable in December 2010 which is right after the artificial intervention of “robo-signing” debacle which hit in November 2010 and resulted in a weak mortgage settlement which many believe gave banks reason to boost shadow inventory and preventing “underwater” homes from hitting the market and helping prop up the housing market.

Interest Rates

This is where the Fed has waived its “magic wand” in a major way to help improve the real estate market. This helps not only the economy but the government as well. However, there is a cause and effect relationship that comes with Ponzi financing the mortgage market to the tune of $80 billion per month in an initiative of buying longer-term Treasuries and simultaneously selling some of the shorter-dated issues it already held in order to bring down long-term interest rates. Anytime you reduce the cost to borrow hundreds of thousands of dollars by 280 basis points it will have an impact. The result is enormous purchasing power by families who in many circumstances now buy a new home cheaper than they can rent one. What family would not want to fulfill their American dream with this scenario at hand?

Case in point: If I took the interest rate of 6.2% and the HPI for homes in the U.S. in the first quarter of 2007 ($378k) vs. a 3.4% rate for a home in third quarter of 2012 at an HPI of $315.5k and compute PITI (Principal + Interest + Taxes + Insurance) payment without a down-payment I get a mortgage payment of $2423 in 2007 vs. $1508 in 2012 on the same house! This represents a payment that is about 37% less than what it would have been in 2007 near the top of the market. This type of purchasing power is certainly helping drive some of the recovery in the housing market thanks to the Fed but it is coming at a cost that will hit us all in the form of higher taxes and larger deficits in the years to come.

U.S. Price Chart

According to the U.S. HPI data I show a peak to trough drop in U.S. home prices adjusted for inflation that was approximately -23%. I realize many homes suffered worse depreciation than this but keep in mind this chart represents the entire U.S. and I prefer to use this chart at the local market level. However, the sell and buy signals are still accurate and backup what the main indicators were displaying during this same time frame. Simply if you would have sold your home in Q2 2006 and rented and then purchased in Q4 2011 you would have saved a ton of money.

Jonathan Miller of Miller Samuel mentioned last week the following which is spot on with regards to price and inventory: Tight lending standards has prevented many sellers from listing their homes because they don’t qualify for the trade up, holding supply off the market. The shortage is manifesting itself by also keeping people unaffected by tight credit from listing until they find a home they wish to purchase. Record low mortgage rates keep the demand pressure on as affordability is at record highs. Rising prices are not really based on anything fundamental like employment and a robust economy.

Tight credit + record low mortgage rates => reduced supply + steady demand => rising prices.

Source: “Tight Credit Is Causing Housing Prices To Rise”: Miller Samuel

The current Consumer Price Index (CPI) shows to be around 2.3% but I do not believe this is accurate because we all know the government manipulates CPI and has changed the way they compute inflation over the years. When adjusted for inflation, American home prices increased by an average of about half a percentage point per year from 1890 through 2008, according to data compiled by Yale University Professor Robert Shiller. However if we go with the BLS number and compare it to the 14% inflation adjusted increase I show in the HPI since Q1 2010 I would say current home prices are overvalued by around 10-12% thanks to the Fed. This is a big number that may not revert to the mean for a while because housing does not change trends as quickly as the stock market for example. Questions loom for housing prices in the future such as when the Fed tapers off the QE, builders catch up on inventory and/or interest rates begin to rise. It will be interesting to see how the current manipulated and fragmented equation of supply and demand impacts housing prices in the future. Be careful because it could take a few more years before a reversion to the mean gets established, which could result in a future mini housing correction.

In conclusion, it is obvious that the “recovery” has been pushed up in a major way by Bernanke’s green ink stained hands. The housing market has now become much more volatile than the past due to it becoming a major profit center for Wall Street banks once the securitization of mortgages took effect. Housing has become “stronger” just like a bodybuilder who injects himself with steroids except in this case QE is the “juice.”

Now we all know Bernanke really does not give a rip about the Realtors (No offense guys and gals) but rather they are the direct beneficiary of his duty to protect the banks who need a stronger real estate market in order to repair their balance sheets and increase profits.

When an entity with the power to print money and the TBTJ banks manipulates the irrefutable law of supply and demand with regards to the four major indicators of existing home sales, new building permits, foreclosure filings and interest rates it eventually makes an impact. The problem with this strategy is that it creates the traditional boom and bust cycle in the economy that we have all grown to fear because of these Keynesian policies. Nobody wants to swallow the hard pill and allow the free market to dictate supply and demand and thus price but rather the preferred method of manipulate and stimulate. The question remains that since the Fed has made it very difficult for investors to achieve any yield in the bond market the Zero Interest Rate Policy (ZIRP) creates a dash for riskier investments in the stock and real estate market that are prone to higher volatility as demonstrated over the past six years.

The big question will be where the next bubble will take place due to these Boom/Bust policies we have been witnessing for so many years. I feel as though it will be in the bond market but at the same time that appears to be too obvious of a choice so it may occur somewhere else. One thing I know for sure is that the Fed’s actions of stimulate and manipulate have created consistent boom and bust cycles because they tinker with the free market. So I would encourage everyone to keep a close eye on the market and make sure you implement proper risk management in all housing related decisions.

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#Housing analyst, #realestate, #appraiser, podcaster/blogger, non-economist, Miller Samuel CEO, family man, maker of snow and lobster fisherman (order varies)
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