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Subprime mortgage crisis

The January home sales report from NAR felt to some people like a letdown — the annual rate of home sales dipped from 5.4 million in December to 5.04 million in January. Some pundits, citing the wildly wrong consensus projections from economists, characterized the results as a bad turn for the housing market.

Step back and you’ll see some encouraging signs of a normalization of the existing home market.

The chart below shows the percentage change in January home sales versus prior year for the last 10 years. (This figures are not seasonally adjusted, reflecting the actual number of transactions in each period.) Since 2006, January sales had been down from the year before. January 2008 was the deep point of the housing slump, with the market coming to a screeching halt that winter. Last January improved somewhat, but still declined from a much lower base. This January, home sales were up 7% over last year. That is forward momentum.

yoy sales jan.png

2009 was a year of two halfs: Home sales were down versus the prior year each of the first five months, and then posted increases in each of the following seven months.

The huge year-over-year increases of October and November were anomalies, driven by buyers hurrying to take advantage of a tax-credit that they believed was expiring.

yoy ch home sales.png

The composition of the housing market was highly unnatural in 2009. First-time home buyers made up close to 40% of the market; distressed sales made up close to 30% of the market. The jumbo mortgage market was essentially closed down for the year, putting intense pressure on the high-end.

And, many of the macro dynamics that contributed to the unnatural composition of the market continue to weight it down today. The job market is fragile and a high number of bank-controlled properties comprises a shadow inventory that puts pressure on home prices.

Despite those conditions, the market appears to be in the midst of a recovery.

The recovery is choppy, but it is being driven by a reasonable impetus. People are looking to buy homes, and sellers are reading the market more rationally, pricing homes in order to transact. The sheer human momentum of housing — families forming, expanding, contracting, moving — is creating the underlying energy for home sales. This activity is what has always been the foundation of a rational housing market.

This recovery in the home market isn’t going to lead the economy out of its slump, as in other recessions. To generate strong economic activity, we need an upswing in home building. For the foreseeable future, there is a surplus of existing housing stock — including bank-controlled properties that are held off market — and new construction isn’t needed to satisfy excess demand.

But a recovery in the existing home market is critical to helping to bolster the feeling of security, opportunity and flexibility among the American consumer. And that recovery is clearly underway.

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This week’s report that more than 11.3 million homeowners owed more on their house than their house was worth has prompted a fair amount of discussion among the people I talk with.

The big question is what the data point means.

In practical terms, almost 1/3 of homeowners don’t have an ownership interest in their home.  They are tenants to the bank, and at some point have to make a decision whether the cash cost of the mortgage is competitive with the cost of a comparable rental unit.  Most experts agree that consumers executing short sales will get dinged on their credit report — though not as badly as in a foreclosure — and will need two years of credit seasoning before they can buy a new home.

Of course, emotions factor in to the consumer’s decision in the short-term.   They’ll hope that values will recover enough to let them regain some equity.  They’ll decide that they don’t want to leave their HoCase-Shiller House Prices Indicesme, with a capital H.  And, they’ll wonder whether the government will find a way to step in and help them regain some value. (The continued paring of price declines in the Case Shiller reports fuels the hope that their home will rebound in value.)

Banks have a vested interest in managing the flow of foreclosures and short sales in the market.  The more distressed properties that come into the market, the more downward pressure on prices, forcing banks to de-value the loans on their books.  In the simplest terms, the banks have an incentive to keep the negative equity loans off the market.

Combine the bank and the consumer incentives and you have a stagnant market.  The foreclosure and short sales inventory hangs over the market, but with little threat of creating another precipitous drop in prices.

Talking about this situation with a colleague, we speculated on what this unnatural market dynamic will mean for real estate this year.  One scenario — which I advanced — was that the volume of home sales could easily stay flat, or decline slightly, in 2010, but that the value of those homes would be up significantly from 2009.  The mix of inventory will shift, as more and more  buyers gain confidence that market has bottomed out and begin to compete for the best inventory in the market.

This kind of activity will be the nature of the slow grind the real estate market, and the economy overall, is going to experience over the next couple of years.  It’s not glamorous…not one bit…but it won’t be as traumatic as the past 24 months.

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October Home Sales Snapshot

November 25, 2009

It’s the time of month again to take a snapshot the housing market. We’ve got the new data on existing home sales, new home sales and price trends from all of the authorities, with accompanying commentaries.
The month showed strong performance in unit sales and a continued moderating of prices.
The seasonally-adjusted pace of existing home [...]

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A look at the leverage cycle

November 9, 2009

If you give people money to buy things, they’ll buy more than if they are using their own money. The less skin in the game, the more risk they will take. That’s the essence of what Yale economist John Geanakoplos calls “leverage cycle” theory. An article in the Wall Street Journal last [...]

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Home sales are within a normal band, but the market pressures are not

October 7, 2009

Earlier this year, I spent some time sifting through historical household and housing data to develop a perspective on what “normal” demand for homes was. One conclusion of that analysis, concluded in May, was there was roughly 18 months of excess housing inventory in the market, and as that inventory was worked through, home [...]

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