By Andy Sutton / Graham Mehl
This will be a bit different of a piece because we are not reporting on something that has already happened; we’re dealing with something that is ongoing and developing. Graham will handle roughly the first half of the article, then Andy will handle the second. Please bear with us as we try to break this editorial into two distinct pieces. You’ll understand as you read it why we chose to handle this in such a fashion.
Since everything in the blogosphere goes by what is officially declared by who, so forth, and so on, ditto, ditto, etc, etc, we are officially declaring there is yet ANOTHER bubble – this one in housing. Again. Perhaps ‘still’ is the proper word rather than ‘again since the first one never really was totally washed out of the system. As an addendum to our very well-received ‘American Economics’ piece, we’ll add a corollary: binges are good, purges are not to be tolerated unless absolutely necessary. If a purge becomes necessary, it will be only enough to give the Proletariat the idea that the problem is actually gone. A purge will never last longer than is absolutely necessary since that might affect consumer spending and the consumetariat’s voracious appetite for debt and financial self-mutilation.
David Lereah, former Chief Economist for NAR, had this publication on speed dial in the days leading up to his dismissal. He’d trot out some baloney line and he’d get stomped – deservedly so. He must have been a busy guy because we know there were lots of people calling his bluff on the rosy housing market. Well, the NAR is at it again. It is still somewhat early in the process in America, but there are definite signs. We want to get on record early. And to preface our content this time around we will say unequivocally that the 2008 financial crisis was not the fault of people paying too much for homes. 2008 was a largely contrived event, meant to partially purge the system and allow for a reset along with concomitant consolidation of wealth (stock market), but leaving plenty of room at the bottom for a re-inflation at a later date.
The anatomy of 2008 is so similar to that of the Great Depression that it cannot be ignored. This was a Greater Depression, but of course the government numbers were fudged to make it not look so bad after all. The fudging was global. This is all theater, people. It is amazing how Americans have an easy time seeing the troubles in Europe and vice versa. The Europeans are the most well-versed people I have ever run across – when it comes to the problems in other people’s backyards. However, neither group is good at seeing its own issues.
I (Graham) have the unique advantage of being US-born and raised (still a citizen) while working in Europe for nearly a decade so I know quite a bit about both cultures. I model what economies and markets are likely to do given certain sets of circumstances. Then I plug in variables. Wildcards if you will, then see what kinds of reactions and changes occur. Andy, on the other hand is US-born, has never been to Europe, but he is probably the most observant person I know. He’s a humble companion and says little, but he’s a trained scientist with multiple US medical certifications and licenses to practice, and worked in cutting edge biomedical research environments before attaining an MBA with honors in Econ. He’s taught at various levels. He’s a trained observer, a student of the scientific method, and is absolutely lethal when it comes to accuracy. He’s a bit more conservative than I am in that he refuses to place time constraints on events. I see his point and we agree to disagree, but I’ve found that people seem to operate better when given a time component constraint. However, I fully understand the dilemma of crying wolf and I try to hedge my remarks regarding time. When you see time constraints provided in this publication, they are mine, not his.
None of this is meant to toot our horns. We get nothing from this other than the satisfaction of helping our fellow man. I bring these points out about our experiences to give you perspective regarding the type of information you’re getting. We’re not always right, despite our collective skills, but we smell a bubble brewing in real estate and so chronicle it we will.
One of the main sources I like to use in doing housing research is The Global Property Guide. It is run out of the Philippines and sports some very comprehensive research and commentary. One of my former responsibilities was to analyze the housing markets in several countries around the globe. I think the tilt is a bit on the rosy side, but the numbers have borne out with independent research I’ve done on my own. For this analysis I’ll be using GPG and ‘official’ US housing numbers from the FHA and the Census Bureau.
The site breaks the world down into logical subunits. For our purposes today, we’ll be looking at North America. The headline article in that section is titled “How much longer can the US housing market grow at this amazing rate?” The subtitle talks about a voracious demand for housing, the eagerness of people to buy houses, and the increase in residential construction activity. The subtitle also points out that prices are rising rapidly as well. Let me quote some statistics, most of which are from the US Census Bureau, then make a few remarks on those numbers.
Above you can look at the Case-Shiller Index for housing in America. The Composite 10 is the top 10 markets by size, the Composite 20 is the 20 largest by size, and the National Index is the whole country. As you can easily see, there was a ramp-up that started in 2000, right around the beginning of the dotcom blowout. So as one bubble was bursting, another was starting. However, the growth was fairly tame until around 2004 and then you’ll notice the change in slope to being more steep. The Index actually topped right in the beginning of 2006 with the largest markets seeing an almost immediate reversal. The 2008 crisis, blame for which was pinned on the housing market, didn’t take place for another two and a half years.
January 2009 and 2012 were something of a double bottom after a very weak attempt to rally in between with the 2012 bottom being notably lower than that of 2009. But notice that even though there was a double bottom, the index never even got close to returning to the pre-2000 ‘baseline’. This failure to return to the baseline is important. It tells us that either there has been a structural change of some sort or that the bubble never fully deflated. Then we see a steady increase in the CS index through the present. This brings to mind a couple of questions, then we’ll get to some of the Census Bureau’s statistics:
1 – Who is buying all these houses?
2 – Mortgage rates have been in the cellar for years now, even when the bubble was unwinding. Why the resurgence in home buying? It certainly isn’t because of a sudden drop in rates.
3 – Note that the National portion of the composite ran significantly lower than the Top 10 Composite in the run-up to 2006, but is much closer now. Is it possible there is some publication bias involved where the various reporters aren’t reporting all their negative results?
During the period to April 2016, the CS seasonally adjusted home price index increased 5.3% (3.3 in real terms, using the government’s CPI joke as a deflator). The previous year period (to April 2015), the increase was 4.3% (no real value given). The FHA’s measure of home prices rose 5.9% in the period to April 2016 (4.6% real – a bigger joke of a CPI deflator).
The most active markets in terms of price increases were Portland (12.32%), Seattle (10.67%), Denver (9.45%), Dallas (8.65%), San Francisco (7.77%), Tampa Bay (also 7.77%), Atlanta (6.51%), Miami (6.44%), and San Diego (6.34%).
The California numbers get immediate attention just because of the fact that businesses and people are allegedly leaving the state in a mass exodus thanks to Jerry Brown and his insane legislature. This immediately calls in question #1 – who is buying all these houses in California to drive up prices at a rate that is nearly 6X that of the government’s cooked inflation metric?
The chart below is a Fannie Mae survey and represents potential homebuyers’ views on rates. In our anecdotal conversations with people looking for homes, rates are almost never mentioned. What is mentioned is the monthly payment, taxes, and whether or not there will be enough money leftover after the transaction to put in all the toys and accoutrements of the American lifestyle. Almost all of the people we’ve talked to are looking to borrow well in excess of the amount necessary to purchase the house so as to have funds leftover for additions, remodeling, etc. Mortgage salesmen have gone the route of used car salesmen. They focus on the bottom line. “What can you afford a month?” and work backwards from there. Let’s look at the expectations of potential homebuyers, then at what the banks are doing to grease the skids.
People surveyed feel there is little chance of rates dropping so they might as well purchase now. However, still nearly half of those surveyed think rates will rise, and although that number is dropping of late, it is still significant. If they expect rates to raise, then now is the time to buy, right? The ones who feel rates won’t change fall into the ‘If I get a good deal, why not?’ category. The banks are quick to assist too. Take a look at the percentage of banks who are easing standards (again) to encourage more foolish behavior:
It’s not an overwhelming percentage yet, but as I said earlier, the bubble is in the earlier stages. By the time it ends, I’d expect to see half or more of banks easing standards to suck as many in as possible. We know wage growth is tepid at best. Home prices are rising and even with the low rates, payments are increasing. Property taxes are increasing nationwide. The aforementioned source doesn’t list trends, but you can look at your own statements from the past decade and decide where the trend is going. The bottom line is housing is becoming more expensive, wages are stagnant, and we’ve got the makings of a bubble being pumped up by a population that is already strung out on credit. My prediction is that this bubble won’t be as large in magnitude, but it will do more damage because people went into this one in comparatively worse shape than the last one 12 years ago.