Monday, December 5, 2011

Housing Market Constipation

Two simple stories illustrate the sad and strange state of the housing market:

Story One:
I was considering moving due to my job change and improved finances.  However in the last year, the most valuable and the least valuable properties on my street both sold for 16% under what I considered the market value.  And it wasn’t just my assessment.  The widow who lived next door to one of the sellers was not very pleased with his selling price.  When the last conversation between two long-time, good, neighbors includes the phrase “You stupid son of a *****”, you know things are not good in the housing market.

So my house is now worth 16% less that I was expecting.  When I subtract the home improvements (windows, deck, structure) that I have made in the last 16 months, I would be selling my house (after 17 years) at an effective $10,000 loss.  You may argue that I should not subtract the improvement expenses, but that is a tough psychological sell.  Therefore I am not selling my house and I am going to stay put and enjoy my new deck and windows
Story Two:

My friend’s wife got a new job about ten miles from where he works.  By moving closer to their workplaces they could cut their total daily commute from 165 miles to 35.  So they fixed up their house and put it on the market.  Under normal conditions it would have sold in three months or less and life would be good.  But the house still sits there months later, drawing little buyer interest with the winter commute approaching.    

Multiply these two stories out by the hundreds of thousands and you begin to understand why the housing market, and the economy, is so weak.  The alarming thing is the two housing markets described above are probably “better than average” locations.  They did not experience overbuilding or rapid property appreciation, yet property values have sunk nonetheless.
Recent information from the Census Bureau indicates that only 11.6% of people in the U.S. moved into a new home in 2010.  This is down from 12.5% in 2009 and is the lowest rate since tracking began in 1948.  Many people can’t move because they can’t sell their houses (either the poor market or one of 10.7 million with negative equity).  Also, more young adults are living at home because they can’t find jobs. And in this recession many older workers lost their jobs and are less likely to move across the country to find work.  The result is that when people aren’t mobile, they don’t spend money on new houses, new furnishings or any other expense associated with establishing a new residence.  This is a major drag on economic growth.

Housing Constipation
The housing market is “constipated”.  It is straining to move.  It is pushing, it is wheezing, it is cramping, but it still won’t go.  The other industries are standing outside the bathroom door, impatiently waiting for the housing market to let loose.  They know that housing has to start producing first before they too can find relief.  But housing is bound up due to poor diet (toxic assets) and poor life style choices (sub-prime mortgages).  So it just sits there producing very little and sometimes emitting some very disturbing gas.

The government has tried to stick its hand in there and provide help with the mortgage modification program, but that failed.  The banks are modifying the mortgages of people that they determine should be helped.  They have a vested interest in not foreclosing on more homes because they already own too many foreclosures.  So the government should just stay out of there and let nature (banks making sound economic choices) take its course.  There is no magic enema for this situation and the laxative of low interest mortgage rates has been futile to this point.
Scraping Along the Bottom

I believe that the housing market hit bottom around February or March of this year.  But I was way too optimistic on the rate of recovery.  Most industries that hit bottom after the great recession skidded and scraped “along the bottom” for an extended period of time before starting to recover.  Housing is doing the same.  It was the last industry to hit bottom because it had the furthest to fall. This skid has been long and continues to be painful.  The industries that fell the furthest took approximately 12 months to begin a recovery.  If housing follows this pattern, look for things to start to improve around March 2012.  The recovery will start slow, but has the potential to grow faster as market slack begins to be reduced.
Here is a review of the current statistics in the housing market.  The number on “where we need to be” and “when we will get there” are my forecasts.  Note that the “where we need to be” numbers are much lower than the housing peak.  This is because the housing marketing in the aughts (00’s) was on steroids.  Those numbers are artificially pumped up and won’t be seen again for many years.

Housing Starts
Oct 2011 = 628,000 (Annual Rate)

Oct 2010 = 529,000
Where we need to be = 1,600,000

When we will get there: 2015
New Home Sales

Oct 2011 = 307,000 (Annual Rate)
Oct 2010 = 282,000                 

Where we need to be = 1,000,000

When we will get there: 2016
Existing Home Sales

Oct 2011 =4,970,000 (Annual Rate)
Oct 2010 = 4,380,000

Where we need to be = 6,900,000
When we will get there: 2014

1 comment:

  1. Don,

    I agree with your thought process needing the housing market to lift off first to drive markets. However I disagree that the fair market value is incorrect. I believe housing was way over-priced and this is a correction from years of being over-priced. Not too many solid investments (legal?) performed at 7% a year for decades.