The sun is shining on these pieces that are scattered all around
This house was everything we knew …
Brick by
brick, we can build it from the floor
If we hold onto each other, we'll be better than before.
And brick by brick,
we will get back to yesterday …. (Train)
If we hold onto each other, we'll be better than before.
And brick by brick,
we will get back to yesterday …. (Train)
Last December I described the housing market as being
“constipated” and said the market would continue to “skid” on the bottom before
finally starting to recover around March 2012.
This forecast was very accurate. Usually a correct prediction made just four
months out is not impressive, but few people were forecasting this. Back then, people were panicking because the
market hadn’t “bottomed out”. Now people
are panicking because the market isn’t recovering fast enough.
The problem is that people are using charts, graphs, and
models based on historic data to compare and forecast the current economic and
housing recovery. You can’t do this
because many traditional indicators are still malfunctioning.
This was a very damaging recession. There is no quick bounce back. There is only a slow, sometimes excruciating
painful, and climb out. Imagine a long
distance runner who falls down the side of a hill. He gets up, brushes himself
off, climbs back up the hill and rejoins the race. He bounces back and is able to finish the
race, albeit at a much slower time than if he had not fallen. Contrast this to a runner who falls and
breaks his arm. There is no bounce
back. And he won’t be finishing this
race or any race until his arm is healed.
When will the housing market start to race again? We may not have the old models to help
forecast, but we have a new one. Many
industries crashed during the recession and have since started recoveries. Housing was the last to hit bottom because it
had the furthest to fall. If you look at
what happened in the capital equipment, transportation equipment, and
recreational vehicle markets, there is a sequence to the recovery process:
1. Crash
– the industry suffers a severe, unprecedented, drop in sales.
2. Skid
– the industry hits the bottom, but does not begin a recovery. It slides on the bottom for almost a year.
3. Walk
– the industry begins to show increased sales, but at a very modest rate.
4. Run
– the industry gains momentum and sales return to healthy (but not peak levels)
The
housing market stopped skidding around March and started walking in April. We will be walking for a while before we run
(forecast at end of post).
The
Current Housing Market
Housing
Starts, New Home Sales, and Existing Home Sales are all up 15-30% over last
year, but this sounds better than it actually is. Remember 15% over a very low number is still
a weak number. And there has not been
consistent growth from month to month in some of the statistics. This causes “panic” from some people, but it
is characteristic of the “walking stage” of this recovery.
Another
hopeful sign is that housing prices actually increased on average in the
March-April time frame for the first time in many months. This was not expected to happen until later
this year.
But
there are factors holding back the market. Listings are very low, down around 20% from a
year ago. People cannot sell their homes easily if their mortgage is
underwater. Unemployment is still high so people are not getting jobs and
buying a house. People are not changing
jobs so they are not moving to new locations.
Prices are still much lower than peak so many people are waiting for a
stronger market before putting their house up for sale. And banks are still holding back on some
repossessions because prices are too low.
Sales are also being slowed by tight
credit. Mortgage rates are low but it is
one giant teaser rate. It looks very
appealing, like a swimsuit model, but you are not getting any of that unless
you have a “super fine” credit score.
There
are some positive factors. There is less
slack in the market than was previously thought. The shadow inventory (repossessions or future
repossessions) is smaller than expected.
This is because it is not in the banks’ interest to repossess too many
houses and people are not “walking away” from underwater mortgages as much as
feared because they still need a place to live.
Bankers and customers continue to work together to prevent foreclosures. This is an example of the free market at
work.
Basic
economics is the key to housing recovery.
Low inventories (supply) lead to higher prices. Higher prices lead to less people being
“underwater”. Higher prices also lead to
higher inventories and this will ultimately lead to a strong housing
recovery. But this process takes time.
The
Forecast
The
“walk” phase will last through 2012, but each quarter should be stronger than
the preceding one. Based on what has
happened in other industries, look for the housing market to start “running”
around March of next year.
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