Thursday, June 28, 2012

A Brick By Brick Housing Recovery

The dust has finally settled down
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 ….

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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