US housing fraud rises as first-time buyers priced out of market

US housing Dec14Signs of stress seem to be appearing in the US housing market once more.  Thus the Wall Street Journal reports:

An estimated one in seven appraisals conducted from 2011 through early 2014 inflated home values by 20% or more..Bankers, appraisers and federal officials in interviews said inflated appraisals are becoming more widespread as the recovery in the housing market cools.”

The problem is that recent price rises have been driven by investors, not actual home buyers, as RealtyTrac warned back in July:

When we look at our data, it’s clear that the home price recovery has been largely driven by investors and other cash buyers.  As those investors and cash buyers slow down their purchases, the big question becomes, will demand from owner-occupant buyers be enough to keep the sales and prices moving higher?”

Today, it seems clear their concern was well-founded.  As the chart shows, latest data for the S&P Case-Shiller Index suggests prices began to plateau in June.  Seasonal trends may well cause them to gently weaken by year-end.

US HOME PRICES STILL TOO EXPENSIVE FOR FIRST-TIME MINORITY BUYERS
The problem is that the investor buying spree means prices are now too high for many potential first-time buyers, as the second chart shows.

US housing Dec14a

The reason is that the US now effectively contains two distinct racial groups with very different profiles:

  • Whites earn $42k/year and have median age of 42 years: Asians earn $49K and have median age of 37 years
  • Blacks earn $33k and have median age of 33 years: Hispanics earn $30k and have median age of 28 years
  • There are 84m white and 6m Asian households: there are 14m Hispanic and 16m Black households

Superficially, the average ratio seems reasonable at 7.6x earnings, close to the 7.4x ratio for Whites.  But the Whites are mainly ageing BabyBoomers, who are moving beyond their peak home-buying period.  Often, they are moving back to the cities and buying cheaper multi-family apartments instead of single homes.

The younger Black and Hispanic households have instead to do the ‘heavy lifting’ on home buying.  But:

  • Median earnings for Blacks are around 20% less than for Whites, and 25% less for Hispanics
  • Thus the average home price/earnings ratio is 9.4x for Blacks and an eye-popping 10.1x for Hispanics.

In addition, 8% of Hispanics and 12% of Blacks are unemployed, versus only 5% of Whites.  Thus first-time home buyers have been a declining part of the market since 2010:

  • Their share was around 40% of the market in the earlier 2000s, and jumped to 50% in 2010 as house prices fell
  • But since then it has been falling steadily, and is now just 33% – the lowest level since 1987
  • Similarly, new mortgage lending is now at a 13-year low
  • And new home sales since 2009 have been running at levels not seen since 1982

The rising amount of fraud in the house price appraisal system is thus a warning sign that the fundamentals of the US housing market are weakening once more.

 

US house price recovery “living on borrowed time”

US house pricesJan14aHousing used to be the key driver for US chemical demand in the SuperCycle, and went into overdrive in the subprime era between 2003-6, when housing starts rose to 2 million/year.  We don’t yet have December’s data, but we already know that 2013′s total will be only half this level, despite all policymakers’ efforts to revive the bubble.

Rather than face reality, however, policymakers instead continue to promote the idea of a ’housing recovery’.  The reason is that a new downturn in housing will explode the myth that current policies can somehow return us to SuperCycle growth levels.  But memories are not that short and people will not easily forget what happened in the sub-prime bubble, as we documented in chapter 2 of Boom, Gloom and the New Normal:

  • The overall value of US housing doubled from $10tn to $20tn between 2000-5
  • Americans extracted $564bn/year in mortgage equity between 2001-5 according to the Federal Reserve
  • This added an average of 6.7% to their disposable income
  • Rising home prices also encouraged a ‘wealth effect’, causing the saving rate to drop from 4.7% to just 1.6%

The blue line on the above chart is a graphic reminder of the madness that occurred.  Created by Prof Robert Shiller, probably the leading expert on US housing markets, it shows the amazing bubble that caused prices to double from their long-term average in just 6 years.

Policymakers are now busy trying to inflate a second bubble, but this time they have major headwinds to overcome.  ”Reversion to the mean” is always the most reliable investment strategy.  And plain common sense suggests that it is unlikely policymakers will be able to sustain today’s prices for much longer.  The trend is clearly downwards towards the long-term average, as the blog discussed when last updating the chart in July:

  • Since then interest rates (green line) have risen quite sharply, and are now nearly double their lows at 3%
  • As a result, US mortgage approvals are at a 13-year low as buyers have disappeared
  • The recent opportunistic buying by speculative would-be landlords is also coming to an end
  • Whilst home ownership rates have been falling for 10 years, and are now back at Q3 1996 levels

The best summary of the otulook, as often, comes from Prof Shiller and the latest S&P/Case-Shiller house price report.  In discussing the slowdown of prices since the summer they warn  that the “monthly numbers show we are living on borrowed time and the boom is fading“.

 

US home prices hit new post-crisis lows in Q1

US housing May12a.pngThe blog is changing its regular presentation of US house price movements, to mirror that used for auto sales. This should help to identify month-by-month changes.

It also means there is no need to use seasonally adjustmed numbers. These are guesswork at the best of times. And in Q1 they have been tested to the limit, due to the abnormally warm weather in most of the US.

The chart is based on the S&P Case-Shiller Index and shows:

• 2012 prices (red square) in Q1 were 3% below 2011 levels (green line)
• This is similar to 2011’s 3.6% fall versus 2010 (blue)
• The 2010 average was 20.4% below 2006’s peaks (black)

Equally, S&P note that prices “ended Q1 at post-crisis lows”, and add:

“Since we are entering a seasonal buying period, it becomes very important to look at both monthly and annual rates of change in home prices in order to understand the broader trend going forward.”

The blog hopes its new format will help readers to do this.

US home prices slip as foreclosures increase

US house pricesApr12.pngSince 2007, every spring has seen a rush of hopeful forecasts claiming that – finally – the US housing market has hit bottom. Sadly, for those trapped in foreclosure, and for those in the chemical industry who depend on housing sales, there is little real evidence today for such optimism.

Housing also provides a good example of the way in which markets are becoming increasingly complex, as we discuss in chapter 11 of Boom, Gloom and the New Normal, to be published next week.

In the past, prices would usually ‘bottom-out’ when inventories of unsold homes were ~6 times the volume of those being sold each month. In March, the average ratio was 6.3 times. But this hides the real picture.

The scandal of ‘robo-foreclosure’, where unauthorised people signed documents to evict people from their homes, means that most foreclosures suffer long delays whilst legal ownership is properly established. This means, for example:

• The average foreclosure process is taking nearly a year (348 days)
• In Florida, one of the worst-hit states, it takes 806 days
• In New York, it takes 1019 days

At the end of 2011, nearly 1.9m homes had some form of foreclosure filing on them. If all these foreclosures were on the market today, they would nearly double current inventory to ~11 months – in line with the level seen in the dark days of 2008.

Another feature of the robo-signing delays is that they have temporarily boosted US retail sales. Those facing foreclosure obviously stop making payments on their mortgage. Barrons, the US investment magazine, calculates this is currently adding 1.2% to US retail sales ($42bn). But as they add “soon enough, the ‘savers’ will have to spend on rent”.

The chart shows how the S&P Case-Shiller index of US home prices initially fell 34% from their peak to April 2009. They then plateaued, as apparent inventory began to reduce. But now they have started to fall again. Prof Robert Shiller of Yale University, the co-founder of the index, is not optimistic:

“I’m more concerned about the downside than most people. I could see it staying languishing and edging down for years.”

He notes that home values took eight years to reach a bottom during the Great Depression and 11 more years to regain their lost ground. Nominal US home prices fell about 30% from 1925-33 and didn’t return to their pre-crash peak until 1944, the year before World War II ended.

Housing is at the centre of the US economy, and was the principal cause of the current financial crisis. Yesterday’s disappointing 2.2% GDP growth is yet another reminder that true recovery will remain a distant dream until the housing crisis is resolved.

US home prices slip as foreclosures increase

US house pricesApr12.pngSince 2007, every spring sees a rush of forecasters to claim that – finally – the US housing market has hit bottom. Sadly, for those trapped in foreclosure, and for those in the chemical industry who depend on housing sales, there is little real evidence today for such optimism.

Housing also provides a good example of the way in which markets are becoming increasingly complex, as we discuss in chapter 11 of Boom, Gloom and the New Normal, to be published next week.

In the past, prices would usually ‘bottom-out’ when inventories of unsold homes were ~6 times the volume of those being sold each month. In March, the average ratio was 6.3 times. But this hides the real picture.

The scandal of ‘robo-foreclosure’, where unauthorised people signed documents to evict people from their homes, means that most foreclosures now suffer long delays whilst legal ownership is properly established. This means, for example:

• The average foreclosure process is taking nearly a year (348 days)
• In Florida, one of the worst-hit states, it takes 806 days
• In New York, it takes 1019 days

At the end of 2011, nearly 1.9m homes had some form of foreclosure filing on them. If all these foreclosures were on the market today, they would nearly double current inventory to ~11 months – in line with the level seen in the dark days of 2008.

Another feature of the robo-signing delays is that they have temporarily boosted US retail sales. Those facing foreclosure obviously stop making payments on their mortgage. Barrons, the US investment magazine, calculates this is currently adding 1.2% to US retail sales ($42bn). But as they add “soon enough, the ‘savers’ will have to spend on rent”.

The chart shows how the S&P Case-Shiller index of US home prices initially fell 34% from their peak to March 2009. They then plateaued, as apparent inventory began to reduce. But now they have started to fall again. Prof Robert Shiller of Yale University, the co-founder of the index, is not optimistic:

“I’m more concerned about the downside than most people. I could see it staying languishing and edging down for years.”

He notes that home values took eight years to reach a bottom during the Great Depression and 11 more years to regain their lost ground. Nominal US home prices fell about 30% from 1925-33 and didn’t return to their pre-crash peak until 1944, the year before World War II ended.

Housing is at the centre of the US economy, and was the principal cause of the current financial crisis. Yesterday’s disappointing 2.2% GDP growth is yet another reminder that true recovery will remain a distant dream until the housing crisis is resolved.