More on That Housing “Recovery”

I was a big bear on housing for a long time.  In August of 2006 I sent out a letter to clients that said:

“The credit driven housing bubble remains the greatest risk to the equity markets at this time.”

I used to have blow out arguments with my friends, colleagues and parents about the housing market and how the fundamentals had become detached from reality.  At the time, most people didn’t think house prices could fall.  I won’t try to claim that I was some sort of sophisticated real estate investor at the time because I certainly wasn’t.  But there seemed to be an undeniable disconnect.  How could the appreciation of housing become disconnected from inflation (which is directly tied to incomes) when housing makes up the most important item on the consumer balance sheet?  It made no sense.  My argument wasn’t terribly complex or sophisticated.  But it was right.

Lately, I’ve become much more neutral on housing.  I have been telling people to actively buy homes they are planning to LIVE IN whereas several years ago I was telling people to avoid home purchases altogether.  So I’ve become much more constructive about residential real estate given the price declines and the improving market fundamentals.  But I still don’t understand the recent surge in confidence here.  Some market pundits are now declaring the recovery here.  As though it’s an undeniable fact.  There’s just one problem.  The evidence doesn’t support these claims that the recovery has occurred before the fact.

I’ll let the charts do the talking.  This is a pretty all encompassing view of residential real estate.  If you have another view or items that you think prove me wrong here I am all ears.

Let’s start with prices.  A few indices.  First, the National Composite Home Price Index.  It’s about 5% off its bottom, 45% off its highs.

Case Shiller.  Similar story.  Flat-lining at best:

New home sales.  Off the all-time lows, but lower than any time in history prior to this recession and over 70% off the highs:

Housing starts.  Same story.  Still a total disaster.

Home ownership rate in the USA.  At a 10 year low.

Total private construction spending on residential real estate.  Again, off its lows, but barely above the flat-line:

How about employment in construction?   Flat.

I don’t intend to rain on the economic parade.  I’ve been saying we’d avoid a recession in 2012 for a long time now and the fact that housing stopped bleeding has played a big role in that call, but let’s not go crazy and start declaring victory in the real estate market when the evidence very clearly shows that real estate remains mired in a deep slump.  It’s great that there are signs of life and it’s stopped collapsing, but let’s maintain some perspective here as well.



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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • freemarketeer

    It’s just a relative call. Compared to those declines, flat-lining is pretty good. This has been a big hedge fund play.

  • Abrams


    May I suggest using the “All Transactions” data from Fed FRED. I feel it captures the true state of the market better.

  • DJ

    You’ve got this one wrong in a certain sense. Those charts are a great reason to buy real estate. You may not make money for many years, but you are unlikely to lose a lot more money. That is a trade I’d take most of the time. Agree that just because the charts are turning up a bit, it doesn’t mean we are going to go back up immediately. And, who really wants to have those charts go back up quickly anyway? That would be cause for worry.

  • Pete

    QE3 has plan for 40b monthly purchase of MBS with no end in sight. It could go for one to two years. If it is going for 2 years, it will be at 960b. That will only get you to 3Q of 2014. Fed said that interest rate will stay low till 2015. That’s close to a cool trillion USD, either new credit for housing, or bank reserves for existing MBS. Housing price can go a lot higher before the rate is creeping up. Another point is that there are just not very many new constructions in the past 6 years (since 2006). Eventually the supply and demand will get to a balance,and we just don’t know when that will occur. It may have already.

  • Rich

    Good comments and charts. I was wondering the same thing over the last few days after hearing so many singing “Happy Days are Here Again” on TV and in the Newspapers. Slight progress, but a long long way to go. Thanks.

  • SS

    cullens been saying there was little downsidebin housing for a while now. but unlike everyone saying theres a new recovery he actually called the collapse.

  • Mick

    With the banks and now FED holding millions of foreclosed homes off the market, this bounce is purely synthetic. Charts and graphs mean nothing in a day when the government is hiding, manipulating, and flat out lying about the facts.

    I’m a buyer when all the poison is out of the market so the healing can begin.

  • mike

    I have stated before..Before any real recovery in housing can occur more qualified borrowers must be available. Currently there are many people who would like to buy but can’t due to very tight underwriting standards.

    Someone asked me about buybacks on another thread.

    Essentially there are no securitization going on anymore. Banks (Wells, BofA, Citi, et al) are either portfolioing a portion of the total loan packages and selling the rest to Fannie, Freddie, et al as whole loans and retaining only the servicing portion. The constant pushed down of rate actually hurts the bottom line of these banks since they are not recovering the servicing fee faster than the pre-payment. Therefore banks are loathe to take on additional risks by lowering the underwriting standards thus possibly having more “scratch and dent” loans that have to be bought back. The chain get pushed all the way back to the originators. Aggregators (wholesale lenders) are also loathe to take additional risk since buybacks hit your capital very hard.

  • http://None Pete

    If the banks make new loans to borrowers, and sell the loans to Fed as MBS. Where is the risk for the banks? if the Fed takes all the risk, I dont see The banks have any credit risk. The banks make servicing fees and a portion of the interest. Am I wrong about the QE3 ?

  • Roger Ingalls

    I wish you could add a chart of affordability to this post. By that, I mean the ratio between median HH income and the median mortgage payment at today’s rate for a 30 yr fixed, using 20% down.

    You would see that it is the most affordable time in measurable data history to buy a home. New borrowers are getting into the mix, after sitting out the past 5 years, with decent credit, down payments, and good debt to income ratios.

    Even folks with modest incomes can afford good housing at these rates.

    In my neck of the woods,(Seattle area) houses are selling quickly, often at asking price.

    Yes, banks are still dribbling out the REO’s, in order to prevent a housing price collapse, or worse, run short on their required capital reserves, but they ARE dribbling them out, and the foreclosures, and delinquincies are no longer rising.

    Things are getting “less bad” in housing, and I agree with you that a recovery is NOT going to look like a V, nor will we likely return to the valuations of 2006-2007 anytime soon. More likely a return to housing following real inflation, however that may be defined.

  • Andrew P

    Keep in mind that unlimited Congressional support of Fannie and Freddie expires at the end of 2012. On Jan 1, F/F bonds will cease to be the equivalent of Treasuries. The Fed is simply allowing risk-averse investors a means to unload their bonds, and providing a market going forward so F/F can stay in business.

  • Andrew P

    Dodd-Frank requires the originator of all mortgages remain on the hook for 5% of the risk. Banks can no longer unload mortgage risk completely.

  • Old Dog

    Folks have a new found appreciation for the illiquidity of housing. No matter how favorable the price, interest rates, tax incentives – it is this single issue that is depressing housing.

  • Johnny Evers

    I can’t see housing going higher, unless it’s another inflationary bubble.
    First, where is the demand going to come from?
    The boomers are retiring and gradually moving into apartments and condos. (Retirement homes and communities may do well.)
    Young people are moving around more and don’t want to get tied down. Young people are also getting started later in their 20s than they used to. They have also experienced the housing crash through their parents and are distrustful of real estate.
    Family size continues to shrink. More people are living alone. Such people are more likely to choose to live in aparments.

    Bullish: Apartments, especially for older people; condos or homes near city centers.
    Bearish: McMansions out in the exurbs, and the massive glut of 1100 square foot ranches built in the 1950s and the Colonials built in the 1970s. Those houses are falling apart and are situated in what used to be industrial areas but are now barren.

  • George H

    This chart shows a even worse price trend.

  • Tom K

    The long-term prospects for housing remain terrible from a demographic / macroeconomic standpoint. You have a lot of forced sellers coming – boomers who expect to liquidate real estate value to pay for retirement and don’t have a lot of other savings. They expect to sell to the generation in their 20-30s — the group whose earnings are being hurt the most by the current downturn, and many of whom have large amounts of student debt already. Plus, many of them have less interest in living in the suburbs than their parents did, so they don’t even want that big house on a cul-de-sac. It’s a recipe for 10-15 years of pain in the housing market.

  • rj chicago

    Um… important item that has only been hinted at via Mark Hanson’s blog is the fact that there are millions of ‘potential’ buyers now renting who have impaired or blowed up credit ratings. Very few commentators take this into accounts – that means at least 10 years out of the debt qualifying market – not a good thing if you are looking to finance a mortgage. This thing has a LONG way to go.

  • Tom

    You can file bankruptcy and get a Frannie/Freddie mortgage within 3 years, so these “blown up” credit ratings don’t impair anything for a decade.

    There is no V shaped recovery and I dont think anyone in the media is implying it so not sure where Cullen is reading it. Even the NAR economist Yun who is a perma bull seems to have learned his lesson from the last 5 years (speaking of which he is barely an economist and more like an industry cheerleader).

    A lot of inventory is off the market since people are underwater and stuck, a lot of inventory is sitting on banks balance sheets being let out a bit every quarter (banks only have to admit the losses at that point due to the changes in FAS 187 in 2009), and home construction is at depression type levels. A healthy market is somewhere around 700K annualized and the bubble era was up to 1.2M. Current is 350K, with more population every year.

    Of course many young people now are dealing with their student debt albatross and won’t be owning homes in their late 20s like previous generations – they will be owning a decade later (or more!). But don’t discount the massive dislocation created by these mortgage rates – we are just doing the same trick we did during the housing bubble, it just has less of a transmission mechanism now due to so many people burnt, with bad credit, and with student loan debt. Every 1% down on mortgage rates means a lot of inflated home prices. I dont expect a similar bubble as before but sometime later this decade when mortgages rise from say 3.5%-4% to something “outrageous” like 6% a lot of people will be frozen at that moment in time and locked out of that housing market, and prices will need to come down again. But at this rate that conversation is 2018+.