By Lance Roberts, CEO, StreetTalk Advisors

There have been numerous media stories out over the last couple of weeks about the recovery in housing at long last.   Of course, this is the same housing bottom call that we heard in 2009, 2010 and 2011 – so why not drag it out again for 2012.  Eventually, the call will be right and they will be anointed with oils and proclaimed to be the gurus that called the bottom.  In the financial world you only have to be right once.

However, back on earth, where things really matter, housing is a major contributing component to long term economic recovery.  Each dollar sunk into new housing construction has a large multiplier effect back on the overall economy.  No economic recovery in history has started without housing leading the way.  So, yes, housing is really just that important and we should all want it to recover and soon.  The calls for a bottom in housing now, however, may be a bit premature as I will explain.

The Total Housing Activity Index shown here is a composite of the sales of new and existing homes, new construction permits for single family homes and new single family home starts.  As you can see we are still near the same lows that we were in 2009 at the end of the recession.  Furthermore, and what is really worse, is that the “recovery” was built on the bank of a whole slew of tax payer funded bailouts, tax credits and incentives from HAMP to HARP to the Home Buyer Tax Credit.  Not quite the recovery the government was hoping for.

The recent bumps in housing have been due to the warmest winter on record in the last 5 years which is skewing the seasonal adjustments.  With 1 in 4 home owners under some form of duress with their mortgage it is only a function of time until a further erosion in price resumes particularly as banks start to deal with the backlog of foreclosures and delinquencies that are on their books.

The bottom line here is that while we have witnessed a very mild recovery in housing from the depths of the abyss; it is important to not forget that it has been with the help of a large amount of artificial support including the zero interest rate policy by the Fed and “Operation Twist” which has suppressed interest rates on mortgages to historic lows.  That won’t last forever and as we wrote in our article on“Why Home Prices Have Much Further To Fall” people buy payments not home prices.

The shear magnitude of the TOTAL inventory that must be cleared, the potential for rising interest rates, a weak employment market (no job=no house), declining real incomes and rising inflationary pressures will likely keep the housing market suppressed and disappointing for quite a while in the future.  This is just a function of economics.

Maybe we have seen the low point in housing?   Maybe the bottom truly has been put in?  A bottom, however, doesn’t mean that a sharp rise in prices or activity is just around the corner.   This particular patient could very well remain comatose for much longer than people expect.


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Lance Roberts

Lance Roberts

Lance Roberts is the CEO of STA Wealth Managment. The mission of STA Wealth Managment is simple - lead our clients to financial success by actively managing their assets while limiting risk to capture returns. Through the utilization of economic and technical analysis, historical research, and risk controls, we build portfolios which will create long-term investment results.

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  • JWG

    Interest rates aren’t going to rise until Bernanke is gone, or until there is a five alarm fire on inflation, which the heavily tweaked core-chained CPI really doesn’t allow to be reported. Although we are in a secular deflationary environment, the Fed can create keystroke money far faster than the credit cycle can destroy credit money, and the Fed is determined to create inflation. That is the theme of Ben’s famous helicopter speech: in a pure fiat world, deflation is impossible if the central bank dares to create money without limit. In Ben’s world, trillion is the new billion.

  • Alberto

    With public debt north of 100% interest rate is not going to be raised in 2014, nor in 2020. Like in Japan, GB and most of Europe, economies are just dead. There is only one possibility: reset. Cancel all those fake debt, wipe out most of big banks and start again investing in real economy that is real people. But let the illusion going on for a little more.

  • Dean

    Previous interest rate increase programs had an unexpected consequence in real estate – people rushed to get in on “owning my house” before the rates became totally unaffordable – sales soared as interest rates climbed. Who knows if we ever have a repeat – the house of cards may all fall down this time.

  • Dan M.

    Dean’s observation is great… as unemployment falls, people are going to look at their Price-to-rent ratios and see opportunity, and I think we have to pontificate, for a second, about what these bank-owned homes are doing, fundamentally, to the economy.

    On one level, if they’re sitting empty, one would think that as they reenter the market they will be a drag on the market (though the market knows they exist right now, so I don’t see how that’s being completely ignored by the current pricing mechanism).

    However, these things are deteriorating as we speak… so what were once nice, liveable homes, are going to be bank-owned, under-maintained trash 12 months after the bank takes ownership. Further, these homes tend to be highly concentrated in certain areas. Taken to its logical conclusion, all the bank owned homes, most of which were probably built between 2000 and 2008, are probably deteriorating from 1st and 2nd tier homes to 3rd and 4th tier homes… This leaves a lower supply of quality homes in quality neighborhoods, and might actually not have predictable results on the market.

  • Russ Smith, Caliornia

    Hi!, Patrons Of Pragmatic Capitalism Et Al:

    How can we assume real estate both commercial and/or residential have bottomed, when we’ve built an unsustainable mountain of derivitives beneath the whole real estate deck of cards? As a pastor once said: “he and his friends just weren’t interested in building sand houses anymore” but derivitive based real estate in my estimation is nothing but sand. We need the obvious concrete foundation that would be ours with Constitutional Gold & Silver coins acting as our money, as mentioned in Article 1; secution 10. How long will it take our Nation to get just that far forward towards reconstucting our true, Constitutional economic livelyhoods? Especially people as the FED continues to add more sand we refer to as inflation, we are headed towards the economic demise that comes with trying to live our lives in quick sand!


  • Happy Swede

    “the obvious concrete foundation”

    Please give concrete arguments on exactly why a gold standard would be preferable to the current monetary system. And are you serious in that you think all transactions should be made in coins?

  • Dan M.

    “The concrete foundation” of our economy is production of real value.

    Right now, in MN (one of the best places to buy vs rent, mind you), one can make a killing buy buying vs renting… assuming they’ll be there for 4 years or more (prices won’t have to rise).

    Maybe there’s more room to move, but unless rents drop, the fundamentals are there: It’s cheaper to buy than to rent.

    I’m quite sure the story is quite different in different areas, and I’m not going to completely ignore the fact rents might actually drop some, but until rents drop I’ll be happy to pay $1,000 on my tax-deductible mortgage (including taxes & insurance) and rent out my lower level for $650… prices can do whatever the hell they want in the mean time… I can play this game for a LONG time.

  • Johnny Evers

    Exactly. … And it’s just a matter of time before the underwater and delinquent mortgage holders figure out it’s in their best interest to walk away en masse and go rent.
    I know one man whose retirement plan was to put as many assets as possible into retirement accounts, buy a second home down South, then foreclose on his house and declare bankruptcy on his credit cards.

  • VII

    I never understand the Real Estate guys.

    All that work for 5-6%. Just to look back but I could buy MCD stock with out all the headaches of dealing with tennets and make more money. All I have to do is take 10 minutes open up an account and pay a wopping $6.00 for a transaction cost.

    Or..I could buy the Nasdaq…trade buy or sell oil, BRK.B etc. If I was so confident about a mild rebound in housing I’d Buy XHB- I made 27% in 5 months. And didn’t need to worry about fixing a sink, collecting money, taking calls from my tennents, showing the property, marketign the property, learning the buyers rights, etc. et al.

    If Real Estate recovers…I’ll own XHB, WY, Toll, Cutt etc. or one of the REITs.
    WE owned a couple of properties and I personally hated the whole thing. What a waist of time to earn what? and income check I can get much easier with out the headache. My personal view.

    I hope housing bottoms after my city assesses property taxes for the upcoming year:-)

  • Kyle J Hipp

    There are tons of ways to invest in real estate or take advantage of real estate trends. I do enjoy managing my properties as once I developed a system, it become much easier. In fact, I have never had a vacancy in 5 years (only 7 units so not that fantastic) and the last 3 tenants that left, I didn’t have to advertise as my other tenants had contacted me with someone they knew to move in. Having a developed system and taking care of issues quickly and effecienty has really paid off for me. In my area I can easily get 15% – 20% annual returns so I don’t mind the extra work.

    It is definately not for everyone but it works great for me and is my retirement plan…. At 40. My favorite aspect is that their are many ways to make money in real estate no matter the market. I love the control that I have where I don’t see that in other forms of investing.

  • Dan M.

    I think if you look at bond rates and stock yields (looking at 1-to-10 year P/E’s as to calculate “expected earnings yields” on stocks) and compare them to putting 20% down on a home equivalent to what they’re renting in some markets they’ll find that buying is quite a good deal right now, especially when you adjust for taxes.

    Of course this assumes staying there for a while, and rents not dropping, as well as your location.

  • VII

    @ Kyle J Hipp-

    I made 20% on XHB in 4 months and 20% on WY in the same time and all I had to do was hit confirm on the buy and sell. Pay $5.00 for the buy and $5 for the sell. Pay taxes on this come April of 2013. I don’t have to fix a sink, call a contractor, pay property taxes, collect a check, etc. I have all the control. It seems even the most seasoned Real Estate person has to wear alot of hats.

    It wasn’t for me. Too illiquid. Further If I wanted to buy Real Estate i’d just go 100% into CGMRX- 15% Since Inception….18.54% annualized for the last 10 years. I’d tell everyone I’m a Real Estate Tycoon and just let it sit until I got close to retirement. Talk about easy.

    Futher I’d rather buy the REIT index. Last 40 years avg return is 9.59%-12.10% depending on which I buy. I dont’ need to buy a truck or go to Home Depot. I just hit confrim on my computer. No complex tax return or estate planning.

  • Sandy the Swede

    Don’t forget about all of the land and/or houses banks have foreclosed upon from developers & investors. This inventory is still sitting in the banks’ OREO account. Prior to retirement at the end of 2010, I spent three years foreclosing or doing deeds in lieu on $400 million of this crap. And I was only one workout guy in one bank among many banks in the same boat. As long as we are still playing “kick the can,” I would plan for another 5 years or so to flush the system. And what happens if interest rates are allowed to seek market levels? What happens when retirees have to start liquidating financial assets because they are unable to earn a decent return on savings? Oh, wait, I forgot that this is part of the plan to heard us geezers into Wall Street to get those dividends.

  • JB

    It is interesting to observe how the housing activity slows down. I definitely agree that working as a real estate agent now is a seriously bad job. On the other hand, I think that now we are experiencing the heyday of renting. Since people can´t afford new housing, they end up renting, which increases the prices. I know a lot of people who had to sell their property, because were unable to pay mortgage and other debts. Their decision whether choose Renting or Buying was more than clear. The rentals are expected to grow even if the prices of real estate go down.

  • Anonymous

    People who lose their homes will need to rent (or move into mom’s basement or double up with friends). But the house they gave back to bank eventually wind up in investor’s hands. These houses will be back on the market as rental, to depress rents. There will likely be more rental houses than renters, if you count those basement dwellers.