WE HAVE BECOME SLAVES TO THE STIMULUS
Today’s pending home sales data was one more sign of the enormous problems that linger in the real estate market. Despite some near-term signs of stability (courtesy of uncle Sam and his never ending bailout campaign) the long-term structural problems in real estate remain. The government can alter the laws of supply and demand in the short-term with their boom/bust policies, but over the long-term the laws of the free market will win.
Mark Hanson at Mark Hanson Advisers analyzes the latest housing release and shows us why the government will ultimately lose this battle with econ 101. The hurdles are simply too numerous. At some point the market will correct. For now, we’re just kicking the can down the road. As always, Hanson’s work is a must read:
Pending Sales for November were just released and despite the market blowing it off, it was a significant print. The consensus was for Pendings to be down 2%…instead they were down a big daddy whopper 16%. Now that’s a miss. It goes to show how twisted housing analysts have become…slaves to stimulus. This release just gave you a glimpse of the new normal (ex-stimulus) in housing. Last month when new home sales came out far below expectations, several analysts said “it’s a blip because the stimulus was going away”. No, that was not a blip — that was the real market showing itself just like it did this morning in the Pending release.
Already the analysts are trying to compare this morning’s release to last Nov 2008 but you can’t do that. This is because last Nov the QE was not in effect yet, rates were sky-high (about 6% to 6.5%), lending guidelines were all over the map, and prices were still in free fall along with the global financial markets. There was not a soul going pending – comparing Nov 09 with 08 is apples to oranges. Despite the $8k going away for buyers who went pending in Nov 2009, buyers still had a much more stable environment this year than last with rates 100bps lower. This is why comparing Oct 2009 with Nov 2009 is a much better comp that Nov 2008.
But in Dec 2008 everything changed with massive gov’t intervention and a crash in rates. The Fed QE forcing rates down sharply in Dec and spurring serious buying is why going forward — beginning with December Existing Home Sales due out in a couple of weeks – YoY comps will get much tighter, with many misses on tap in the near to mid term. In fact, my early CA survey shows sales down YoY about 20%. Last Dec, there was a robust 37,836 sales. In Nov 2009, there were only 35,860. I expect Dec CA sales to be roughly 30k. That is a big MoM and YoY miss and the theme for 2010 house sales because of the lack of inventory due to foreclosure moratoriums, mortgage mod initiaves, and epidemic negative equity preventing 10s of millions from selling and re-buying. Remember, negative equity does not start at 100% for most…it starts at the point where they can’t sell their house for enough to pay the loan, the Realtor and put a down payment on the new vintage loan…perhaps 75% on Jumbos and 85%-90% on conforming loans. On a national basis, Existing Sales will fall sharply in Dec but I think they will still beat Dec 2008′s 361k…but not by much.
To sell remotely the same number of houses in 2010 as in 2009 many things have to go right. The most important is more foreclosures. They made up just under 40% of all sales in 2009 and are what is in the most demand. There are enough foreclosures hung up in the pipeline right now to satisfy demand for a long time. If foreclosures and short sales surge early in the year, sales counts have a shot at down 10% from 2009. If not, expect down 20% at least. The second most important is rates – they have to stay very low. We know refi and purchase activity dry up in the mid 5%’s. In July and August 2009 when rates ticked up to the high 5%’s sales began to wane fast. Then when rates plunged 100bps, housing picked back up sharply going into the original Nov 30th ex-stimulus date.But with increased foreclosures and short sales, come all the house price and write down challenges we experienced when foreclosures were coming without interference. Having their cake and eating it too will be a difficult task in the housing sector for the gov’t in 2010.
Source: Mark Hanson Advisers
TPC,
If I can sum this up, housing is in the crapper, the consumer is near dead, yet we go higher b/c Wall St analysts are bad at their job? You may very well be correct with your forecast for Q1 strength in the market, but if this is the case, how on earth does anybody make a compelling argument for a rational market? The word insanity keeps coming to mind over and over again.
As I often say, the market does not necessarily reflect the real economy. It reflects expectations compared to the real economy. If expectations for a recovery remain low and we continue to outperform those expectations then stocks will outperform. Combine that with the fact that markets can remain irrational for years and voila! You have all the ingredients for a rally….
Your logic makes sense, I’m just trying to reconcile it with Rosenberg’s comments: “Remember that this time last year the consensus was at $77 operating EPS for 2009 and we got $56.” Despite a significant miss of these overly OPTIMISTIC numbers, we still rallied 20% last year. And David appears to be calling for a significant miss to forecast again this year (unless GDP surges to impossible double digit levels). So how are analysts too pessimistic, given that we didn’t hit their optimistic numbers last year and most certainly will not again this year?
I don’t know VCC. Rosenberg made the same argument all of last year. I think the back half could prove to be risky, but then again I don’t put much faith in any forecast out more than a quarter.
I am a firm believer that it’s impossible to forecast out more than a quarter or so with any real accuracy. Hence, why I believe investment time horizons should remain short in duration. As of now, I think the estimates are far too low for Q4 and that means it’s a bad idea to get short in front of and during the upcoming earnings season.
I’ll take it from there after Q4 earnings are over….
Hey TPC, wasn’t the issue last year that analysts were far too optimistic at the beginning of 2009 and so the market continued tanking the first 2 months, but those same analysts then became too pessimistic and stayed too pessimistic as the market started rising.
My expectation ratio troughed Q4 last year so estimates became too pessimistic heading into the New Year and into Q1.
In other words, it’s a bad idea to take Rosey’s long-term outlook and try to create a short-term strategy from it. I think he will ultimately be vindicated, but his timing is likely wrong.
Are you subscribing to Mark’s reports, or is he publishing in places other than his blog?
Not only us, but China and the asian sphere looking for some of the stimulus overflow. It will end badly, but no one knows when. The reason is simple, China can be reduced to two simple facts: (a) the stimulus is huge so we get no information about the state of China’s economy … this is neither positive nor negative, but anyone extrapolating that China will pull the global economy out of the Great Recession cannot be doing anything but guessing, (b) consumer spending is actually decreasing relative to GDP, (c) corollary with (b) fixed asset/capital spending is increasing with GDP … every business cycle ends with this. US and Europe … are at that stage now.
Wanna bet that Bernanke keeps up the QE throughout 2010, 2011, 2012, 2013 …..? Japan has been doing QE since their great bubble burst, and they are still doing it.