A Case can be made for Housing Bubble #2

The housing industry has always led us out of a recession and it would seem so again. Housing data, pricing, demand is currently the bright spot in the economy or are we headed to another bubble?

 

I am suggesting that the economy is being overshadowed by everything else that is going on here and around the world. Without the focus on the economy, we are heading to bubble #2 and this will be brought on by the housing industry.

 

I am outlining 10 reasons why we are headed to bubble #2. It is my intent is to provide verifiable reasons why buyers need to consider buying and sellers to sell because homes will not be affordable to most – sooner than later!

 

You may consider this a negative or pessimistic outlook but it is a reality and I pray will be proven wrong. If you are not paying attention to our economic problems because of everything else, I don’t blame you. At least read this blog and prove me wrong.

 

It seems our law makers at every level can’t handle one issue at a time let alone a myriad of problems. We are entering into unchartered waters and the economy may be improving in spite of the problems. We must take care of others, plan for the worst and pray for the best. 

 

If you have read my blog posts over the years, I have always said that “As housing goes….so goes the economy”. Unfortunately, I think housing will take us into a depression which will last for years. Entering into military conflicts used to always serve more than one purpose – military expenditures always helped the economy rebound. Not so much anymore.

 

The first “housing bubble” was brought on by the financial industry and the non-correction of housing prices during the 2001 recession. Housing did not bring us to the brink of disaster, the financial industry did.

 

Why will the housing industry led us to another devastating bubble and may happen as early as next year? I am outlining 10 reasons for you to fully consider and research by you to either disagree or reluctantly agree. In any event, share your thoughts for others to consider.

 

By the way, my opinion has nothing to do with the Affordable Care Act, Benghazi, IRS targeting, NSA spying, worldwide conflicts, lack of leadership, no ethics or morals or all of the regulations that bombard us on a daily basis! The lack of attention on the economy is the problem.

 

Supply

 

            Number of years people move – since I have been involved in housing dating back to the 1970’s, families moved on an average of about 7-years. In the late 1990’s and through to the height of the bubble in 2008, families were moving on an average of about 4-years. Wage earners found new job opportunities which increased their salary. That was the only way to gain income and also the change to both parents working became the norm rather than the exception. Families were considering housing not as a home but as an investment.

            Families are now moving less and the average number of years families move is rising back to the historical levels.

 

1. Families are staying in their homes longer changing the supply and the demand curve.

 

            Existing homes listed for sale – the number of homes listed for sale is significantly down across the nation but not in every market. Remember, housing is affected by local markets rather than national trends. Why are families not selling their homes? Most families are into “bunker style living” and are risking a move for better pay especially with all of the unknowns facing all of us. Also, homes purchased from 2008 – 2010 are most likely still underwater.

 

The greatest generation and the baby boomer generation typically live in a home with equity. Baby boomers are not moving because of numerous reasons.

1. Their non-equity nest egg is gone and needs to be replenished before retiring.

2. They will stay in their jobs longer.

3. The idea of retiring to Florida or Arizona does not have the same appeal. It is not greener on the other side of the fence.

4. They want to stay closer to friends and family.

5. They do not want to move-up but move-down but most consider their current home as adequate. Take baby boomer homes and “underwater” homes off the market and there will be a significant supply deficit.

                                                                                                          

2. Economic fear is in the hearts of homeowners – why sell if you don’t have to.

 

New homes housing starts – the nation over-built from 2002-2008 but since then, new housing starts has been 70% below the number of new homes needed to meet the demand. Builders have gone out of business; subcontractors have disappeared, materials are in short supply, land prices have remained high, local government regulations have increased the time to start new housing projects; financing is difficult to obtain for a residential project; those builders that can build are but they can’t meet every market segment demand.

3. Lack of new home construction will be the achilles heel of the housing industry driving home prices higher and higher.

                                             

Demand

 

            Family formations – new families are being postponed due to the economy and lack of jobs. For college grads from 2008 and into the foreseeable future the economy has been a deterrent for starting a family. The traditional family has also been under attack. Many people are and always will be renters. However, rental complexes bring high density housing to local areas and local governments have historically limited high density housing mainly due to citizen backlash.

 

Young families are delaying having children because of the economy and the need to have two paychecks to make ends meet.

 

4. The bottom line is that there is a generation of buyers that are sitting on the sidelines watching without being able to or even wanting to buy a home.

 

            Participation rate – we have all been reading about how the participation rates continue its decline and now at the same level as in 1978. By the way the way, the recession back in ’79-’81 was the worst recession until now and it was stagflation back then and what would you call our economic situation now?? A mess!  

 

There are more people supported by the federal government than those working!  The economy is in an out of control downward spiral with government policies not turning the trajectory but fueling the fire. Unemployment is being overshadowed by healthcare and government is giving us false information to make us feel better.

 

5. Without a sustainable economy and job growth buyers will not be able to nor want to buy the most important product of their life ---- a home!

 

            Pent-up demand – there is a true pent-up demand regardless of the negative outlook. There are enough buyers in the market resulting in multiple offers and shorter time homes are on the market. The shift to a seller’s market was swift and clear but it is still not enough for homeowners to consider listing their home for sale. The true pent-up demand for homes can’t be measured by statistics and would probably be manipulated just as is the unemployment and inflation rates have been manipulated by government.

 

6. in 1979, the motto was “Where will our children live?”  Maybe not today but soon, we will be saying this over and over again.

 

Prices

            Home prices – the housing market readjusted in 2008 – 2010 during the great recession. This price adjustment was accentuated by the financial industry and the lack of a price adjustment in 2001. Most of the previous recessions have not lasted as long as the “great recession”. Also, the economy expanded after all of the previous recessions except this time. As the economy expanded, housing prices increased but not at alarming rates.

 

Today, however, the buyers in the market to buy a home are chasing a limited number of homes. They have to make concessions and multiple offers are driving prices higher. What hasn’t changed or controlled housing prices is interest rates which have remained historically low. It is not a matter of "if" but "when" interest rates start to move higher and when that happens the housing industry will shut down - again!

 

We will not have a balanced market but a Jimmy Carter housing market. Housing will remain unaffordable because interest rates will rise back to a normal historical level and buyers will not be able to afford to buy since home appreciation will outpace salary advances and job growth. 

                             

7. Housing prices are recovering but will soon stagnate again, level off and bubble #2 will see a decline but not as drastic.

                                                                             

Inflation – the Federal Government changed the parameters defining how the inflation rate is calculated. Energy and food prices are not included in calculating inflation……WHAT?  The basis in which to compare year after year has changed and the political spin from inside the beltway makes you doubt everything! 

 

All I know is this – everything costs more today than it did 1-yr ago. Agree or disagree?

Gas has come down over the past month and is in the low $3 in the Charlotte area.  Why, because there is ample supply and a lack of demand. I thought $3.50 per gal was the new norm and I am glad to be wrong. Should we not be focusing on why demand is lower?

 

8. Inflation will force housing prices higher outpacing family incomes.

                                                                                        

Labor and material shortages – in the housing industry there is a labor shortage now even before normal production is sustained. Material shortages – I am out of the loop on this but in past recessions, manufacturers scaled back their operations to meet demand. I just don’t think the demand for new home material has caused manufacturers to ramp up production. Thus, their production will lag behind the demand and cause prices to escalate. Please track the most important monthly statistic to really gauge how the economy is performing. If nationally NAHB reports new home starts edging up to even 1,000,000 housing starts (we need 1,200,000 housing starts to keep up with the population growth), the economy is on a roll. Then watch the prices of new homes again skyrocket.

 

2009 – 2011              less than 600,000 housing starts each year

2012                           less than 800,000 housing starts

2013                           projected to be less than 900,000 housing starts

 

9. Labor and material shortages in the housing industry will cause production delays causing higher costs. 

 

Interest Rates - First of all, the Federal Reserve is the key in manipulating the economies ebbs and flows. During the Carter stagnation with interest rates at 17.5% and higher, sellers would ONLY watch what the Fed’s action were and how interest rates would change and then refinance their mortgage. Adjustable rate mortgages became main stream during that time and it was the ONLY way buyers could buy a home. Today, the Federal Reserve simply has no more reasonable tools left in their bag of tricks to guide the economy into a better place.

 

The Federal Reserve decided back in 2008 to start a quantitative easing (QE) program designed to energize the economy. Remember I am not an economist but I do know that the Fed does not manufacture anything other than printed or digitized money.

 

QE 1 – Nov. 25, 2008 to Mar. 31, 2010                 (printed $1,700,000,000,000)

 

QE 2 – Nov. 3, 2010 to June 30, 2011                 (printed $   600,000,000,000)

 

QE 3 – Sept 13, 2012 to Current                           (printed $1,200,000,000,000)

 

QE 3 is an on-going active policy buying $85,000,000,000 per MONTH in bonds and treasuries. Thanks to the federal government for making a billion the new million. 

 

Without a question, during the Carter stagflation era, 17.5% interest rates made buying a home unaffordable. So the Fed constantly lowered the rate as the economy improved. Eventually reaching a traditional mortgage interest rate in the 6 - 8% range!

 

If the Fed’s QE policy is to energize the economy:

1. How will interest rates react to a robust economy?

2. How will prices of goods and services react to a robust economy?

3. How have salaries of those working fared over the past three years and in the future?

4. How will the pent-up demand for housing affect the prices of homes?

5. How will housing supply increase as the economy expands?   

 

In past recessions, the change in the Fed rate was gradual and people could plan their lives because the economy was more predictable and government policies were clear and precise. Today……………….not so much!

 

The unintended or maybe intended consequences of the Fed continuing their QE policy, the day they soft land this practice, the vibrations through the stock market and interest rates will be dramatic. Welcome aboard to the Carter years but much worse.

 

Interest rates will rise sooner than later. How high …………. I am not sure that our government and expert economists know for any certainty. All I know is that since 2008, interest rates have been historically low and for 5-years, people have become accustom to cheap money AND they still didn’t buy!

 

For historical context during previous recessions, the following are annual averages:

 

1974                 9.19%

1981               16.63%

1989               10.32%

2000                 8.05%

2010                 4.50%  (about the same in late 2013)

 

Let’s compare a current mortgage payment with a late ‘70’s and early 1980’s double-digit interest rates of 17.5%

 

$150,000 mortgage

 

In 1981:          Monthly P & I = $2,096

 

In 2013:          Monthly P & I = $  760

 

By the way, the median price of a home:

 

1980                          $169,000                   @ 17.5%                    P & I =            $2,478/mo.

 

2013                           $257,200                   @ 4.50%                    P & I =            $1,303/mo.

 

10. The Fed will try to manage a gradual rise in interest rates but will fail miserably.

 

The reason this is important to revisit is because our national focus has again been redirected from the economy to a variety of issues i.e. health care. Next, the focus may be the Middle East again or all of the social issues running us amuck.

But in the end, it is the economy ………stupid!  

 

We see depends largely on what we look for.

 

Putting things in perspective allows us to look at them with a fresh set of eyes – and a renewed sense of optimism.

 

Please review the following list of reasons why it is a good time to buy a home.  Please include additional reasons if not listed.

 

1.    Now is the best time to purchase at the best possible price

2.    Buyers can find a mortgage with the best terms

3.    Interest rates remain at historical lows but NOT for long

4.    Long term appreciation opportunities can be realized

5.    Mortgage interest remains a tax deduction

6.    Rents are increasing

7.    There are down payment assistance programs available

 

Salary - more taxes - higher consumer debt  – inflation – higher health care costs + lack of housing  supply  +  Increased home prices  +  higher interest rates   =  a problem for homebuyers and sellers.

Who has the torch? The Greatest Generation left us a better place to live, shop, learn, work and play. Are the baby boomers doing the same? Are we sticking our heads in the sand or are we in survival mode because our nest egg has disappeared or are we going to say “Enough is enough. Our children deserve better”.

 

What event will make fear disappear and cause optimism to again become the norm? Until a positive mindset returns to the American people, our road to recovery is seriously hindered.


COMMENT BY:   Doug Fullmer -Real Estate Professional -Commercial & Government

If I may, David, look at the housing market from another point of view. I believe the so-called "housing recovery" is an illusion and is only temporary. From an article last June 3 in the NYT:
"Blackstone, which helped define a period of Wall Street hyperwealth, has bought some 26,000 homes in nine states. Colony Capital, a Los Angeles-based investment firm, is spending $250 million each month and already owns 10,000 properties. With little fanfare, these and other financial companies have become significant landlords on Main Street. Most of the firms are renting out the homes, with the possibility of unloading them at a profit when prices rise far enough."

This is only two of the private equity funds in the game, and the numbers are 5 months old. Consider Colony Capital's $250 Million a month purchase of single family residences (SFR). Tens of thousands of SFRs are owned by investors.

I bleieve that these investors are the reason the SFR market has not only bottomed, but climbed some. But this is only temporary. Investors of this sort are not usually into holding these types of investments for long periods of time.

At some point, these investors will decide it is time to liquidate.
The question is will they do it slowly and methodically; or will they liquidate quickly. The speed with which they liquidate will determine whether or not there is another bubble or if the market only dips slightly. Time will tell.

 

 

Home Prices are Rising as Fast as our National Debt - Really!

You should be checking your local housing market to assess how high home prices have increased since the beginning of the year. For our local area in North Carolina, price has increased:

Median Price is up 10.1%

Average Price is up 11.5%

The Lack of listing inventory plus stronger buyer demand is the main component that is driving this price gain, but appraisals are very tricky in a market that has rising prices..

Monthly supply of homes for sale in the Charlotte region is bouncing between 5 and 6 months.

 

 

 

 

 

This graph was published by the National Association of Realtors and represents the national inventory level of homes listed for sale.

 

Please offer an explaination as to why homeowners are NOT listing their homes for sale.

 

 

 

            Over the past 4 to 5 months shows 80 days on average to get a listing sold (days on the market). This figure is significant because it also tells me that there are qualified buyers in the market and the rise in interest rates have again made buyers decide that now is the time to buy.

 

 

College Graduates & Real Estate- a case to be made today

The average starting salary for a bachelor's degree graduate stands at $44,259, according to the September 2012 issue of Salary Survey, published by the National Association of Colleges and Employers

2012 U.S. household consumer debt profile:

• Average student loan debt: $34,703

The unemployment and underemployment rates are astounding for college graduates. 

In fall 2012, a record 21.6 million students were expected to attend American colleges and universities.

Not a perfect analysis but let’s say that the 21.6 million students are split evenly from 2008 - 2012. Thus, approximately 5,400,000 students are ready to graduate each year. On the average, about 56% of those students graduate. NOTE: my estimation on the low side.

The number of graduating students per year would be 3,024,000.

On the average since 2008, the student unemployment rate is around 8%.

(2,782,080 students graduate over the past 4 years = 11,128,320) – that found a job!!

About 5,000,000 jobs were created over the past 4-years for the 11,000,000 new  graduates that found a job and they were in competition with unemployed workers with experience for these jobs!

NOTE: by the way, I don’t believe new college graduates that are included in the 8% that can’t find a job are NOT added to the unemployment rate – they never had a job!

 

 

If you are in your 20’s, the possibility of taking advantage of low interest rates to buy a home is a fleeting opportunity due to college debt, low starting salary or NO job.

In my opinion, graduates that were lucky enough to find employment over the past 4-yrs need to strive and buy a home sooner than later. Why? 

A home is a hedge against inflation,

Provides a savings account opportunity

Your home will appreciate in price over time

You will not be subject to rent increases.

However, the starter home will not be purchased by first time homebuyers but by those previous buyers that went through foreclosure and short sales. This only makes starter homes even more difficult to find.

I think most college graduates will consider buying a home as a commitment and unattainable goal. Both of which will not be considered a positive by them but should be by their families. And the situation will not get any better for them in the short term and perhaps even longer as there is NO light at the end of the tunnel – only more darkness.

If you know a recent grad and they have a job, you should advise them to purchase a home. The problem is the down payment and not the ability to pay a mortgage. After all, the mortgage payment will be less than their apartment but for not much longer.

Interest rates have already ticked up significantly and I am not sure they will stop.

The Fed can’t afford to stop using their credit card and they can’t afford to continue to use their credit card – a NO WIN situation!

 

 

 

The 1970’s Changed our Culture, Economy, and Family

The 1970’s was a dramatic decade of change transitioning every aspect of our lives. We of course didn’t realize the shifts or nudges or 2 x 4’s immediately but most seems very apparent today.  

Since starting my blog in 2008, I have been saying that “As housing goes….so goes the economy”. This has been the pattern coming out of every recession since the first one that I experienced in early 1970. Not so much anymore. I will try to present my views on how the 1970’s has affected housing and how housing will not be the answer to our economic woes.

The framework in which to review how we have changed as a country, we must first review the national policies and personal failures of our leaders. Our view of the federal government changed in the ‘70’s and has been going downhill ever since. The problem, we continued to send the same politicians to do the same job over and over again but expect different results………………..we are insane!

Any way, we have to start with Richard Nixon.

Nixon's second term saw a crisis in the Middle East, resulting in an oil embargo and the restart of the Middle East peace process, as well as a continuing series of revelations about the Watergate scandal. The scandal escalated, costing Nixon much of his political support, and on August 9, 1974, he resigned in the face of almost certain impeachment and removal from office. Source: From Wikipedia

 

Our trust disappeared in our leaders starting with Richard Nixon and then entered Carter which did not change our opinion. The stagflation era (could we be heading in this direction ---now?) under the Carter Administration stressed the foundation of the family – financial. To buy a house, your interest rate was well over 15% and the only way to afford a home was to have 2-income earners.  (Source of quotes is unknown) 

 

"One important adaptation to the rising cost of housing is found in the increasing appearance of two-earner households... The second income provided more than 30% of total household income "

"First time buying households were even more dependent on a second income... It seems clear that the second income was made it possible to accommodate rising housing costs as a higher proportion of the total household income. Thus the growing importance of the second earner is a major factor in the continued affordability of home ownership”

 

2-income families have increased about 20% since 1970. 50% of that increase occurred during the 1970’s. The balance of the shift occurred over the next 30-years.  

 

 

In a previous blog post, I outlined the median price of homes changes by decade. Do you know that the median price of a home in 1970 was $23,400!

In 1980, the median price of a home in the US was $169,000.

What is your opinion on why such a significant jump?

 

I never realized that there was this significant jump in housing prices and to never be reset but at a higher price.  Yes, inflation did have a part in the increase but that was dampened by how much 2-income families could afford to buy when mortgage interest rates were around 18%.

Can you imagine if the Fed today would raise interest rates to 6% …… we would go into a depression!

The change in the family to a 2-income family caused the median price of homes to skyrocket. In the ‘70’s, the move-up market was created! The second income added over 30% to the available income to be qualified for a home mortgage.  The housing market shifted over night as builders built homes to meet the demand primarily driven by available family income – the market changed!

 

1970 - 1979                                         2010-2019      

 

Prime Rate                                          12%                                                     3.25%

SF Housing Starts                               888,100                                               800,000

US Population                                     213,300,000                                        314,000,000

Home Ownership Rate                       64.4%                                                  65.3%

 

Result                                                  Stagflation                                          Hyper Inflation

Please tell me that you see the stark differences between 1970 and 2012 but also see the deep concern in the differences. This is not going to end well for the housing industry.

Little did we know that the 70’s would change us forever!

Live: started to live further out from urban cores; “nice but not necessary” not practiced; today, vertical mixed use developments are the modern small town America

Work: Mom’s and Dad’s started to both work; today over 50% of mothers and over 50% single parents with preschool children are employed outside the home; hand held calculators in the 70’s to iPads now

Shop: Walmart went national in the 70’s; the JC Penny catalog, Woolworths to internet shopping

Play: HBO was founded in 1972 and ESPN in 1979. Today, technology overload.

This was reinforced by what we watched – pre- personal computers! As an example:

            “The Mary Tyler Moore Show VIEW SHOW The Mary Tyler Moore Show is an American    television sitcom created by James L. Brooks and Allan Burns that aired on CBS from 1970 to 1977. The program was a television breakthrough, with the first never-married, independent career woman as the central character: "As Mary Richards, a single woman in her thirties, Moore presented a character different from other single TV women of the time. She was not widowed or divorced or seeking a man to support her.”

 

 

Fast forward to 2013, do you think the family core has changed for the better or worse?

 

 

In the 1970’s, we started to see manufacturing jobs disappear and shipped off to other countries.. The best that I can research as to why includes:

1. Oil and energy problems

2. The dollar was taken off the gold standard

 

OK, this makes some sense but how was housing affected by the above or were there additional circumstances that changed us as home buyers --- besides 18% interest rates and 2-income families?

Yes…………sewer and the EPA!

Sewer moratoriums with the Clean Water act of 1972 limited the Supply of Land

During the ‘70’s there was no problem finding land in urban, rural or suburban locations at reasonable prices and with reasonable land owners because government oversight was only beginning. However, the supply was curtailed not only by interest rates, inflation, but also SEWER availability!

Reston, Columbia and Irvine Ranch started the planned community concept by moving homeowners to the suburbs and leaving the core commercial/retail/office jobs in the city.

During the 70’s, the biggest problem was sewage treatment plants and the moratoriums established by government until the Clean Water Act amendments passed.

The most important due diligence issue was the availability of public water and sewer.

The Federal Water Pollution Control Act of 1948 was the first major U.S. law to address water pollution. Growing public awareness and concern for controlling water pollution led to sweeping amendments in 1972. As amended in 1972, the law became commonly known as the Clean Water Act (CWA).

The 1972 amendments included:

Established the basic structure for regulating pollutants discharges into the waters of the United States.

Gave EPA the authority to implement pollution control programs such as setting wastewater standards for industry.

 

Maintained existing requirements to set water quality standards for all contaminants in surface waters.

Made it unlawful for any person to discharge any pollutant from a point source into navigable waters, unless a permit was obtained under its provisions.

Funded the construction of sewage treatment plants under the construction grants program.

Recognized the need for planning to address the critical problems posed by nonpoint source pollution.

Local municipalities imposed sewer moratoriums because their wastewater treatment plants were not in compliance with the new federal regulations. This stopped housing in its tracks. Land availability dried up because of the lack of public sewer facilities. With housing supply restricted, prices continued to escalate because 2-income earning families created a false market which builders capitalized on. The economy and housing moved forward but at a very, very slow pace.

“Similarly, many of the wastewater treatment plants that were upgraded in the 1970s to comply with the Clean Water Act are aging and will need to be upgraded or replaced in the future.^”

            Source Unknown

I do know that wastewater treatment plants are nearing capacity with actual flow or allocated flow. Local municipalities strapped for revenue will have enough funds for general maintenance but little allocated for expansion of water and sewer treatment facilities.

Builders are still working off the subdivisions that failed during the bubble. Many of these subdivisions had water and sewer lines installed and capacity allocated. Once this inventory is sold to home buyers…………………….what then?? MORATORIUM!

This simply means NO building? Planning…..what planning – how can you plan when you are in survival mode?

The EPA is relentless by imposing new regulations while the entire country is focused on other things. And, this is an agency which sent 93% of the workforce home because they were considered non-essential during this government shutdown.

Wastewater treatment will again be the achilles heel of the housing industry and the economy.

In summary, the 1970’s changed are economy benchmark so significantly, we are only now realizing the effect. High interest rates, stagflation, 2-income families, and wastewater treatment plant moratoriums with Federal pollution controls add up to serious consequences in 2014 and beyond.