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Reasons for Skepticism

Housing’s Breakout Year

by MIKE WHITNEY

Housing is back.

Prices are rising, sales are strong, inventory is low, and according to a recent survey, 82 percent of real estate agents believe that it’s “a good time to sell a house.” Also, a new report prepared by the ULI Center for Capital Markets and Real Estate confirms “renewed optimism for growth in real estate …….The March survey reinforces the current optimism regarding the single-family housing industry…..This reflects signs of a solid housing recovery, as buyers, sensing a turning point, return to the market.” (“Study Finds Much Optimism in Real Estate Market”, National Mortgage Professional)

So after 5 years in the doldrums, with consumer confidence at its nadir, wages steadily declining, a weak jobs report,  flagging retail sales,  wholesale inventories plunging, and bank lending at a standstill, we are asked to believe that housing has reached escape velocity and the market is on the verge of a breakout year?

Pardon my skepticism, but I’m not convinced. The sharp uptick in housing prices in the last 9 months is unsustainable, in fact, prices will probably flatten out or retreat by autumn. The Fed’s rate-stimulus, aggressive government mortgage modifications,  inventory suppression and the temporary surge in investor spending will not reflate the bubble and push prices back to their 2007 highs. The only way that’s going to happen is if the Obama team agrees to guarantee mortgages that the banks issue to  high-risk loan applicants. The lobbyists and attorneys for the big banks are trying to accomplish that goal by pressuring the Consumer Financial Protection Bureau (CFPB) to ease lending standards on their Qualified Mortgage rule, but, so far, they have not succeeded. Bottom line: Unless the banks start lending money to people with bad credit; there won’t be another housing bubble.

Okay, but why do prices keep going up when the economy is still dead-in-the-water.

It’s mostly speculation. The investor share of the market is now bigger than ever, even bigger than 2005-2006 at the peak of the bubble. Take a look at this article from OC Housing News aptly titled “The only increase in housing demand is coming from investors“:

“When most people think about a bull market in any asset class, it begins with an increase in demand for the product. In housing, this demand has historically been from owner occupants taking jobs and competing for the available housing stock with their new income. All sustainable housing market rallies in the past have been built on strong job growth and increasing wages. Not so with our current housing recovery. This has many questioning whether or not this recovery is real….

As I’ve repeated many times, owner occupant demand is showing no signs of life. If not for investor demand, the housing market would still be languishing with prices and sales volumes lingering at the bottom. However, both prices and volume are up, and those who want that outcome have investors to thank for it.

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Take a good look at the above chart. Can you detect the “great recovery” in mortgage applications? No, of course not. It’s all hogwash.  The only reason prices are going up is because the  yield-crazed speculators are dipping their beaks in the market and pushing up prices. If it wasn’t for that, we’d see what’s really going on, that the detached, single family home is going the way of the Dodo. Here’s more on the topic from the Wall Street Journal:

“U.S. housing recoveries almost always have been ignited by rising demand from families and individuals looking for a place to live. This recovery is different. Investors—including some big Wall Street players—are leading the way, say industry executives and analysts….

Investors have always played a role in the housing market, but their presence was often small. Currently, cash buyers—largely investors—make up about 32% of sales nationally, according to the National Association of Realtors. In Southern California, a favorite target for investors, absentee buyers accounted for 31.4% of purchases last month, up from an average of less than 17% between 2000 and 2010, according to DataQuick MDA, a real-estate research firm.” (“Investors Pile Into Housing, This Time as Landlords“, Wall Street Journal)

If you’re thinking about buying a house in the near future, you’d better reread the above passage as if your life depended on it. Because when the lottabucks investors move on, prices are going to fall and Mom and Pop homebuyers are going to take it in the sternsheets for the umpteenth time.  And, remember,  these investor groups don’t even have to cut-and-run for prices to drop. All they have to do is reduce their share of sales. This is an issue that journalist Nin-Hai Tseng explores in an article at CNN Money titled  ”Investor frenzy over housing has peaked”. Here’s an excerpt:

When the U.S. housing market crashed in 2007, millions lost their homes to foreclosure. With their finances in shambles, they picked up the pieces by renting rather than buying. Big institutional investors quickly caught on, snapping up foreclosed properties on the cheap and renting them out.

All this has helped drive the recovery we’re seeing today: Investors effectively absorbed the excess inventory of homes for sale, which in turn has helped push home prices higher….

While this has gone on for some time, the investor frenzy might have peaked. Rents for single-family homes have essentially flattened — rising just 0.1% in March from a year earlier, according to a report released Thursday by real estate listing website Trulia. What’s more, in some cities where investors had the biggest appetite for properties on the cheap, rents have fallen….

With rents softening, investors may start selling off their properties….there’s risk that this could dampen momentum of the recovery. Some have argued that once big investors stopped buying, home sales and subsequently home prices could start flattening then falling again.

See? Rents are already softening and margins are already shrinking, so it’s only a matter of time before the investor-craze runs out of gas. So, ask yourself this: What’s going to happen to housing prices when 30% of the market goes “poof”?

When the big money pulls up stakes and moves on, prices will drop like a stone, mainly because they are not supported by fundamentals. Jobs are scarce, unemployment is high, wages are falling in real terms, and loans are still hard to come by without a hefty down payment and flawless credit. On top of that, the market faces other headwinds that we rarely hear about in the MSM, like student loans, which figures to be a humongous drag on future sales. Get a load of this except from CNBC:

  …Total student loan balances nearly tripled between 2004 and 2012, according to a new survey from the Federal Reserve Bank of New York. Now $1 trillion in collective student loan debt is directly affecting the housing recovery.

“Short term, you see a decrease in the number of first-time home buyers,” said Brian Coester of Coester Valuation Management. “You’re going to see somebody who would have been able to afford a more expensive house maybe go for the lower version or the downgraded version.”

First-time home buyers usually make up over 40 percent of the home buying population, but their share has hovered at or below 30 percent during this recovery, according to the National Association of Realtors. The student debt burden has kept many potential buyers out of the market, either forced to rent or to move back in with their parents…”

Who’s going to make up for all those firsttime homebuyers who are drowning in red ink?

Investors? Wall Street?

No way. First sign of trouble, and the speculators will vamoose. These guys operate on a very simple principle; sell first and lose less.

Of course, I could be wrong, after all, prices have gone up nearly 8 percent in the last year, so what’s to stop them from going higher still? According to the MSM, housing should log double-digit gains for years to come. Happy days are here again, they say. Here’s how the Wall Street Journal sums it up:

The U.S. housing market has broken out of a deep slump, and prices are shooting up faster than anyone thought possible a year ago….Prices of existing homes rose 10% in February nationally from a year ago. They have been rising during the seasonally slow winter months—and they show signs of jumping further as the spring buying season gets under way….

“The recovery is solid. There are pure fundamentals you can point to,” says John Burns, chief executive of a real-estate consulting firm in Irvine, Calif.

But he says the housing market is turning up sharply, “hockey-sticking faster than it otherwise would,” because of investors, low inventories and low mortgage rates.”

How do you like that? On the one hand, the author blows enough smoke to set off a fire alarm, and on the other, he breezily admits the truth, that it’s all “because of investors, low inventories and low mortgage rates.”

Some recovery, eh?

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. Whitney’s story on Bernanke’s Subprime Bonanza appears in the April issue of CounterPunch magazine. He can be reached at fergiewhitney@msn.com.