“Housing – people are insane if they think housing isn’t going to get crushed with rising rates. As you outline often, it’s already happening in ( NY, Den, etc. ) I live in LA and most of my friends/ coworkers are telling me how dumb I am to not jump in. I know to just stay quiet, but I think they are about to walk into a buzz saw (again).” – email from a subscriber
The National Association of Realtors reports that December existing home sales fell more than the NAR led its Wall Street lap-dogs to believe they would decline. Larry Yun, the NAR’s market elf, has been blaming phlegmatic housing sales over the last two years on low inventory. There’s only one problem with this assertion: it’s not true based on historical data:
The chart above is drawn from data that the Fed, for some inexplicable reason, purged from its FRED database. It illustrates the inverse relationship – generally – that exists between inventory and sales. The bigger factor driving the economics of the housing market right now is the deteriorating financial condition of any household that might want to buy a house. The Fed and Government have largely exhausted the population of would-be mortgagees that can make a 0-3% down payment on a conventional mortgage plus carry the monthly burden of servicing that mortgage. The tax advantage from deducting real estate taxes was stripped from the equation.
I suspect the Fed is getting worried about the housing market. The Fed’s QE holdings rose $5 billion last week. The entire increase is attributable to an increase in mortgage holdings. Not only is the Fed not reducing its balance sheet, it felt compelled to inject capital into the mortgage market.
One thing to keep in mind. A large percentage of homes purchased and financed with 0-3% down payment mortgages in the last couple of years are underwater. When a buyer puts almost nothing down on a mortgage-financed home, the transaction costs all-in are about 10% of the value of the home. These homes are underwater at closing. Except in certain bubble areas, homes have not appreciated in value enough to make up for the amount that low down payment buyers are underwater when they closed. When the stock market eventually tanks, it will take home values down at least 30-40%, and possibly more.
Just like any market bubble, I believe the housing market is reaching the point of exhaustion. As households continue to get squeezed financially, there will be a lot of homes put on the market hoping for last year’s price. As I’ve mentioned before, when home prices are rising quickly, there’s an oversupply of buyers. When home prices start to drop, the buyers disappear. When prices are rising continuously, it’s very easy to sell a home. When prices begin to fall, it becomes difficult to sell a home. It’s been very easy to sell a home for the last 5+ years. I believe it’s going to start to become difficult to sell a home at current general price levels. The smartest sellers will price their home to move. This will begin the process of “re-pricing” the market lower, which in turn could trigger a flood of flipper homes to hit the market – just like 2007/2008.
Greenwich, Connecticut housing values are down 20%. Greenwich would be the “poster child” for the high-end housing market. NYC values are starting to get hammered. For taxpayers who itemize, the new tax law limits the deduction for State, local, sales and property taxes to $10,000. This will hammer the high-end market, which in turn will put downward pressure on everything below it.
The commentary above is an excerpt from the latest weekly Short Seller’s Journal. If you are interested in learning how to make money from the most overvalued stock market in U.S. history, visit this link for more information: Short Seller’s Journal subscription information.