Housing: A Lost Decade

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(Reuters) – The worst U.S. housing crisis since the Great Depression has been declared over. But is it?
What some of Wall Street’s forecasts for a recovery may be underestimating are tectonic shifts in the U.S. economy that make the housing market a different place from a decade ago.

Record levels of student debt, 15 years of flat incomes and the fact that nearly half of homeowners are effectively stranded in their houses look likely to weigh on prices into the indefinite future.

Several housing experts have said the market is in danger of drifting for years. In a bleaker scenario, the fragile U.S. economic recovery could slip back into recession if Europe’s crisis deepens or the political impasse in Washington triggers a new budget crisis, putting the housing market at risk again.

“We’ve gone through half of a lost decade since the crisis started in 2007,” said Robert Shiller, co-founder of the Case-Shiller U.S. housing price index and an economics professor at Yale University.
The so-called Lost Decade in Japan occurred after the speculative bubble in the 1980s, when abnormally low interest rates fueled soaring property values. The ensuing crash has continued to afflict the Japanese economy ever since.

“It seems to me that a plausible forecast is, given our inability to do stimulus now, for Japan-like slow growth for the next five years in the economy. Therefore, if there is an increase in home prices, it’s modest,” said Shiller.

A Reuters poll published on Friday showed most economists think the U.S. housing market has now bottomed and prices should rise nearly 2 percent in 2013 after a flat 2012.

GENERATION STAGNATION

Consider the plight of college graduates, who go on to become the biggest group of first-time U.S. home buyers.

Many graduate into a climate of falling wages and soaring rents, members of the most indebted generation in history who owe an average $25,000 in student loans.

They elbow their way into a labor market so rough that the number of people with jobs is at a 30-year low, health and retirement benefits are shrinking and the young workers face a greater chance of losing their jobs than any generation before.

For Steve Blitz, chief economist at ITG Investment Research in New York, the housing market improvement has gotten as good as it can without more improvement in the labor market.

“I don’t see it worsening unless the economy goes back into a recession, but I think it’s more a case of stagnating,” Blitz said.

It is not just the employment picture that makes the prospect of a housing recovery so precarious.
Housing prices and income usually move in lock step. But real median household income is stuck at the same level as during the Clinton Administration in 1996 — at about $49,000.

That means the housing market will remain troubled for “an extended period of time,” according to Sam Khater, a senior economist at housing data company CoreLogic.
“It’s not about job growth. It’s about income growth,” says Khater.

Back in 1996, the median home price was around $80,000. When house prices soared to $200,000 in 2006 — the market peak — it was due to jumbo mortgages, not jumbo pay raises.

Banks lured consumers with low interest rates that later turned much more expensive and blew up monthly payments, eventually helping to cause the housing crash.
On the one hand, the housing implosion has created a bonanza for those buyers who can take advantage of it: U.S. real estate is now 36 percent cheaper than in 2006.

In nearly every city, it now costs less to own than to rent.

But many would-be homeowners cannot buy. Lenders have virtually locked them out of the market by denying them mortgages, according to statistics from the Federal Housing Administration and a recent Morgan Stanley research report.

In May, consumers able to close on a mortgage had, on average, a near-perfect credit score. They could afford a 19 percent down payment on their new home. And they were still on track to spend no more 24 percent of their income on their new house, according to the Ellie Mae Origination Insight Report.

“Most of the population can’t meet current mortgage underwriting standards,” says trade publication Inside Mortgage Finance founder Guy Cecala. “They’re getting eliminated before they even get to the door.”
Some believe this credit freeze is only going to worsen. Washington is considering new mortgage regulations that would shift more responsibility for bad loans away from taxpayers and investors and toward banks.

“If all these new rules that Washington is talking about are put into place, it would be even harder to get a mortgage,” said Brian Lindy, an analyst at Amherst Securities Group, which released a report in May entitled “The Coming Crisis in Credit Availability.”

Even for those who can afford to, buying a house can be a harrowing experience. After watching a nation crash and burn, plenty of people remain in shock. They are loath to take the risk anytime soon.

As research firm S&P Capital IQ’s Robert Kaiser said at a recent housing conference: “Consumer confidence simply hasn’t recovered enough to support the housing market.”

BUSTED CONVEYOR BELT

The housing market, as economists often like to point out, is a conveyor belt. A homeowner sells a house. The new buyer moves in, and the seller buys a better house. In time, that buyer in turn sells, and buys a better house.

Normally these so-called move-up buyers are the housing market’s biggest consumer group. They are what keep that conveyor belt moving.

Today the apparatus is broken.

That’s because about half of homeowners with mortgages simply can’t move.

Twenty-four percent owe more on their houses than they are worth. Another 25 percent are equity poor, meaning they have less than the 20 percent of equity required for a down payment to trade up to a new home, according to housing-data company CoreLogic.

Sean O’Toole, the CEO of foreclosure-data aggregator ForeclosureRadar.com, estimates that it will take at least another decade, at the housing market’s current pace of growth, for homeowners who are underwater just to break even on their houses.

“We went from $4.5 trillion of mortgage debt in 2000 to $10.5 trillion of debt in 2008 — and we are still only down to $9.8 trillion,” says O’Toole.

“All those people with negative equity, they can’t sell. They are stuck in a prison of debt.”

A HIT WITH MULTI-GENERATIONAL HOMES

The U.S. housing market is actually hundreds if not thousands of markets.

Cities such as New York and San Francisco have joined other world cities, like London and Hong Kong, to form a global housing market that aligns its fortunes with the wealthy elite.

Then there’s Stockton, the California city that filed for bankruptcy in June. A recent Rockefeller Institute of Government research report suggested it could turn into a ghost town with its lack of jobs and abundance of abandoned, foreclosed homes.

Still, there’s no doubt that in most places the housing market appears to have bottomed out and is now gathering strength.

The places that were hit hardest — like the warm states where baby boomers go to retire — are snapping back, and some states with strong income and job growth, like the natural gas haven of North Dakota, are solid.

“I don’t think it’s a head-fake, because when you look across all your price measures and construction measures on the starts side, you’re seeing broad-based indication of improvement,” says Beata Caranci, deputy chief economist at TD Bank Group in Toronto.
But even those who say the recovery is on are subdued. “We have to be a little bit cautious,” said Caranci. “It’s the beginning of a recovery.”

The Case-Shiller home price index, considered a bellwether of the U.S. housing markets, rose in May for the third consecutive month.

Those price hikes, however, reversed just a sliver of the wealth lost since the housing peak: $200 billion of the $6.7 trillion that has evaporated since 2006, according to a recent Bank of America report.
Some of the biggest jumps — such as the 10 percent year-over-year price gains in foreclosure-filled cities like Phoenix and Miami — were largely due to banks holding back inventory. That’s because of lingering legal problems from the so-called robo-signing foreclosure scandal as well as a reluctance to flood the market, according to CoreLogic’s Khater.
“Don’t let the volatility in prices fool you,” he said. “Yes, prices are increasing in some markets, but in the longer term it has to come back to incomes, and unless incomes are increasing, price increases are not sustainable.”

At this point in a typical cycle, executives at the homebuilding companies are usually the loudest members of the housing recovery pep squad. Yet the mood has been subdued in the most recent round of earnings conference calls with homebuilder executives.
In late June, Lennar, the third-largest homebuilder in the United States, reported a rise in new orders for the fifth straight quarter, helping to push share price to a year high in July.

Executives had foreseen that, after the housing crash, family members would start to live together as a way to save. Lennar started designing a new home that included a 600-square-foot apartment with its own entrance called the “Multi Gen Home.” It has been a hit.

Nonetheless, Lennar’s chief executive officer, Stuart A. Miller, told analysts in June that he was nervous about uttering the word recovery.

“I don’t think that there’s reason for exuberance right now — except for the fact that the beatings have stopped.”

[Jazzman]

I felt nostalgic reading this. I understand the negative equity dilemma faced by lenders, and home owners, but when viewed through the prism of the actual causes of the bubble and its ensuing collapse, sympathy joins the ranks of large deficits. One particular statement will rankle with many market watchers; “Washington is considering new mortgage regulations that would shift more responsibility for bad loans away from taxpayers and investors and toward banks.” What an admission!

To my mind, the “conveyor belt” was wholesale securitization of mortgages, and not the move up market.

Also important is the high failure rate of loan modifications estimated at 53%.

I bought in a new development in Maui, which recently seems to be doing OK. A few vacation buyers, but the majority appears to be FTBs persuaded with tempting offers of “$1,000 gets you in”. When you speak with these buyers it is very clear many have very little understanding of the market, because bubbles, cheap credit, and high prices are the new normals, and is all they (FTBs) know.

The problem is the huge emphasis on home ownership, and the importance placed on its role in the economy. The wider correction which is the lost decade being talked about, is the housing market finding it’s rightful place and role.

[bearishgurl]

[quote=Jazzman] . . . I bought in a new development in Maui, which recently seems to be doing OK. A few vacation buyers, but the majority appears to be FTBs persuaded with tempting offers of “$1,000 gets you in”. When you speak with these buyers it is very clear many have very little understanding of the market, because bubbles, cheap credit, and high prices are the new normals, and is all they (FTBs) know. . . .[/quote]

I thought it was a good article, too, Jazzman. But I honestly don’t think there is a huge percentage of homeowners “married to their house” in CA. I don’t think the established parts of the state turned over as fast as other parts of the nation, due to Prop 13 and its progeny. Many of the “heirs” who “inherited” these properties have no employment skills or net worth in their own right and couldn’t/can’t qualify to move up. In any case, they wouldn’t (and shouldn’t) “move up” due to having artificially low property taxes, which is all they can afford. Granted, a small percentage of ignorant “heirs” have mortgaged their parent’s property to death and may be in danger of losing it to foreclosure, but I believe these owners are in the minority. I have no doubt that there will be many more “Prop 13 heirs” (Prop 58) in the coming years who will elect to buy their siblings out (if they have any) and raise their families in their childhood home.

There is absolutely no cheaper way to live in CA, ESP in a coastal county.

The vast majority of the owners in CA who currently still have negative equity purchased in the last eight years, likely with little or zero down and an “exotic” purchase $$ situation or purchased in the last 15 years and refied/HELOCed their property to death, IMHO.

The massive new-tract developments in the interior counties of CA which are more than 40 mi from a decent job base are screwed, IMO. This includes the majority of those tracts situated within the counties of No RIV, SB, Stanislaus, interior Monterey, Fresno, SE Placer, Merced, Madera, San Joaquin and NE Sacramento Counties.

The recent new developments in the above counties also advertised in Alameda Co, LA Co and out-of-state billboards and radio stations “$3,000 gets you in” and “Vets 0 down.”

I envision the state’s eternally-distressed interior tract developments possibly eventually being turned over to HUD for Section 8 housing.

I’m divided on whether a High Speed Rail running parallel to SR-99 will bring well-paying jobs thru some of these counties. The jury is still out here, and, in any case, the completion of this proposed project is many years away. Perhaps CSU Merced and CSU Fresno will churn out hundreds of graduates with skills highly sought after which may eventually encourage tech and biotech companies to build campuses there (on much cheaper land).

My personal experience with natives of these counties (as well as those from the other side of the sierras) is that they would *prefer* to stay in their county of origin for a lifetime (to be near family) but cannot find decent paying jobs so migrate to the CA job centers near the coast for employment.

[spdrun]

Who actually wants to live in inland CA? At that point, you may as well be in Poenis or Lost Wages and pay lower income taxes. Flights from PHX or LAS to SAN are $50-$75 one way if you buy at the right time, and take about an hour. You can be at the beach in less time than it takes to crawl there in CA traffic.

People are discovering that fact too late.

[Anonymous]

Banks lured consumers with low interest rates that later turned much more expensive and blew up monthly payments, eventually helping to cause the housing crash.

Is this what happened? I don’t recall low interest rates that later turned much more expensive. I recall thinking that they would, but the interest rates just kept going lower.

[spdrun]

^^^

Teaser. Rates.

Several points below prime that reset to above-prime after x years.

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