If you believe these headlines, it is reasonable to not only believe the real estate market is fully recovered, but that the US economy is in an upward spiral.
"Home Prices UP!" "Employment is Getting Better" "The Recovery is in Place" "Fewer Homes Have Negative Equity"
On December 4, 2013 we read in the Wall Street Journal, for example, that the level of new home purchases is the highest in four months. New homes in October sold at an annual rate 25% higher than the month prior. The positive reports gave new reason to believe that the Federal Reserve may end its government bond buying scheme sooner than later. Optimists would like to believe, despite the recent increase in interest rates, the housing market has bounced back from the lull during the summer when mortgage rates were at the highest in the past two years.
It's all good news isn't it when we see the November Jobs report and read the US created 203,000 jobs putting the unemployment rate at 7%. This is the lowest jobless rate in five years. Lots of homeowners and people in real estate were beating their chests over the report that new home sales rebounded to 444,000 in November, an increase of over 25% over October.
At 444,000 units, according to HS Dent Research, the US is building fewer homes than nearly at any other time since numbers were kept since the 1960s. In the mid 2000s, we were building more than 1.2 million homes a year. While building is good because it adds to employment, the pace is well below par. In addition, the November number may reflect people delaying buying decisions in October during the government shutdown. There may be further proof when we look at the 4 per cent drop in mortgage applications in the last week. Don't be surprised if the annual rate continue to fall or at best remain flat in the months ahead.
Astute investors make decisions based on facts, not headlines
When we study Mortgage Delinquencies and Foreclosures by Period Past Due, All Loans, the numbers do not include shadow inventories (delinquent notes not yet in foreclosure). Lenders only report shadow inventories of loans backed by the government sponsored entities such as Freddie Mac and Fannie Mae. As a result, many lenders simply avoid reporting what we believe could be a significant number of delinquent notes.
Much of the rebound in real estate is coming from speculators and institutions snapping up properties with cash. The bloom is not a result of real families buying homes with mortgages. This time is different.
The difference between headline statistics and reality
The good news is the Echo Boomer generation is about as large as the Baby Boomer generation. But the Echos are in their late 20s and it will be awhile before they experience peak spending and peak earning in their mid 40s. Also, the Echo Boomers are spread more thinly than the Baby Boomer generation. This means they may not have the same explosive effect on real estate like their parents. Remember, that real estate explosion took place in spite of high federal tax rates and double digit inflation. It was all do to demand. Ordinary people doing very predictable things.
Thanks to Dent Research we are surprised to see that when the Boomers were in peak spending and peak earning, from 1990 to 2010, 40 per cent of all real estate purchased across the country was built on lot sizes of half an acre to 10 acres in size. This group was not buying starter homes at that time, they were buying the biggest house on the biggest lot primarily out in the suburbs. This is unprecedented. It is also interesting. Just as Boomers wanted something different than the home they grew up in, it follows that their children want something different too. Notice how comfortable Echo Boomers are in areas in and around cities where there is a lot of action and a lot of life. Young adults refer to the Conejo Valley as "the bubble." The explanation I got from my sons was something like, It was fine to grow up there, but we don't want to live there now.
It is reasonable to this observer that since Boomers bought the same type house in the same location around the same time, Boomers may be selling in mass about the same time too. As I wrote in The 'great senior sell-off' here in the VC STAR mid May, 2013, "They (Baby Boomers) will want to sell their homes, and they're hoping there are people behind them to buy their homes," according to Arthur Nelson, director of the Metropolitan Research Center at the University of Utah. Nelson said he expects that growth in metros like Atlanta and Dallas, as those buyers will be waiting. But "elsewhere, in shrinking and stagnant cities across the country, the story will be quite different."
The next real housing crisis may start sometime later in this decade. We may find that there are a lot more people dying and selling houses than there are real families buying houses. If you believe that equity in your home(s) may need to be turned into cash flow for you sometime soon to last you 20 or more years, now may be the best time to put paint on that pig and sell it.
Certain statements contained within are forward-looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.
This information contained in this newsletter is general in nature and should not be construed as comprehensive financial, tax, or legal advice and the opinions expressed are not endorsed by NPC. As with any financial or legal matter, consult your qualified securities, tax, or legal representative before taking action.
While there are over 3,000 local financial advisers with many different opinions, it’s possible that not all firms in the Conejo Valley pay for independent research. This independent research is one of the features that helps investors see the larger picture and make appropriate, if not more informed decisions. The independent research has been used with investors in the workshops the firm conducts since1999 when John Grace became Master Certified and a Charter Member with the H S Dent Advisor’s Network.
“Master Certified” references those who pay a fee to learn about various economic trends and have demonstrated by passing tests the ability to effectively answer.
Investments are inherently risky and will fluctuate with changes in market conditions. Consideration should be given to the possible loss of a part or all of principal invested.