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Problems In The Housing Market? Reality Awakens Oracle

  • Written by Syndicated Publisher No Comments Comments
    May 8, 2014

    For the last two years, I have regularly been updating our analysis of the housing market and why the much prophesied recovery was unlikely. (For more information see herehere and here for examples.)  Yet, despite the hard data to the contrary, the mainstream analysis continued to beat the “housing is recovering” drum.

    This past weekend, the “Oracle Of Omaha” finally had to admit what I have been discussing with you all along. The New York Post penned the following:

    “Nor were the Oracle’s comments on the housing market. Despite dozens of interviews in recent years in which he insisted he was very bullish on housing, Buffett is now pulling back, saying that ‘housing is not that strong yet; I’m surprised by that.’ Buffett should know. His Berkshire Hathaway owns some of the biggest housing-related companies in the world, from Benjamin Moore paints to Shaw carpets.”

    While the media is quickly promoting Buffett’s comments as a “prediction” of the housing market – quite frankly it is more an admittance, than a forecast.

    As I discussed in “Housing Recovery, What Has Been Forgotten:”

    “I recently penned an article showing the $30 trillion, and counting, that has been thrown at the economy and financial system to keep it afloat over the last 4 years.  Of that, trillions of dollars have been directly focused at the housing markets including HAMP, HARP, mortgage write downs, delayed foreclosures, government backed settlements of ‘fraud closure’ issues, debt forgiveness and direct buying of mortgage bonds by the Fed to drive refinancing and purchase rates lower.  Of course, the Fed has also maintained its ZIRP (zero interest rate policy) during this same period with a pledge to keep it there until at least 2015.

    The point here is that while the housing market has recovered – the media should be asking ‘Is that all the recovery there is?’  More importantly, why are economists, and analysts, not asking the question of ‘What happens to the housing market when the various support programs end?’ With 30-year mortgage rates below 4% we should be in the middle of the next housing bubble – not crawling along a bottoming process.”

    With the Federal Reserve pulling back on their interventions, government programs now having run their course, combined with higher borrowing costs – it really should come as no surprise that the housing recovery is under attack. More importantly, the bulk of the housing recovery, such as it was, was driven by “all cash” buyers for rental properties and speculators for a quick “flip.”  The problem is that higher prices have now made these opportunities much less lucrative – as I predicted would be the case:

    “Much of the current buying in the housing market has come from speculators and investors turning housing into rentals.  This, however, has a finite life and rising home prices will speed up its inevitable end as rental profitability is reduced.”

    The following charts clearly show the real state of the housing market and why mainstream analysts continue to miss the “forest the trees.”

    1) Many analysts have been suggesting that housing inventory is too low, which is keeping people from buying homes.  This is likely not the case with the number of vacant homes still near historic peaks.

    Housing-VacantHomes-050514

    2) The “everyone should own a home” meme is no longer the case as more individuals opt from renting over buying.  This is due to both financial and psychological reasons.

    Housing-Own-Rent-050514

    3) In fact, home ownership is now at the lowest levels since 1980.

    Housing-HomeOwnershipRate-050514

    4) It is difficult to consider “buying” a home when full-time employment remains elusive.  Full-time employment, which pays better wages and provides benefits, leads to increases in household formations and home ownership. A lack of full-time employment remains a major impediment to the recovery story.

    Employment-FullTime-JoblessClaims-050514

    5) As we have stated many times previously, people buy “payments” rather than“houses.” Therefore, increases in interest rates have ALWAYS led to a downturn in real estate related loans.  Also, notice that R/E loans have not only turned lower but at the peak was only at levels associated with the bottoms of previous downturns.

    Housing-Loans-Rates-050514

    While I am not suggesting that we are about to have another real estate crash, there is also little reason to expect that the “housing recovery will drive economic growth” meme will come to fruition either. As the massive financial supports from government interventions, housing subsidy programs and the Federal Reserve’s monetary campaigns recede from the marketplace, the organic drivers of home ownership were never repaired.

    With banks now easing lending standards in order to entice borrowers back “into the water,” it is important to remember this got us into trouble last time. As Mark Hanson recently wrote:

    “In a normal housing market, in which at least 80% of all house purchases are done with ‘fully documented’ mortgage loans, house prices are solidly rooted to contemporary ‘end-user fundamentals.’ That is, the mortgage loan with its LTV, appraisal, DTI etc guidelines is the ‘house-price governor.’

    When the majority of houses are purchased with mortgage loans it is virtually impossible for house prices to wildly detach from end-user fundamentals, unless credit goes haywire like from 2003 to 2007. Sure, there have been exceptions to this over the decades. But, for the most part housing is a pretty simple asset class that for decades leading into the change of the millennium remained mostly in-check to fundamentals and a great inflation hedge.”

    We should all step back for a moment, Warren Buffett included, and remember that an organic recovery in home ownership, even if it is a long and arduous process, is far better than one driven by artificial stimulation, lax lending standards or speculative investment.  Will housing recovery, i suspect that we have seen the majority of that recovery already. That is a disappointing notion, but with an economy that is expected, according to the Federal Reserve, to have a long term economic growth trend of 2.2% – a recovery to historic norms, much less the pre-crisis peak, is highly unlikely.

    Images: Flickr (licence attribution)

    About The Author

    Lance Roberts – Host of StreetTalk Live

    After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.

    Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to the management portfolios. A daily financial blog, audio and video’s also keep members informed of the day’s events and how it impacts your money.

    Lance’s investment strategies and knowledge have been featured on Fox 26, CNBC, Fox Business News and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, The Washington Post all the way to TheStreet.com as well as on several of the nation’s biggest financial blogs such as the Pragmatic Capitalist, Zero Hedge and Seeking Alpha.

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