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After almost
six years, 2,200 posts, and eight million page views, I am moving on from
posting regular updates at Financial Armageddon so
I can devote my energies to an exciting new members-only website called Panzner
Insights, where I'll be focusing on markets, economics, and
geopolitics.
While I will be
keeping Financial Armageddon up
and running for the time being and may occasionally post new material at the
site, it won't be a priority for me. Needless to say, that doesn't mean I
believe the nightmare is over—far from it. I just think it's time to
look at things a little differently, to try and handicap the bigger picture
going forward, and to offer some suggestions drawn from my experience on Wall
Street that might enable members to capitalize on current developments.
Hopefully,
those of you who have found my posts, books, columns, and other work
interesting or helpful will visit Panzner Insights and
check out what is on offer.
And now for today's
post...
Housing:
Plenty of Reasons to Be Pessimistic
There’s
plenty of debate about—and money riding on—the question of
whether we are in the midst of a sustainable recovery in the housing market.
Nobody knows for sure, of course, but there are plenty of reasons to be
pessimistic.
For one thing,
the supply of homes, in terms of what is currently on the market and what is
potentially for sale whether or not prices rebound further—the
so-called shadow inventory—remains significant relative to demand, even
though data from the National Association of Realtors (NAR) shows that
inventories of existing homes are back to
where they were eight years ago.
Aside from the
question of whether developments that have occurred since
then—including the fact that their are more
ways to sell property than by going through a broker—have distorted the
inventory calculation, the composition of sales has changed from what it was.
Nowadays, a much greater share of transactions are in the
“distressed” category than before the bubble burst. Given that
more than 20 percent of sales are foreclosures and short sales makes the
current ratio look healthier than it is in comparable terms.
Needless to
say, shadow inventory is far greater than it was during the go-go years, when
people were happy to remain long despite a booming market. With prices having
fallen sharply since then, we now have a situation akin to those seen in
other post-collapse markets: Holders can turn seller on a heartbeat as prices
move closer to what they paid or owe on their mortgages. Given that more than
20 percent of mortgagees are underwater, that represents a sizable overhang.
The tide of
past, present, and future foreclosures—actual and de facto—has
also left lenders with substantial holdings of “real estate
owned” (REO) properties that will undoubtedly be offered for sale at
some point. These are not voluntary investments being held for the long-term;
they are unwanted assets that are costing money by the day to finance and
maintain. According to HousingWire, nearly half of mortgage giant
Fannie Mae’s REO holdings are unable to reach the market at present.
It’s not
just about supply, however. Demand is significantly less than it used to be
for a variety of reasons, most notably because it is much harder to get
financing now than it was when the property market was booming. Despite some
recent loosening of credit conditions and ultra-low mortgage rates, anecdotal
and other reports make it clear that lenders are generally unwilling to grant
loans except on stringent terms to the highest quality borrowers.
But even if you
discount the fact that traditional home buyers are having a difficult time
borrowing the money they need to buy a home, it’s apparent that other
factors, including societal shifts, are undermining demand—and will
likely continue doing so for the foreseeable future.
Number one
among them are economic conditions in the post-crisis era, which are having
an adverse affect on prospective homeowners’
willingness and ability to take the plunge. A structurally weak employment
market, where temporary and low-paid services jobs comprise the lion’s
share of the jobs being created and where the odds of finding another, better
paying, and more secure opportunity are low, is not the catalyst for people
to step up and make what could be the biggest investment of their lives.
Demographic
factors are also playing a role. The upheavals of the past decade or so have
reaffirmed the truism that growing older means trading down and taking less
risk. And while ultra-low interest rates have pushed some of those who
survive on their savings to invest in something other than a bank CD, real
estate is definitely not the investment of choice. At the same time, broader
societal changes, including more people living alone and more single-parent
households, is undercutting demand for what has traditionally been a nuclear
family-oriented investment.
Perspectives
about what really matters are evolving as well, especially among the younger
generation. Whereas in the past the milestones of getting married, buying a
car, and acquiring a home represented the natural progression of things when
children reached adulthood, priorities have changed. A recent Bloomberg report
noted that 4G wireless telephones trumped V-8 cars for the 80 million U.S.
consumers born from 1981 to 2001. Meanwhile, the still-ailing post-crisis
economy has convinced a growing number of young people to embrace “the
age of frugality.”
In addition to
shifting preferences, many of those who are at the lower end of the
demographic scale already have a big financial burden hanging around their
necks, which precludes them from taking on other big commitments like a
mortgage—that is, student loans. Aside from the fact that, for many
graduates, these obligations are far higher than they were, proportionally
speaking, even a decade ago, the prospect of being in the hole for as far as
the eye can leave a lasting impression on impressionable individuals.
Policy-making
in Washington and by the Federal Reserve further underscore doubts about
taking big risks that might backfire. While the latter keeps reassuring
everyone that it has matters under control and that
interest rates will remain low for years to come, given how many promises
they and other authorities have broken over the past several decades,
it’s not surprising that people are hesitant to count on that on those
assertions going forward.
Lastly and
perhaps most importantly, demand is being undermined by broader-scale mood
swings. People are beginning to accept that it isn’t necessary to own
your own home, nor is it necessarily a long-term goal. That might seem like
heresy in a country where property ownership has been viewed as a God-given right,
but when you consider that in economic powerhouse Germany the share of
residential property accounted for by rentals is more than 60 percent in most
states and 90 percent in the capital, Berlin, it’s not all that
strange.
In sum, while
it is easy to focus on the traditional indicators of supply and demand and
start believing that the long-awaited recovery in the property market has
arrived at last, the fact is that much has changed in the wake of the events
of the past decade, a development that is likely to weigh on prices for many
years to come.
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