There are a
bunch of charts in this item but the conclusions are what we want here. The clear take home is that the recovery is
not happening at all. What is happening
is that a floor has been established driven by rental income alone. It is not been driven by rising employment
and naturally induced demand.
The bad news is
that this consolidation can last another decade. However, the stage is set for a steadily
improving employment market which will slowly clean up inventories. I say this because the USA balance of
payments is now inexorably swinging over to the positive solely because of the
rapid change over in our oil position.
This is well under way and has actually been held back somewhat by this
administration.
The trend line
is now toward all of North America to roll over into a huge growth modality
were most changes will be accelerators.
Housing will certainly be part of all that.
An Update On The
Housing "Recovery"
In July of last year, I asked the question of whether housing was
really recovering or not? There has been much hoped placed on
the "housing recovery story" over the last few years as it
relates to the economy and I thought it was time to update the data to see how
far we have progressed. With each passing month, all eyes have been
glued to television screens, and headlines, as the latest estimations of
housing starts, completions, new and existing home sales, etc. are trumpeted as
a sign of a renewed housing cycle. This is no trivial matter as real
estate is seen as a bedrock to economic strength as much as it is the sign of
achievement of the "American Dream."
It is true that in past housing was a large
contributor to the strength of economic growth in the U.S. Just
recently Chris Puplava wrote:
"While residential investment represents a
small portion of gross domestic product (GDP), housing is perhaps one of the
most cyclical sectors of the economy and tends to lead economic swings by
months to years. As such, keeping a close eye on housing provides a valuable
insight into future economic trends. While housing represented a major headwind
to the economy after the housing bubble burst, as I show below, it is now
providing a major tailwind instead."
While Chris is correct in his assumptions, the
question is really how sustainable is the current recovery in housing.
More importantly, what really drives long term economic growth is not
residential investment as much as "household
formation" where a couple buys a home, raises a family and continues
the consumption cycle that supports economic growth.
At The Margin
The problem with most of the analysis each month is
that it is based on the transactional side of housing which only represents
what is happening at the "margin." The economic
importance of housing is much more than just the relatively few number of
individuals, as compared to the total population, that are actively seeking to
buy, rent or sell a home each month. In order to understand what is
happening in terms of "housing" we must analyze
the "housing market" as a whole rather than what is just
happening at the fringes. For this analysis, we can use the data
published by the U.S. Census Bureau which can be found here.
Total Housing Units
In an economy that is roughly 70% driven by
consumption it is grossly important that the working age population is, well,
working. More importantly, as discussed in "Obama's Economic Report Card:"
"Full-time, benefit providing, employment is
the only type of employment that matters for the average American. Full-time
employment allows for an increasing standard of living, household formation,
and higher personal savings rates."
To present some context for the following analysis
we must first have some basis from which to work from. Our baseline for
this analysis will be the number of total housing units which, as of Q3-2013,
was 132,845,000 units. The chart below shows the historical progression
of the seasonally adjusted number of housing units in the United States.
###
As an example, the most recent report
of "existing home sales" showed that 4,900,000 homes were
sold on an annualized basis in November, 2013 (the last reported month).
Since this is an annualized number, we must divide it by 12 months to see the
estimated seasonally adjusted number of sales in November was actually just
408,333 homes. This number of existing home sales represents just 0.3% of
the total number of homes available. This is what I mean
by "activity at the margin." When put into this
context the "existing home sales" report doesn't seem
nearly as exciting.
What about new homes? New home sales were 421.000 on
an annualized basis this past November (the last reported month) which equates
to 35,023 new homes per month. This makes up an even smaller percentage
of the total homes available at just 0.02%.
Understanding "sales" represent only
a very small fraction of the housing market we must look at what is happening
within the total housing market to get the real story. In this regard, we
can use the Census Bureau data to see how many homes are just sitting vacant,
owner occupied or being rented. From this data we can get a much better
picture of the real strength of the economy, and how much of a
potential "tailwind" there may be.
Vacancy Rate
Out of the total number of housing units some are
vacant for a variety of reasons. They are second homes for some people
that are only used occasionally. They are being held off market for one
reason or another(foreclosure, short sell, etc.), or they are for sale or
rent. The chart below shows the total number of homes, as a percentage of
the total number of housing units which are currently vacant.
###
If a real housing recovery was underway, the vacancy
rate would be falling sharply rather than hovering only 0.5% below it's
all-time peak levels.
Owner Occupied Housing
Another sign that
a "real" housing recovery was underway would be an increase
in actual home ownership. The chart below shows the number of owner
occupied houses as a percentage of the total number of housing units available.
###
Despite the Federal Reserve flooding the system with
liquidity, suppressing interest rates and the current Administration's efforts
to bailout banks and homeowners, owner occupied housing remains near its lows.
Home Ownership
The simple reality is that there has really been
very little actual recovery in housing. With five years of economic
recovery now in the rear view mirror, it is clear that the average American is really not recovering as evidenced by
the lowest level of home ownership since 1980.
###
At 65.3%, the current level of home ownership shows
the lack of household formation which is a detraction from longer term economic
growth. The weak economic growth rates and widening wealth gap certainly
explain the fall in homeownership rates and the lowest level of birthrates on
record.
However, the recent reports of sales, starts,
permits, and completions have all certainly improved in recent months.
Those transactions must be showing up somewhere, right?
REO To Rent
While the Federal Reserve, along with the current
Administration, have tried a litany of programs to jump start the housing
market nothing has worked as well as the "REO to
Rent" program. With Fannie Mae/Freddie Mac, and the banks
loaded with delinquent and vacant properties, the idea was to sell huge blocks
of properties to institutional investors to be put out as rentals. This
has worked very well.
The chart below shows the number of homes that are
renter occupied versus the seasonally adjusted homeownership rate.
###
Do you see the potential problem here?
Speculators have flooded the market with a majority of the properties being
paid for in cash and then turned into rentals. This activity drives the
prices of homes higher, reduces inventory and increases rental rates which prices "first
time homebuyers" out of the market. The problem is that when
the herd of speculative buyers turn into mass sellers - there will not be a
large enough pool of qualified buyers to absorb the inventory which will lead
to a sharp reversion in prices.
Maybe this is why the Federal Reserve, and the FDIC,
are looking to relax the regulation put in place after the last housing bubble
which required banks to have "skin in the game." By removing that restriction banks can now go
back to providing mortgages to unqualified buyers, pool them and sell them off
to unwitting investors. Haven't we watched this movie before?
While the surge in housing activity, which still
remains at historically low levels as shown in the chart below, has certainly
been welcome it should not be forgotten that it has taken massive bailouts,
stimulus and financial supports to induce such relatively small amounts of
activity.
###
"There is no argument that housing has improved
from the depths of the housing crash in 2010. However, while the housing market
remains at very recessionary levels, recent analysis assumes that this has been
a natural, and organic, recovery. Nothing could be further from the truth
as analysts have somehow forgotten the trillions of dollars, and regulatory
support, infused to generate that recovery.
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."
The housing recovery is ultimately a story of
the "real" employment situation. With roughly a
quarter of the home buying cohort unemployed and living at home with their
parents the option to buy simply is not available. The rest of that group
are employed but at the lower end of the pay scale which pushes them to rent
due to budgetary considerations and an inability to qualify for a mortgage.
As I stated previously, the optimism over the housing recovery has gotten
well ahead of the underlying fundamentals. While the belief was that
the Government, and Fed's, interventions would ignite the housing market
creating a self-perpetuating recovery in the economy - it did not turn out that
way. Instead, it led to a speculative rush into buying rental properties
creating a temporary, and artificial, inventory suppression.
The rising risk to the housing recovery story lies
in the Fed's ability to continue to keep interest rates
suppressed. It is important to remember that
individuals "buy payments" rather than houses. With
each tick higher in mortgage rates so goes the monthly mortgage payment.
With wages remaining suppressed, 1 out of 3 Americans no longer counted as part
of the work force or drawing on a Federal subsidy the pool of potential buyers
remains contained.
While there are many hopes pinned on the housing
recovery as a "driver" of economic growth in 2014 - the
lack of recovery in the home ownership data suggests otherwise.
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