Mark Hanson's latest on housing

“Effective negative equity” is central to my “structurally broken housing market in need of years of de-leveraging before a “durable” bottom can occur”, theme. I have been pounding the table over “Effective” negative equity for years and finally it’s mainstream. Chances are this one report will be blown over. But like with ”shadow inventory” — when this thesis grabs hold — ultimately everybody will be talking about it, it will raise uncertainty, and economists will have no choice to respect the “math”.  And the math requires housing sector estimates have to be ratcheted down.  This literally changes everything with respect to housing ‘demand and ‘supply’ fundamentals. 

The Zillow report confirms there is still a ton of de-leveraging to do before US housing has a shot at a “durable” recovery.  Remember, in the past everybody could always sell and rebuy all of the time. Equity — or a lack of it – was rarely a problem because before the housing bubble loans required down payments.  And during the bubble no down payments were needed.  Moreover, house prices always rose during these periods. What created “zombies” prior to the housing crash was employment, income, and rates. But now it’s all about the equity. And with such a large percentage of homeowners in a negative and/or “effective” negative equity position housings’ “Maximum Potential Demand” profile is much weaker than it ever has been before.

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Housing is going through a demand spurt no doubt. The smart money was the institutions who began to buy two and three years ago. On Twist — and a plethora of media coverage on Wall St buying bulk housing pools and participating in County courthouse foreclosure actions at year-end 2011 – everybody become a distressed house flipper or rental professional.

Towards the end of last year all the hoopla and press coverage activated the “dumb money” — which includes pent-up demand — which are ”retail” who are pouncing early this year and chasing the market into summer.  But the numbers are not there…repeats can’t support this market.  April Existing and New Home Sales and the Zillow data prove it.  This market needs investors and first timers, like it had from 2010-2011.  But now. First-timer volume hit a fresh 4-year lows last month and distressed resales 6-year lows.  It’s a sad state of affairs when rates are at historic lows and First-Time buyer demand is at post-crisis lows. 

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I think there is a good chance the housing market is about to experience mid-year volatility never seen before mostly propagated by malinvestment from P/E funds using cheap money to buy up all the distressed housing and turn them into rentals.  There is no ”housing shortage” problem in the country with respect to “places to live”.  When including SF construction, MF construction, lack of demolition, the past 5 years of foreclosures of vacant house, rentals and 2nd houses, and lackluster household formation I argue there is plenty of houses out there in which to live.   There is simply a transitory dislocation with respect to houses in the “for sale” bucket.  Builders are being opportunistic and capitalizing on this right now. But if I am right and the ”housing shortage” problem is only a allocation mirage then forward estimates are wildly aggressive. And obviously, if this is still a free market and demand is strong enough this supply will find a way to market.

Bottom line on the Zombie housing market:  Of the 54 million homeowners with mortgages — the primary repeat buyer cohort and a primary builder demand cohort – over 22 million are dead to the housing market.  Of the 70 million SF homeowners — mortgage’d and free and clear — 33 million are Zombies.  Thus, we can’t expect housing to act like it has in the past.  With so many Zombies it will be impossible for repeat and new home sales to perform as expected. The past 18 month bounce — especially on prices — has been on cheap and easy money from investors looking for a dividend stock and/or Treasury replacement trade. some foreigners following their lead, and finally the ‘dumb money’ (retail) chasing into this summer.

But we are running out of greater fools very quickly, especially with first-timers sidelined and new-era “investors” who are quickly pricing themselves out of markets nationwide.