Post by unlawflcombatnt on Feb 25, 2013 12:56:55 GMT -6
from seeking Alpha via Patrick.net
Housing Market "Recovery" Is A Complete Myth
by David Kranzler
"I primarily focus on the precious metals/mining stock sector. But since the mid-2000's, when the nature of the housing bubble was as obvious as was the internet/tech stock bubble that preceded it, the housing market has been a source of irritation that has inspired me to make it a secondary research/intellectual focus. When you analyze the critical variables underlying the housing market, it leaves no doubt that the market is still fundamentally damaged and overvalued, with a very high probability that market has another serious decline ahead of it. Furthermore, housing stocks have completely dislocated from market fundamentals and investors who hold them risk a significant loss of capital once the equity market discounts the underlying fundamentals outlined below.
The housing market recovery that is perceived by investors and the public at large is a product of deceptively reported housing statistics and hyperbolic media reporting. The entities that report housing market data (Government agencies and housing market associations) take a lot of liberties with adjusting the data, often utilizing data massaging techniques such as "seasonal adjustments." The following example illustrates this point with the Government's housing start report from January 17, 2013.
The headline reported 954,000 housing starts for December on a "seasonally adjusted annualized" basis, a 36.9% increase over December 2011. That 36.9% increase is embedded with a plethora of statistical errors. If you look at the non-seasonally adjusted number of starts for the month of December, it came in at 61,500. It turns out that was the lowest monthly non-adjusted number since March 2012. Here's the link for these numbers: Census Bureau Housing Starts.
Here are a couple of charts prepared by Zerohedge which graphically portray my point that the actual data, when stripped away from the statistical adjustments, show an entirely different picture: Unadjusted Housing Starts.
Overvalued housing stocks
To illustrate the degree to which the market has run ahead of the true fundamentals, take a look at this chart I prepared:
(click to enlarge)
The top graph is a 10-yr daily price chart of the Dow Jones Home Construction Index (DJSUB); the bottom graph is a 10-yr, new homes sold chart on a monthly, not seasonally adjusted basis from the Federal Reserve database. Since October 2011, the Dow Jones Home Construction Index has gone up 288% and yet, the level of monthly, non-seasonally adjusted new homes sold has been flat. Clearly valuations in the stock market have completely dislocated from the fundamentals.
The illusion of low inventory
One big factor contributing to the illusion of a strong housing market has been the widely reported and falsely perceived "low inventory" of homes for sale.
The National Association of Realtors (NAR) most recently reported that the supply of existing homes is 2.04 million. Add to this about 151,000 newly built home inventory. On the surface, this "visible" inventory of homes for sale is small relative the amount of inventory which accumulated and helped trigger the start of the 2007 housing market collapse. Unfortunately, this visible inventory number is misleading, as it completely discounts the "shadow inventory" factor.
For purposes of this analysis, the shadow inventory is defined as homes that are in default/delinquency, delayed foreclosures, unlisted bank REO (real estate owned, which is foreclosed homes sitting on bank balance sheets), homeowners who want to sell but are waiting for the market to improve and - probably the most significant - the many millions of homeowners who are significantly underwater on their mortgage and are thereby prevented from selling. Many of the latter transition into the category of delayed foreclosure/REO.
Housing market consultant Mark Hanson is someone whose work I have followed for several years. He does extensive "data mining" to support his research. He recently published an analysis of the true housing market inventory in which he quantified the shadow inventory.
In comparison to the recently reported NAR + new inventory, Mr. Hanson defines and quantifies the shadow inventory of homes at 20-30 million homes: Shadow inventory. Before you react with disbelief, I would urge you to read through that report to see how that number is derived. Even if his number of off by 50% (and I would bet that it isn't), it means that the number of homes which could potentially hit the market over time is 10-15 million additional homes. It will be impossible for the housing market to ever recover both in terms of price and sales volume/inventory until that shadow inventory of homes clears the market.
In addition to the above described "shadow" inventory, the banks are holding foreclosed inventory on their balance sheet, fostered by a Federal Reserve which has flooded the primary mortgage system with a couple trillion dollars in liquidity. This liquidity makes it possible for banks to hold onto the non-income generating homes, thereby preventing the banks from swamping the market with additional inventory. In fact, some estimates show that banks may be withholding as much as 90% of their REO from the market:
Online foreclosure marketplace RealtyTrac recently found that just 15 percent of REOs in the Washington, D.C., area were for sale, a statistic that is representative of nationwide numbers, the company said Bank REO.
As you can thus see, there are a lot of homes that are being "hidden" within the banking system and withheld from the "for sale" inventory. This has created the illusion of low inventory and has helped generate a small price bounce in the marketplace. Barring some miracle, this market illusion is not going end well.
The truth is, if the Government/Fed stimulated housing market bounce continues long enough, the artificial rise in prices will unleash an avalanche of shadow inventory homes from sellers who would be able to unload homes with currently underwater mortgages and from banks who would be able to unload their big inventory of REO...."
Housing Market "Recovery" Is A Complete Myth
by David Kranzler
"I primarily focus on the precious metals/mining stock sector. But since the mid-2000's, when the nature of the housing bubble was as obvious as was the internet/tech stock bubble that preceded it, the housing market has been a source of irritation that has inspired me to make it a secondary research/intellectual focus. When you analyze the critical variables underlying the housing market, it leaves no doubt that the market is still fundamentally damaged and overvalued, with a very high probability that market has another serious decline ahead of it. Furthermore, housing stocks have completely dislocated from market fundamentals and investors who hold them risk a significant loss of capital once the equity market discounts the underlying fundamentals outlined below.
The housing market recovery that is perceived by investors and the public at large is a product of deceptively reported housing statistics and hyperbolic media reporting. The entities that report housing market data (Government agencies and housing market associations) take a lot of liberties with adjusting the data, often utilizing data massaging techniques such as "seasonal adjustments." The following example illustrates this point with the Government's housing start report from January 17, 2013.
The headline reported 954,000 housing starts for December on a "seasonally adjusted annualized" basis, a 36.9% increase over December 2011. That 36.9% increase is embedded with a plethora of statistical errors. If you look at the non-seasonally adjusted number of starts for the month of December, it came in at 61,500. It turns out that was the lowest monthly non-adjusted number since March 2012. Here's the link for these numbers: Census Bureau Housing Starts.
Here are a couple of charts prepared by Zerohedge which graphically portray my point that the actual data, when stripped away from the statistical adjustments, show an entirely different picture: Unadjusted Housing Starts.
Overvalued housing stocks
To illustrate the degree to which the market has run ahead of the true fundamentals, take a look at this chart I prepared:
(click to enlarge)
The top graph is a 10-yr daily price chart of the Dow Jones Home Construction Index (DJSUB); the bottom graph is a 10-yr, new homes sold chart on a monthly, not seasonally adjusted basis from the Federal Reserve database. Since October 2011, the Dow Jones Home Construction Index has gone up 288% and yet, the level of monthly, non-seasonally adjusted new homes sold has been flat. Clearly valuations in the stock market have completely dislocated from the fundamentals.
The illusion of low inventory
One big factor contributing to the illusion of a strong housing market has been the widely reported and falsely perceived "low inventory" of homes for sale.
The National Association of Realtors (NAR) most recently reported that the supply of existing homes is 2.04 million. Add to this about 151,000 newly built home inventory. On the surface, this "visible" inventory of homes for sale is small relative the amount of inventory which accumulated and helped trigger the start of the 2007 housing market collapse. Unfortunately, this visible inventory number is misleading, as it completely discounts the "shadow inventory" factor.
For purposes of this analysis, the shadow inventory is defined as homes that are in default/delinquency, delayed foreclosures, unlisted bank REO (real estate owned, which is foreclosed homes sitting on bank balance sheets), homeowners who want to sell but are waiting for the market to improve and - probably the most significant - the many millions of homeowners who are significantly underwater on their mortgage and are thereby prevented from selling. Many of the latter transition into the category of delayed foreclosure/REO.
Housing market consultant Mark Hanson is someone whose work I have followed for several years. He does extensive "data mining" to support his research. He recently published an analysis of the true housing market inventory in which he quantified the shadow inventory.
In comparison to the recently reported NAR + new inventory, Mr. Hanson defines and quantifies the shadow inventory of homes at 20-30 million homes: Shadow inventory. Before you react with disbelief, I would urge you to read through that report to see how that number is derived. Even if his number of off by 50% (and I would bet that it isn't), it means that the number of homes which could potentially hit the market over time is 10-15 million additional homes. It will be impossible for the housing market to ever recover both in terms of price and sales volume/inventory until that shadow inventory of homes clears the market.
In addition to the above described "shadow" inventory, the banks are holding foreclosed inventory on their balance sheet, fostered by a Federal Reserve which has flooded the primary mortgage system with a couple trillion dollars in liquidity. This liquidity makes it possible for banks to hold onto the non-income generating homes, thereby preventing the banks from swamping the market with additional inventory. In fact, some estimates show that banks may be withholding as much as 90% of their REO from the market:
Online foreclosure marketplace RealtyTrac recently found that just 15 percent of REOs in the Washington, D.C., area were for sale, a statistic that is representative of nationwide numbers, the company said Bank REO.
As you can thus see, there are a lot of homes that are being "hidden" within the banking system and withheld from the "for sale" inventory. This has created the illusion of low inventory and has helped generate a small price bounce in the marketplace. Barring some miracle, this market illusion is not going end well.
The truth is, if the Government/Fed stimulated housing market bounce continues long enough, the artificial rise in prices will unleash an avalanche of shadow inventory homes from sellers who would be able to unload homes with currently underwater mortgages and from banks who would be able to unload their big inventory of REO...."