Is the housing market doomed? Let's see:
- The number of people defaulting on the very first payment is sharply higher these last couple of months. Shows that people refinancing at current rates or buying at these prices cannot afford the rates they are getting and homes they are buying.
- Housing inventory levels are at multi-year highs. It takes time for municipalities to issue permits for new residential development. Such permits are finally being issued for applications submitted 12-18 months ago, causing supply to rise at a time when demand is low due to high prices.
- Wage growth has not kept up with increase in home prices, rising rates, gas and energy prices and inflation.
- Home Builders desperate to lure doubtful buyers are offering major incentives like free upgrades, appliances or 6 months no interest financing much like auto manufacturers. Look what happened to the auto business.
- Consumers are finally tapped out. They used equity in their homes to off-set lack of wage growth. Now they don't have any equity, in fact, if they sell their homes, they will owe more than their home is worth.
On the other hand, housing stocks look like they cannot possibly go down. Indeed, home builders like KB Home (KBH), Lennar (LEN), DR Horton (DHI) and others have hit 52-week lows and stayed above it for the last 4-6 weeks. The Fed also, stopped raising rates as of their last meeting and all signs indicate that they will stay pat at the next meeting too. Banks have lowered interest rates on 30-year fixed mortgages these last few weeks in anticipation of the Fed decision and some people are predicting them to lower rates even further.
I believe that stocks are a leading indicator of where the housing market is going. Considering these stocks have been cut by 50%, we are no where near the end of the housing bottom. The "soft" landing is going to be a little harder than most people expect. While houses are not going to dump 50%, the next 6-12 months will see houses specially in markets like Southern California, Florida and New York go down by another 15-30%. If anyone thinks otherwise, please feel free to dispute my notion.
-- Faisal Laljee
14 comments:
The only thing new in your list of data points is the high number of defaults (leading to foreclosure). The rest of the points are not new. The housing market peaked in December. (many say in July 2005).
I often wonder why people make predictions, such as "go down by another 15-30%". What is that based on because we have been hearing that for ages?
And, what's very funny to me is that most of these predictions are coming from either the media or from Wall St. strategists ot stock traders.
THEY JUST HAVE TO BE RIGHT, THIS TIME! They don't want to miss it!
But, all I want people to do who are so sure about the coming bubble (it's been coming for 6 years now) is to add the "THEREFORE" to the end of their proclamation. Then, they would have my attention.
Faisal
i wonder when is the right time to bargin hunt out of favor Home Depot and Bed Bath and Beyond.
The question is do we buy at this point? These copmanies will be with cash up to their necks in 12 months from now and chanves are we will se some big buy backs. DHI today +5%. Funny is the dam stock is rising just when all the bad news is out!!!
George - I am looking to buy, particularly MDC. So yes, there is more upside to these stocks than downside at these levels. It might take some time for them to start moving up though so we will need to be patient.
-- Faisal Laljee
Larry - Yes most of my points were not news. I was merely recapping the points for and against the housing market in general.
As for why people make predictions, well, for one, it gives us a target. I was echoing my sentiment based on the drop home builders have suffered. I know for a fact that in Los Angeles, a home that was selling for 1.9 million just 8 months ago is not even fetching 1.7 million. The owner has a loan out for 1.54 million so if he does not sell for 1.60 million, he will lose money on it. Just the fact that he is willing to part at 1.7 million now shows a mere drop of 10%. I think another 15% is certainly not out of the question for certain areas and certain kind of homes. For condos, this can be worse - hence my range of 15-30%.
-- Faisal Laljee
Boris - I am not a fan of Nardelli and HD still faces the CEO compensation issue. That said, both HD and LOW are breaking out of their short term down-trends so they do look good. I prefer Lowes.
-- Faisal Laljee
No, Faisal, he would lose $200K if he bought it for $1.9 MM and sold it for $1.7 MM. But, This example of buying a (luxury) home at the top of a market in which you suddenly have to sell is not a good example. Afterall, as soon as you buy a house you would have to absorb the 6-7% commission if you turned around and sold.
Consider this: Maybe the house was worth less than he paid at that nano-second in time.
Also, the downturn in 1991-1995 was much worse for So Cal than this time around, imho.
Larry - he bought it for $1.2 million in 2001. So its not a situation where he is selling suddenly. Also, if he is in debt all the way to $1.54 million, he needs to obviously make the sale at over than amount, assuming he cashed out his equity of $0.34 million.
I am not sure what point of mine you disagree on. I believe that median home prices are going to come down further from these levels. Do you disagree? If so, why?
-- Faisal Laljee
Yes, "equity" is not profit. So, he loses money below $1.2 million.
And, what you are saying is at $1.7 million, his asset appreciated $500,000? (only 40%)
He may have bought poorly, but, perhaps $1.9 million was not the market?
I do not believe median home prices have come down at all, yet.
There is evidence of that starting here in Phoenix-Mesa by about $2,000
Larry - If someone bought a home 2 or more years ago, the value has not dropped much from the purchase price. However, in the last 3-6 months, prices have dropped 5-15% at least in Southern California (my father-in-law is a realtor).
BTW - I hope housing does not go down. I own 2 properties in So Cal and I would stand to lose. :)
On a side note, I went to biz school at ASU so very familiar with your neck of the woods.
-- Faisal Laljee
"On a side note, I went to biz school at ASU so very familiar with your neck of the woods."
I AM WATCHING CAREFULLY THE BUBBLE IN PRETTY GIRLS WITH LITTLE SHORTS WALKING FREELY ON THE ASU CAMPUS.
"However, in the last 3-6 months, prices have dropped 5-15%" - In real estate, that is a huge range. I have seen no numbers to support this.
Thoughts on land book value?
Ryan - I am not sure if I understood you correctly, but are you asking about the price of land as opposed to the actual home on the land?
I am talking about the value of the land the home builders have on book as compared to their market cap. The book value is frequently lower than actual value depending on when it was purchased.
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