Is This a Recovery or a New Housing Bubble?
Investors have taken comfort from the recent improvement in housing prices seen across the country.
But now the shares are rolling over. Could the relative underperformance of the homebuilders be telling us something?
David Stockman, former director of the Office of Management and Budget under President Ronald Reagan, thinks so.
In an interview with The Daily Ticker, Stockman said, "I would say we have a housing bubble again. I don't think we have a real, organic, sustainable recovery."
Stockman argues that "fast money" is moving into the local real estate markets that suffered the biggest declines in order to "speculate in buy-to-rent for a quick trade."
Stockman thinks that these speculators will be looking to sell out as soon as prices rise sufficiently to give them a specific rate of return and that "they will be gone as quickly as they came."
U.S. Housing Market Recovery Just Rescued 4 Million Homeowners
In further signs of a U.S. housing market recovery, home prices are up – meaning a whopping 33% fewer homeowners are underwater.
When the U.S. housing market bottomed out in 2008, nearly one in six homeowners owed more on mortgages than their homes were worth. That translated to 12 million underwater homeowners.
But the outlook has improved considerably.
That's because home prices, which peaked in 2007, rose 7.4% in November from a year ago, according to real estate firm CoreLogic. That's the largest year-over-year increase since 2006, when the housing industry was nearing its peak.
As home values rose, the number of "underwater" borrowers fell last year by almost 4 million, and that total could drop to 4 million within two years, according to JPMorgan Chase & Co. (NYSE: JPM).
That's good news not only for the housing industry, but for the entire economy.
"For most middle class households, homes are by far their biggest asset," Karen Weaver, head of market strategy and research at investment firm Seer Capital Management LP told Bloomberg News. "So once the housing market starts to recover it helps consumer spending, it helps the whole economy."
Here's Another Genius Mortgage Idea From Washington That Is Going to Cost You
Now here's another good idea from the geniuses that ruin, I mean run, our country.
The Obamarama administration really wants to help homeowners whose homes aren't worth what they borrowed to buy them. In other words, they are "underwater."
A lot of the loans to homeowners that are underwater are owned outright or, at a minimum, insured (more often both) by Fannie Mae and Freddie Mac, the government-sponsored (which means taxpayer saddled) enterprises that the government had to take over when in 2008 they lost on their trillion-dollar bets that home prices would go up forever. Geniuses!
In fact, these geniuses own or insure close to half of all home loans in the United States. Obviously, they like to bet big. But they didn't bet alone. They had betting partners.
The casino was the whole country and the whole system.
The mortgage originators, prime and subprime lenders, banks – everyone was handing out loans because, get this, they wouldn't be responsible for the loans they were making. Fannie and Freddie were buying them all up while the guilty parties would make money as Fannie and Freddie pipelined more products to – guess what – make more loans!
In case you forgot, that's where all the money came from in the whirling dervish derby that fed the mortgage bubble and aided and abetted Alan Greenspan's how-low-can-you-go interest rate policies. I guess we can call him the Big Pit Boss. But I digress…
So, if Fannie and Freddie own your loan and you're underwater, they have been cattle-prodded by the geniuses above them (yep, government geniuses) to let you refinance at a lower rate (lower than the crushing, sucker's rate that ballooned on you).
Because, as an investor (that's what home buying really is – an investment, not a right) you made a go-for-broke bet at the table and forgot your basic math. Math that says, "One, plus the none that I have, equals three, so this is a good bet I can double down on and retire."
What will these geniuses think of next?
Why You Can't Trust Bob Toll's Prediction of 20% Home Price Increases in 2013
Bob Toll, Executive Chairman of Toll Brothers, recently told Reuters that home prices are going to jump 20% in 2013 and another 25-30% in 2014.
But before you decide to pile into real estate, you might want to think about it for a moment.
It's not that there's anything wrong with Mr. Toll, nor even his prediction. He is a seasoned executive in one of the most respected homebuilders in the country; it's why he made this prognostication and what he stands to gain from it that bothers me:
- Toll Brothers (NYSE: TOL) is one of the most prominent and capable homebuilders in the country. If people believe that real estate will appreciate, they are more likely to buy more of Bob Toll's product.
- Toll Brothers needs more of the same – big bailouts, big stimulus and low interest rates because that greases the skids in the banking system for big real estate companies like his. Without the extra money floating around, Toll Brothers' financing options are limited and he can't build or at least build as much. Worse, if interest rates rise, his cost of capital will increase significantly and negatively impact his margins. Rising property values give companies like Toll Brothers greater collateral and borrowing power, so of course he wants properties to appreciate…a lot.
- Toll is also an outside advisor to President Obama. That means he's plugged into the White House like other big business leaders and has a vested interest in preserving the status quo rather than shaking up the establishment and really fixing things.
As for the notion that real estate will appreciate 20% next year and as much as 30% the year after, that's a more nuanced insight. Note, I'm not saying it's impossible, just that it's highly unlikely on anything other than an extremely localized basis.
Why Bob Toll is Wrong About Home Prices
When viewed against the longer term lens of history, housing values are still as much as 6-12% overvalued.
You can see that quite clearly in the Case-Shiller Index created by Yale's Robert Shiller. Take a look:
QE3 Will Give Rebounding Homebuilder Stocks An Extra Push
QE3 – Federal Reserve Chairman Ben Bernanke's $40 billion-a-month booster shot – could be just what the doctor ordered to keep homebuilder stocks surging.
The Fed's buying of mortgage-backed securities (MBS) is designed to help push down 30-year mortgage rates — a major incentive for consumers to buy a house.
The strategy is already working. Last week, just a month after QE3 was announced, mortgage interest rates fell to the lowest level on record.
The average 30-year loan stood at 3.39% as of Oct. 11- down from 6.1% at the start of the recession in December 2007.
And the Fed has said it plans to keep its own federal funds rate, a benchmark for interest rates, at "exceptionally low levels" at least through mid-2015.
Such policies, designed to jumpstart the economy by boosting the housing market, necessarily benefit homebuilder stocks as well.
"You get more benefit when people buy homes," Bernanke says. "It's the purchases of new homes that generate the construction activity, the furnishing, all those things that help the economy grow."
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Ben Bernanke's Misguided Focus on Housing is Like a Bad Joke
It's a little early for April Fools, but Ben Bernanke might just be a prankster at heart.
I say this because he recently told the Economic Club of Indiana in Indianapolis that the Fed's plans for QE3 would help create more economic activity and higher home prices. Then he added, almost as an afterthought, that this would help many more savers than it would hurt.
I was waiting for the punch line…or the laugh track…or maybe an old bada-boom from Paul Schaeffer's band offstage. Only it never came.
It's like he was making a bad joke, "but QE is good for savers. No, really! I swear…"
Why the Fed chief keeps linking housing prices to savings and, by implication, to an economic recovery defies logic.
No matter how hard he tries, he can't solve our nation's economic woes by making the same mistakes all over again.
Part of the reason housing blew up in the first place is that people began to view rising home prices as personal ATM machines. Now Bernanke is simply putting a new face on the same monster.
Think about it…
We already have a multi-year oversupply in homes on the market and ridiculous amounts of construction are still going on in parts of the country where there are quite literally no buyers. If you've been to Las Vegas or parts of Florida you know exactly what I'm talking about.
How many homes do we really need at a time when values remain 30%-50%, and in some places even 70% below their peak?
Certainly not the millions of new homes that Bernanke thinks we do while unemployment remains high and actual buying power has been dramatically reduced.
And millions of strapped American families two paychecks away from bankruptcy surely don't care.
Bernanke's False Bottom
Now I know the media is very excited about recent data showing a recovery in housing prices, but let's take a deep breath. Seasonal demand accounts for a good portion of the bump. So does bargain hunting.
This suggests a new round of speculators has entered the game — and those folks are buying with cash, making mortgages irrelevant.
As a result, prices are being bid up even though overall demand remains relatively constant.
Then there are the banks. All of them claim they want to lend money, yet find every excuse not to. While they will claim otherwise, practically speaking they're saying one thing and doing another.
This, too, speaks to a massive disconnect.
Can the U.S. Housing Market Continue this Recovery?
The ailing U.S. housing market, the trigger of the Great Recession, is indeed starting to recover – but it'll take years before it's healed.
The Standard & Poor's/Case Shiller Home Price Index released today (Tuesday) revealed that home prices in 20 U.S. cities rose in June from the same period a year ago. It also marked the first such gain since September 2010.
All 20 cities tracked by the index also rose in June from May, the second month in a row in which every city posted month-over-month gains. The most robust one-month gains came from Detroit, Minneapolis, Chicago and Atlanta.
"The combined positive news coming from both monthly and annual rates of change in home prices bode well for the housing market," David Blitzer, chairman of the S&P's index committee said in a statement. "We seem to be witnessing exactly what we need for a sustained recovery: monthly increases coupled with improving annual rates of change."
Helping the housing market rebound are record-low interest rates. Mortgage rates hit historic lows this year, and while they have inched up a tad, they are still at record low levels.
The National Association of Realtors last week reported sales of previously occupied homes climbed 10% in the past year. Builders, seeing an uptick in interest from potential buyers, are growing more confident. The group in June applied for the largest number of building permits in roughly four years.
The news is encouraging, but don't be mistaken: The U.S. housing market is still a far cry from healed or even healthy.
"We seem to have upward momentum and we have confirmatory evidence and like NAHB housing confidence index," said economist and index founder Robert Shiller. "But you know we have lots of clouds on the horizon too."
This is How to Fix the U.S. Housing Market
Real estate research firm Reis reported today (Thursday) that apartment rents are rising at the fastest rate since 2007.
Reis said vacancies hit a 10-year low as rental rates for the second quarter jumped 1%, the biggest increase since the financial crisis.
Compare this information with recent data on pending home sales, new home sales, and housing prices that has been more promising than months' past and it seems the U.S. housing market is on the mend.
That was the topic posed to Money Morning's Chief Investment Strategist Keith Fitz-Gerald during a visit Thursday to Fox Business' "Varney & Co." program. Fitz-Gerald outlined what the recent housing data is telling us about the U.S. economy and the future of home prices and sales.
He also suggests what the U.S. government should do to encourage a stronger economic recovery and let people once again believe in the American Dream of home ownership.
Check out this Q&A session with Fitz-Gerald about the latest developments in the U.S. housing market. You can see all of Keith's analysis in the video below.
What the Government Must do to Fix Housing
Recent data on pending home sales, new home sales, housing prices and rental rates have suggested the U.S. housing market is really on the mend – is that so?
That was the question posed to Money Morning's Chief Investment Strategist Keith Fitz-Gerald during a visit Thursday to Fox Business' "Varney & Co." program. Fitz-Gerald outlined what the recent housing data is telling us about the U.S. economy and the future of home prices and sales.
He also suggested what the U.S. government should do to encourage a stronger economic recovery and let people once again believe in the American Dream of home ownership.
You can see all of Keith's analysis on the U.S. housing market in the accompanying video.