Despite the many prognostications that real estate is on a permanent mend, the latest data just out suggests once again that basic economic fundamentals (instead of false hopes or bad weather as was suggested by many) are steering the housing market.
Existing home sales fell 0.2 percent to a seasonally adjusted annual rate of 4.59 million units. Year over year, sales are down an eye-popping 7.5 percent, which the biggest decline since the housing bubble burst, save for the periods of 2010 and 2011 when the expiration of government subsidies spurred buying surges and subsequent slow downs.
The annual sales rate is barely above the roughly 3.4 million unit levels during the worst of the financial crisis and not even remotely close to the 7 million annual rate during the peak of the housing bubble in the mid 2000s, and now, just out from the Wall Street Journal, its article entitled “Demands for home loans plunge,” detailing that lending declined to the lowest level in 14 years.
With interest rates near historic lows and loan qualification standards almost as lax as they were during the mortgage binge at the height of the boom, what are we to make of these dismal statistics?
Is housing in for some bad news?
Contrarian indicators (seemingly positive signs which pop up at market tops but in actuality can indicate a fall is imminent) suspiciously abound.
U.S. housing starts are still brisk at an annual rate of almost one million units, and just last week “Nightline” (ABC) aired a piece entitled: “Nightline Prime follows couples fighting against high bids in a real estate market that has never been hotter.”
Meanwhile median home prices continue to climb, jumping 6.9 percent year over the year (FHFA figures) with some areas seeing increases in the mid-20 percent range.
The latest Gallup survey on investment preferences in the U.S. puts real estate ahead of gold and stocks for the first time in years, reminiscent of the previous bubble when the amount of people favoring real estate as the best long-term investment rose to as high as 50 percent just before the bubble burst.
Does any of this sound familiar?
Similar to the “beginning of the end” last time around, however, many analysts and real estate cheerleaders are failing to see the proverbial writing on the wall until it may be too late once again.
The reality is that as interest rates rise, as they have been since the feds announced their taper of Quantitative Easing (QE), mortgages become less affordable.
Median home prices, meanwhile, continue their ascent, further hampering affordability of the mortgage payment. Investor sales have played a large part in the rise in home sales but as home prices rise, the profit in such an investment is eroding.
Many are losing interest and moving on to more lucrative areas, such as the stock market. Investors, unlike the occupying homeowner, can be fickle and will bail out much quicker than someone who occupies the property.
Making matters worse, large blocks of homes were sold to large investment firms after the crisis in attempt to unload large quantities of homes. These firms have no emotional attachment to what they own and will unload whatever asset starts falling in value.
This fact alone could dump massive quantities of homes on the market if they make for the exits en masse.
With the economy failing to kick start with any meaning, despite trillions in monetary stimulants, and full-time job growth still anemic, the case for increasing demand is a hopeful one at best. Adding to the concern, historically, any meaningful economic recovery was led by housing.
After half a decade into this so-called recovery, home sales are no where near normal, let alone at levels they should be at if a real recovery were underway.
Although no one can know for certain which way the real estate market will go in the near or far term, it will most likely follow the basic economic fundamentals, which have always driven this market.
The real players are stable and normal interest rates, strong employment, economic strength and the ability of the market to supply long-term and consistent meaningful demand within the parameters of a normally constrained supply, none of which appears to be happening now.
The only positive is the feds’ money printing programs (QE), which continue to keep the home market from falling flat for now, but with the feds continuing to taper, that support may end soon.
This article expresses the opinions of Marc Cuniberti. He hosts “Money Matters” on KVMR FM 89.5 and 105.1 FM at noon Thursdays at noon and is syndicated on more than 30 radio stations throughout the U.S. His website is www.moneymanagementradio.com.