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The 2013 housing market and my prediction for 2014


By iwog   Follow   Mon, 12 Aug 2013, 7:45am PDT   29,348 views   627 comments   Watch (0)   Share   Quote   Permalink   Like (4)   Dislike (9)  

Prices are going way up from here.

This is going to be a well supported analysis of the current housing market conditions and the implications for the future. Please put equal thought and support into your rebuttals. Most of this concerns California and although I'm not familiar with the rest of the country, California is generally a leading indicator of all things economic.

Being heavily invested in real estate, there are three things of particular importance to me at the present time. All three lead to my prediction of significantly higher prices:

1. How is the spike in mortgage rates impacting the market?
2. How is the spike in home prices impacting supply?
3. How does past market action in late summer compare to prior years?

To answer these questions, I require the most real time data source available. Case-Shiller and most other indices lag the true market by months so they are mostly useless except as a good measure of where we've been. As many know, I'm a fan of Redfin charts so I will concentrate on Redfin market data. I've pulled up the most populous 20 California counties to find out what is going on.

1. How is the spike in mortgage rates impacting the market? Mortgage rates crossed into the 4% territory at the end of May. Since a typical closing takes 15-45 days, there has been ample time to determine if higher mortgage rates have put a damper on listing and sales. There is no such blip in the data. Both listings and closings are well within 2013 trends. Mortgage rates are not relevant.

2. How is the spike in home prices impacting supply? For this we have an entire 18 months of steady price appreciation across almost all California markets. The number of listings in some markets have slightly increased, but in most cases those increases were either less than seasonal norms or have since reversed. The spike in home prices is not pulling more supply into the market.

3. How does past market action in late summer compare to prior years? In my opinion, this is the most important predictor of what will happen in 2014. Does late summer market conditions match years prior to a bull market, years prior to a bear market, or years prior to a flat market? The answer is unequivocally that market action in July and early August of 2013 matches the years leading up to the biggest gaining years both during the bubble and 2012.

I'm going to be using San Diego as my reference since posting 20 different California counties would be redundant. Almost all charts for all areas match what his happening in the San Diego market.

We are going higher in 2014. Probably much higher. Most California counties look like San Diego. Not only are the price gains continuing but new inventory is NOT forthcoming. Here is Los Angeles county just to demonstrate how consistent this is:

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marcus   befriend   ignore   Fri, 2 May 2014, 4:04am PDT   Share   Quote   Like   Dislike (1)     Comment 588

tatupu70 says

marcus says

I never said interest rates aren't even more highly correlated to inflation. I'm not going to apologize for this not being simple.

If you understand this--then how can you continue to say there is a correlation between house prices and interest rates?

Because it's complex.

Real estate prices are affected by inflation. But it's also affected by the cost of debt, and income properties (for investment) are affected by the general expectations about return on investment.

This entire argument is silly. The monthly payment for owning a home is in a very real sense the price people pay for a home. And this is STRONGLY affected by interest rates.

The history you want to look at doesn't show this as well as it might because economics is always complex with many variables. In the period you're looking at, the baby boom becoming buyers, and women entering the workforce are probably bigger factors than interest rates or inflation.

iwog   befriend   ignore   Fri, 2 May 2014, 4:09am PDT   Share   Quote   Like (1)   Dislike (1)     Comment 589

Inflation cannot kick in without a political revolution combined with wealth redistribution. As long as Republicans remain a roadblock, there will never be anything remotely resembling high inflation.

Incomes will keep falling. I know several lawyers who have made their living for decades and are facing bankruptcy. Doctors are hurting. Engineers are hurting. This is the middle class end game. All the money is flowing to capitalists and they keep pressing to take more.

What's left is debt and I expect debt to increase for a few years before the final crash. There will also be stimulus coming from the medical industry as they ramp up Obamacare.

As a side note, the baby boomers are beginning to spend their retirement savings accounts and tapping equity in their homes. As a simple matter of economic Darwinism, the rich aren't going to let them keep much of it. They will gut the stock market while they still can and dump housing before the old folks move into cheaper digs.

marcus   befriend   ignore   Fri, 2 May 2014, 4:13am PDT   Share   Quote   Like (1)   Dislike (1)     Comment 590

iwog says

As a side note, the baby boomers are beginning to spend their retirement savings accounts and tapping equity in their homes. As a simple matter of economic Darwinism, the rich aren't going to let them keep much of it. They will gut the stock market while they still can and dump housing before the old folks move into cheaper digs.

You do have some good instincts. Although I hope you're wrong.

A lot of people will be expecting this. So if you're right, it needs to happen in a way that fakes most of them out. That is, either earlier than expected. Or later, with one or two head fakes to the downside first.

control point   befriend   ignore   Fri, 2 May 2014, 4:42am PDT   Share   Quote   Like   Dislike     Comment 591

marcus says

Real estate prices are affected by inflation. But it's also affected by the cost of debt, and income properties (for investment) are affected by the general expectations about return on investment.

The cost of debt IS inflation plus risk premium.

It does not change in a vacuum.

Expected future value of money/current value of money = opportunity cost of money = inflation rate.

tatupu70   befriend   ignore   Fri, 2 May 2014, 4:43am PDT   Share   Quote   Like   Dislike     Comment 592

marcus says

Here maybe if Iwog says it you'll understand.

I understand but it's not relevent. I'm telling you what history says. If you're saying things are different now and going forward the historical relationship may not hold--well, that's a different discussion.

You can't, however, state that historically there has been a correlation. Because there hasn't.

tatupu70   befriend   ignore   Fri, 2 May 2014, 4:47am PDT   Share   Quote   Like   Dislike     Comment 593

marcus says

Because it's complex.

Sure--but whether or not there's a correlation isn't. It's a simple mathemetical calculation.

marcus says

Real estate prices are affected by inflation. But it's also affected by the cost of debt, and income properties (for investment) are affected by the general expectations about return on investment.

Yep--that's what I've been saying.

marcus says

This entire argument is silly. The monthly payment for owning a home is in a very real sense the price people pay for a home. And this is STRONGLY affected by interest rates.

Yep, but more weakly than incomes.

marcus says

The history you want to look at doesn't show this as well as it might because economics is always complex with many variables. In the period you're looking at, the baby boom becoming buyers, and women entering the workforce are probably bigger factors than interest rates or inflation.

I'm glad you understand my point.

iwog   befriend   ignore   Fri, 2 May 2014, 5:08am PDT   Share   Quote   Like (1)   Dislike (1)     Comment 594

marcus says

A lot of people will be expecting this. So if you're right, it needs to happen in a way that fakes most of them out. That is, either earlier than expected. Or later, with one or two head fakes to the downside first.

We've had the head fakes. The ocean of cash is waiting for the all clear and then it all goes into the stock market. Despite the bull market since 2009, we're just a little bit above values in 2000. That's 14 years with a market that has just barely peaked over the 14-year highs.

Today would have been a strong day in the stock market except the Ukraine decided to go to war.

marcus   befriend   ignore   Fri, 2 May 2014, 8:49am PDT   Share   Quote   Like   Dislike     Comment 595

tatupu70 says

marcus says

Because it's complex.

Sure--but whether or not there's a correlation isn't. It's a simple mathemetical calculation.

Yes. And say a perfect correlation of prices going up when interest rates going down would be a correlation of -1. A slightly less strong correlation would be a correlation of -.999 etc. Even a correlation of -.7 would be (in my book) a very strong correlation. A correlation of - 3, still very much a correlation.

So yes, it's a simple computation. But it's not a yes or no calculation.

In this case not only are you not saying what you mean by "there isn't a correlation," (although I know what that means). It's complicated. Sometimes there is a strong negative correlation, other times a strong positive correlation. Either one of us could probably come up with conditions for there being a positive correlation and conditions for when there is a strong negative correlation (what I have been saying exixts and you and Tatapu say does not).

We also both can come up with significant time intervals of historical data that back up these claims.

IT's not really that interesting an argument, but the underlying dynamics are interesting. It's a fascinating dynamic really. The fact that expectations of inflation can cause (are supposed to cause anyway) interest rates to go up. And high interest rates put a damper on prices. Conversely, a lack of inflation expectations can cause interest rates to go down, which in turn often cause capital assets to go up in price, because cheap borrowed money leverages higher prices.

marcus   befriend   ignore   Fri, 2 May 2014, 8:50am PDT   Share   Quote   Like   Dislike     Comment 596

tatupu70 says

I'm glad you understand my point.

I don't have hardly any emotion about the degree to which you do not understand my point.

marcus   befriend   ignore   Fri, 2 May 2014, 9:00am PDT   Share   Quote   Like   Dislike (1)     Comment 597

iwog says

That's 14 years with a market that has just barely peaked over the 14-year highs.

Yes, but that 14 year high was one that occurred as we went into the 21st century, which was a big psychological hurdle. IT was supposed to be like the jetsons here on the other side of the year 2000.

So you reckon this consolidation WAS long enough for the market to digest
the stock market move from 800 in 1982 to 14000 in 2000 ?

And now we are off from a platform like the one from 1966 to 1982 to propel us up into the stratosphere ?

Btw, I wonder if Tat thinks there is a correlation between what happened in the stock market from 1982 to 2000, and what happened to LT interest rates.

marcus   befriend   ignore   Fri, 2 May 2014, 9:07am PDT   Share   Quote   Like   Dislike (1)     Comment 598

control point says

The cost of debt IS inflation plus risk premium

And when long term money can be borrowed for the same as expected inflation, or even less ? What does this do to prices of capital assets.

marcus   befriend   ignore   Fri, 2 May 2014, 9:13am PDT   Share   Quote   Like   Dislike (1)     Comment 599

tatupu70 says

I'm telling you what history says

No you aren't.

If I show you a significant period when housing was going up when mortgage money was getting dramatically cheaper, you'll say it doesn't count because incomes were going up. Those significant periods of time exist, and it's more than extremely obvious I'm right.

Give it up man.

marcus says

YesYNot says

When was the last time interest rates increased for a sustained period? What did housing prices do?

When was the last time LT interest rates dropped for a sustained period?

What did housing prices do?

In the period you refer to interest rates were rising along with perceived high inflation in everything (not just asset values).

During the protracted period when interest rates were dropping it was not deflationary except during recession, and even then incomes weren't dropping except due to layoffs.

Can you put this all together?

iwog   befriend   ignore   Fri, 2 May 2014, 9:13am PDT   Share   Quote   Like (1)   Dislike (1)     Comment 600

marcus says

So you reckon this consolidation WAS long enough for the market to digest

the stock market move from 800 in 1982 to 14000 in 2000 ?

Absolutely. Growth + profits + inflation result in a market that's currently priced about average.

Now factory in a 100% money supply growth since 2005, a general raping of the bottom 80% who generally don't buy stocks anyway, and an exploding aristocracy that is becoming bored with their trust baby lifestyle and want to strike it rich about the same time that traditional investment returns are a joke.

When this thing turns parabolic, everyone is going to jump on.

control point   befriend   ignore   Fri, 2 May 2014, 9:22am PDT   Share   Quote   Like   Dislike     Comment 601

marcus says

And when long term money can be borrowed for the same as expected inflation, or even less ? What does this do to prices of capital assets.

Long term money cannot be borrowed for less than expected inflation. Inflation may turn out to be higher than expectations, but the long term bond market is telling you what the long term inflation expectation is right now.

The yield curve even tells you when the market expects inflation to pick up.

tatupu70   befriend   ignore   Fri, 2 May 2014, 10:13am PDT   Share   Quote   Like   Dislike     Comment 602

marcus says

So yes, it's a simple computation. But it's not a yes or no calculation.

Yes, it pretty much is. When I did the calculation over an approximately 80 year time period the correlation was positive 0.05 or so. In my mind that is no correlation.

And if you really want to get tricky you can statistically determine whether a correlation exists to a 95% confidence--that is a yes or no answer.

tatupu70   befriend   ignore   Fri, 2 May 2014, 10:16am PDT   Share   Quote   Like   Dislike     Comment 603

marcus says

If I show you a significant period when housing was going up when mortgage money was getting dramatically cheaper, you'll say it doesn't count because incomes were going up. Those significant periods of time exist, and it's more than extremely obvious I'm right.

I will do nothing of the sort. The only caveat I'll say is that you have to choose a large enough time period to make for a proper calculation. If you do so, I am very confident that you will find a different answer than you think you will.

tatupu70   befriend   ignore   Fri, 2 May 2014, 10:21am PDT   Share   Quote   Like   Dislike     Comment 604

marcus says

Btw, I wonder if Tat thinks there is a correlation between what happened in the stock market from 1982 to 2000, and what happened to LT interest rates.

Of course there is. I've never done it, but I'm quite sure if you did the calculation you'd find that a pretty strong correlation exists between stock returns and interest rates.

marcus   befriend   ignore   Fri, 2 May 2014, 10:30am PDT   Share   Quote   Like   Dislike (1)     Comment 605

control point says

Inflation may turn out to be higher than expectations, but the long term bond market is telling you what the long term inflation expectation is right now.

This is debatable. But I can only handle being in one extremely stupid debate at a time. What you say is usually true, but many including I would argue not always. These are unusual times. Can you say QE ?

I used to believe what you say here. But in recent times I have come to see markets as more "rigged" than I used to. Also, markets, including the bond market can get out of whack do to things like, flight to quality, QE, strong international currency imbalances, what currency is the the worlds reserve currency and so forth. So I think your statement is an oversimplification. The bond market is a market, that takes many things in to account (besides inflation).

tatupu70 says

When I did the calculation over an approximately 80 year time period the correlation was positive 0.05 or so. In my mind that is no correlation.

So we may finally get to an understanding, and lets say you get to feel you're right. I'm pissed that it's so fucking stupid, and that we got to this with such difficulty.

Sometimes there is a very strong negative correlation between RE prices and interest rates. Sometimes there is a very strong positive correlation. It's even pretty simple to explain the conditions for both.

By "sometimes" I mean time frames of multiple decades or more.

You interpret this as no correlation. Since in your view the periods of strong positive correlation cancel out the long periods of negative correlation.

I view this differently. There is no absolute answer to this. But I consider 15 to 30 year time frames significant, and I believe that understanding why there is a positive correlation (when there is), and why there is a negative correlation when there is are both extremely easy.

Furthermore, I acknowledged that a period coming up, when and if inflation kicks in, could be one of the positive correlation times. But given the bizarre mix now, I'm not sure at all. A lot does depend on the bond market.

But I'm very happy if you go away feeling vindicated and that you won the argument.

YesYNot   befriend   ignore   Fri, 2 May 2014, 10:54am PDT   Share   Quote   Like   Dislike     Comment 606

Here's how housing and interest rates have gone over the last 30 years or so, which I believe Marcus referred to. I adjusted the Case-Shiller data to account for inflation. Inflation was done yearly, but it averaged to about 2-3%.

edited to fix chart

marcus   befriend   ignore   Fri, 2 May 2014, 11:08am PDT   Share   Quote   Like   Dislike (1)     Comment 607

YesYNot says

Here's how housing and interest rates have gone over the last 30 years or so, which I believe Marcus referred to.

Why inflation adjusted RE prices ? That wasn't my point. In fact interest rates dropping when inflation exists is one of the primary conditions leading to a period when interest rates are very negatively correlated with RE prices (such as the period in your window.

Although the correlation can even be seen there (not including the aberration of 2007 - 2012). Maybe some will want to plot RE prices against Interest rates to see the correlation. But it is obvious.

tatupu70   befriend   ignore   Fri, 2 May 2014, 11:13am PDT   Share   Quote   Like   Dislike     Comment 608

marcus says

I'm pissed that it's so fucking stupid, and that we got to this with such difficulty.

OK--I don't think it's stupid at all. IMO, this is an important topic because many people on here assume that as interest rates rise, house prices are going to crater or at least fall in nominal terms. But when you look at what happens historically, this is anything but certain. That's the point I wanted to make.

YesYNot   befriend   ignore   Fri, 2 May 2014, 11:18am PDT   Share   Quote   Like   Dislike     Comment 609

I chose to adjust for inflation, because RE prices have gone up in every 30 year period you can think of. This is because RE generally goes up with inflation. Adjusting for inflation is a way to remove this fairly well known appreciation effect.

marcus says

Although the correlation can even be seen there (not including the aberration of 2007 - 2012)

You can't just exclude the part of the data that don't agree with your theory.

So, while interest rates have gone from 10 down to 4%, national housing has been volatile but has gone with inflation give or take. I picked the years, b/c that was where the CS data started. I'd say that over this period, housing has been pretty immune to the large change in interest rates.

If you stop worrying about black swans and this time it's different yada yada, you might expect that housing will continue to follow the 3% inflation + - 10 or 20%.

tatupu70   befriend   ignore   Fri, 2 May 2014, 11:18am PDT   Share   Quote   Like   Dislike     Comment 610

marcus says

Why inflation adjusted RE prices ? That wasn't my point.

Although the correlation can even be seen there (not including the aberration of 2007 - 2012). Maybe some will want to plot RE prices against Interest rates to see the correlation. But it is obvious.

Not to continue this well past the point of interest, but looking at the graph, interest rates pretty much fell for 30 years straight. Home prices went up for 5 years, down for ~10 years, then up for 10 years, down for 3-4 years, then flat for 4 years.

How do you conclude there's a correlation there?

marcus   befriend   ignore   Fri, 2 May 2014, 11:21am PDT   Share   Quote   Like   Dislike (1)     Comment 611

tatupu70 says

many people on here assume that as interest rates rise, house prices are going to crater or at least fall in nominal terms.

This can happen and in fact should, with all else being equal. If interest rates were to rise dramatically for reasons other than inflation expectations, then housing prices would drop. And even if interest rates are going up because of inflation expectations, at some point the fed might repeat what Volker did which would put the kabash on RE appreciation (at that point).

Also, what if inflation and interest rates are going up, but incomes aren't, as they were last time inflation and rates were rising a lot ?

It's really hard to say. But I've had enough experience trading to know that I don't know.

marcus   befriend   ignore   Fri, 2 May 2014, 11:34am PDT   Share   Quote   Like   Dislike (1)     Comment 612

tatupu70 says

How do you conclude there's a correlation there?

Jeez.

**To see correlation you would plot say interest rates on the horizontal axis and RE prices on the vertical and take time out of it.

I will acknowledge that the 2007 - 2013 data obfuscates it. Am I cherry picking, or is this an extremely anomalous time ? You decide.

But if you did what I said ** using data from 1983 - 2006, you would see a very nice downward pattern and a VERY significant negative correlation.

Do the same from say 1950 - 1980, (strongest 1968 - 1980) and you would see a very nice positive correlation.

YesYNot   befriend   ignore   Fri, 2 May 2014, 11:39am PDT   Share   Quote   Like   Dislike     Comment 613

Maybe the question is, why do people on Patnet expect that we will have high interest rates in the absence of any inflationary pressure?

Do you have such expectations Marcus? I've not read any convincing argument around here.

Even if we were to have mortgage rates increase without any other changes, the net effect would not necessarily be lower prices. Buyers would not want to buy at current prices, because monthly payments would increase. On the flip side, sellers would either not be able to sell at reduced prices (mortgage) or not want to sell at reduced prices. After all, sellers still have their low interest rate loan locked in, and their monthly balance is based on their locked in rate. So, you would have a slow down in sales, but prices might not be so predictable.

tatupu70   befriend   ignore   Fri, 2 May 2014, 12:01pm P