patrick.net

Heraclitusstudent says

Otherwise how do you explain your own numbers: why is demand low?

Housing is the cost the shelter to your own capacity to either own the debt or liability cost of the shelter.

The issue with this cycle which was always my root core thesis is that

Mathematically we simply couldn't have enough qualified home buyers once you X out the cash buyers to call this a real recovery.

Cash demand strong, rental demand strong, mortgage buyers have been very weak, something that we haven't ever seen in any housing cycle to date.

The problem with the rental cycle is that we have rental wage inflation rising well above wage growth so it makes it harder and harder for that group to even have the capacity to save for that down payment.

One form or another housing will always be bought each year because it's shelter. The demand weakness we have seen recently is primarily due to the capacity to own the debt of housing. Rental demand has been smoking hot and that is a plus for the builders

Logan Mohtashami says

we simply couldn't have enough qualified home buyers once you X out the cash buyers

Logan Mohtashami says

The problem with the rental cycle is that we have rental wage inflation rising well above wage growth so it makes it harder and harder for that group to even have the capacity to save for that down payment.

You're not answering my question: if supply is ample, and housing is not scarce, then why did both rents and sales prices go up so much? In any market with sufficient supply, prices would align with what people can afford. This is not what we are seeing.

- Cash buyers cannot explain it unless you are saying there is just enough supply for these buyers, which essentially is the same as saying there is not enough supply for everyone.
- Investors cannot explain it either: they just move housing for sale to the 'for rent' category, and rent prices are high too.
- You could say there are too many houses and not enough apartments. It doesn't explain why prices and rents for houses went up too.
- you can't say it's a temporary imbalance because it's been lasting for years.

So what is the answer?

Heraclitusstudent says

You're not answering my question: if supply is ample, and housing is not scarce, then why did both rents and sales prices go up so much?

1. We didn't have enough rental supply for the rental demand

Heraclitusstudent says

Cash buyers cannot explain it unless you are saying there is just enough supply for these buyers, which essentially is the same as saying there is not enough supply for everyone.

2. If cash buyers weren't in this cycle 20% above historical levels we would still be in recessionary sale levels even in year 6 of the cycle with rates this low.

This is to me is the biggest miss from people. It usually comes form people who don't have a financial background or don't follow housing because the levels of rich Americans and foreign buyers for this long period of time is something that we haven't seen in the last 40 years even.

The supply of homes is there if the real net demand could take it, but outside of the Rich buying homes the demand from majority of the population is weak

When you don't have the mathematical income models right

PITI I + DTI w LTI factors going against real median incomes then you get data line charts like this

But rental demand you see this

Axis them out and you get this

Hence why in 2014

We saw 2 major housing demand metrics hit 21st century lows which we didn't even see in the great recession

Logan Mohtashami says

1. We didn't have enough rental supply for the rental demand

If we have enough supplies, but not enough renting supply, it means we have excess 'for sales' houses, and prices should go down, everything else being equal. So by itself this explains nothing.

Logan Mohtashami says

2. If cash buyers weren't in this cycle 20% above historical levels we would still be in recessionary sale levels even in year 6 of the cycle with rates this low.

Ok but...
- What do the "rich" do with these houses?: I suggest that a lot of these houses are just investment properties (for example bought by retired people sitting on retirement savings). Or they are bought by people who will actually live in them, and "cash" financing is just a preference based on wide availability of cash savings and rare investments opportunities. Most of these are not vanity houses kept empty by people who don't care to pay taxes and maintenance on a depreciating asset. So they don't decrease the supply. If rentals they just move it to the rental category.

- You seem to be saying this is a special demand that is not matched by corresponding supply. Then basically you agree this is a supply problem. If we were building more to match this extra supply, then this wouldn't impact prices. And it's been years already and extra supply is nowhere in sight in spite of the massive price signal. If that is the case we should have a building boom right now. Why isn't that happening?

- foreign investors: Again, are these people gonna live the units empty? I rather doubt this is the case for a large number. If they come to live in the US, then they are added population. If no extra supply is created for this added population, then this goes back to my point exactly: extra supply doesn't match the extra population.

Logan Mohtashami says

When you don't have the mathematical income models right

Again, income models wouldn't matter if supply was available. Prices would just align with these income levels, even if that meant much more basic homes.

Heraclitusstudent says

Again, income models wouldn't matter if supply was available. Prices would just align with these income levels, even if that meant much more basic homes.

I couldn't disagree more with this thesis on supply and demand and here is why.

If 45% of all the homes in America are bought with cash and those who make 2.5 -3X median income that is a big enough net demand driver to keep prices rising in disconnection from what main street America can afford in a below balance market place

( Note) that even today we still have more than 3 million homes that are either in distress or in foreclose but not in the market place, that is well above the total inventory in the market place day. So, on net you're missing double the homes on the market that would be distress sales adding to 100% increase in total net inventory

That is a massive amount of homes that isn't in the market place and again nobody talks about this even thought the data is there each month to show it

So we have a disconnection in price gains to main street America

Hence why this data point was created in this cycle

Which leads to this data point

Even today Mortgage purchase application are showing a negative 2% YoY print even with the 21st century lows set into the market place last year. Even I thought we could show at least 5% conservative growth year over year

What you are showing is a symptom of the Fed meddling both with the money supply and over the long haul (40yr) the exchange rate.

This even surprises me because we are working off a 21st century low on purchase apps

Maybe it is because Patrick's book is finally getting some traction?

Logan Mohtashami says

If 45% of all the homes in America are bought with cash and those who make 2.5 -3X median income that is a big enough net demand driver to keep prices rising in disconnection from what main street America can afford in a below balance market place

You totally ignored the points I made:
- cash financing doesn't mean it is EXTRA demand that wouldn't have happened otherwise. It's just a financing preference.
- you assume that people paying cash are particularly rich. But this includes a lot of retired people who have cash because that's their retirement savings. They are not rich. That's the money they need to survive through years of retirements.
- most of these houses are not empty, therefore they do not contribute to a lack of housing availability for other people
- if there is an extra demand, why isn't it met with extra production? Let's take the example of the smartphones market, that is well supplied: how long do you think it would take for an extra demand to be satisfied with extra supply? Why isn't the same happening for this extra demand for housing?

Logan Mohtashami says

we still have more than 3 million homes that are either in distress or in foreclose but not in the market place, that is well above the total inventory in the market place day. So, on net you're missing double the homes on the market that would be distress sales adding to 100% increase in total net inventory

Two points on this:
- These homes are not on the market.
- Most of the distressed homes ARE OCCUPIED. Assuming they were foreclosed and dumped on the market, that means some people will be dumped on the market on the demand side: for rental most likely.

Therefore I don't see how you could consider this like a potential extra supply of homes that could fall from the sky tomorrow.
This simply isn't the case.

Heraclitusstudent says

You totally ignored the points I made:

- cash financing doesn't mean it is EXTRA demand that wouldn't have happened otherwise. It's just a financing preference.

I don't agree with this thesis either, you're basing this on a economic assumption theory. This is why the demand bulls missed their sales expectations. They believe you actually have net mortgage growth demand when the trend has been negative adjusted to population and working force. This is biggest miss and mistake I have seen from people in housing and it primarily comes from people who don't have a financial lending background

This thesis that mortgage demand would have taken over cash demand I have used for years speaking at economic conferences as the biggest mistake in housing
economics ever.

Even with 6 years of data to show this it is still doesn't work.

New home sales came in at 481,000, about where they were in 1992.
Why is building so tepid in spite of the very high prices?

Heraclitusstudent says

Therefore I don't see how you could consider this like a potential extra supply of homes that could fall from the sky tomorrow.

The supply is there, you just don't have the demand, this is why you had lower total month supply in 1999, 2000, 2001, 2002, 2003, 2004 and 2005
and the market sales grew because you had a lot fake mortgage demand back then

Heraclitusstudent says

New home sales came in at 481,000, about where they were in 1992.

Why is building so tepid in spite of the very high prices?

This about how low home sales are but the price inflation is off the charts

What happened in 2014 was that the expected sales growth was 20%-30% and demand went negative actually even with a 429K total sales
So the builders paid the price in sales but made up for it in prices

I expect to see at least 8% sales growth this year because it's such a low bar to work with, if you do see back to back negative sales builders will adjust and cut prices to stimulate demand

New home is more a rich man's game than ever 90% mortgage market less than 15% first time home buyer market

Toll average selling price is $782,000 ... this sector has nothing to do with main street America any longer

Logan Mohtashami says

- cash financing doesn't mean it is EXTRA demand that wouldn't have happened otherwise. It's just a financing preference.

I don't agree with this thesis either, you're basing this on a economic assumption theory.

I think cash being a financing preference is not an assumption.
In any case, assuming there was an extra demand, with investors rushing to buy on lower prices. This just changes who buys. It doesn't change the overall availability of housing for people looking for a roof (rent or buy) provided investors actually rents these units.

So you didn't answer by points. You also didn't answer as to why extra demand is not met with extra supply.

Heraclitusstudent says

You also didn't answer as to why extra demand is not met with extra supply.

What extra demand are you talking about? There is no extra demand out there for existing homes

I don't know how else to say this, this cycle has had the worst mortgage demand ever recorded post WWII but has the highest cash buyer demand post WWII
and even with the high level of cash buyers sales growth trend have turned negative.

For example we saw a 6% YoY drop in cash buyers in Jan 2015 from Jan 2014 is this trends continues at 6% and you have negative purchase applications again on a YoY basis you're going to have back to back negative home sales years in year 6 and 7 of the economic cycle

Logan Mohtashami says

What happened in 2014 was that the expected sales growth was 20%-30% and demand went negative actually even with a 429K total sales

So the builders paid the price in sales but made up for it in prices

Are you assuming demand doesn't depend on prices? Really?
I think you are confusing the causality here.
Builders are focusing on the upscale market and THEREFORE very few people can afford it.

I go back to the example of smart phones: imagine smartphone makers were selling only upscale expensive phones. How long would it take for one of them to beak rank and address the demand for low priced phones? Within a year you would have factories spitting out low priced junk phones by the hundreds of millions.

Why isn't the same happening for houses?

Logan Mohtashami says

What extra demand are you talking about? There is no extra demand out there for existing homes

You just explained above that cash buyers are extra demand.

Heraclitusstudent says

Are you assuming demand doesn't depend on prices? Really?

The YoY price gains are slowing down that is a fact, and this is including 3 million homes that are in distress that is not in the market place so you have a lot more conventional sales that distress

You're creating a hypothesis without looking at all the data, you're excluding 100% increase of distress inventory that isn't in the market place and a near 50% demand drive for the richest Americans and foreign buyers for years.

causation
correlation
representation

It's all in the data for everyone to see

I can't just exclude 3 million distress homes out of the equation in regard to real term pricing which has disconnected from main street America.
That shows no discipline

Logan Mohtashami says

I can't just exclude 3 million distress homes out of the equation in regard to real term pricing which has disconnected from main street America.

That shows no discipline

But you are excluding the people living in these homes and this is ok?

Heraclitusstudent says

But you are excluding the people living in these homes and this is ok?

Those aren't homeowners they aren't paying for their mortgage, A lot of them haven't paid on a mortgages for 2-4 years and 1 million of those homes are empty

There is no way I can ignore that information, that is creating a false narrative

Every year I talk about this number and showing why rental demand will be strong because these Americans will be renters not homeowners when they finally lose their homes

Look, you are describing low demand, low mortgage origination and at the same time high and rising prices. With no explanation.
In what market does it make sense? It doesn't.
You just can't explain it, unless there is a lid on the supply.

Logan Mohtashami says

Those aren't homeowners they aren't paying for their mortgage, A lot of them haven't paid on a mortgages for 2-4 years and 1 million of those homes are empty

There is no way I can ignore that information, that is creating a false narrative

But you ignore they will need a roof if they hit the curb, and this is not a false narrative?

Logan Mohtashami says

Every year I talk about this number and showing why rental demand will be strong because these Americans will be renters not homeowners when they finally lose their homes

I'm talking of the mismatch between the number of people needing a roof and the number of roofs available.
You are talking of things that do not affect this mismatch.
You are not answering my point.

Heraclitusstudent says

With no explanation.

In what market does it make sense? It doesn't.

I have explained this 11 times on this thread, so I am going to explain one last time

You have an unreal supply and demand market place

1. 100% plus inventory which would equal 10 months of supply has been kept off the housing market due to legal constraits

2. You have near 50% demand from the Richest Americans and foreign buyers creating a false sense of pricing power which is ok with them but for main street
it has priced a lot Americans out of the housing market

Causation
Correlation
Representation

Causation

Correlation

That is as clear as I can make it

Lowest purchase application demand this century
Lowest first time home buyer demand this century

Logan Mohtashami says

1. 100% plus inventory which would equal 10 months of supply has been kept off the housing market due to legal constraits

2. You have near 50% demand from the Richest Americans and foreign buyers creating a false sense of pricing power which is ok with them but for main street

it has priced a lot Americans out of the housing market

Again you are assuming rich Americans grab houses, wall them off, and generally make them unavailable for people to live in. This isn't the case.
Again you are assuming distressed properties are a miracle supply of empty homes that will fall from the sky. They aren't.

I'm talking of the mismatch between who needs a roof and what roofs are available to live under. This mismatch is what results in high prices, both rents and sales.
You are talking of things that DO NOT AFFECT this mismatch.

This is a mute conversation. I'm going to stop there.

Heraclitusstudent says

This is a mute conversation. I'm going to stop there.

This I can agree with it :-)

Good talk though! It shows people can have a civil economic discussion on the net

Call it Crazy says

Hey Logan, after yesterday with Tat and now this discussion, do you ever feel like this with them?

The best clue that one is on the wrong side of a discussion is if you and Indigenous back him/her up.

Herc brings up good points actually, but I really think Logan is so wrapped up in the details that he can't see the big picture.

The bottom line is that prices are rising even with low demand. Obviously that points to a supply issue. There is absolutely no other way to frame it.

I'll just add a note on the kind of non-sense that passes as journalism nowadays:
http://news.yahoo.com/u-home-sales-dip-remain-near-multi-highs-150413476--business.html
Let's forget the title referring to "multi-year highs" but conveniently doesn't mention we were already at this level more than 50 years ago, with 120 millions less people.

There is more reason to be optimistic on housing. The labor market is gaining steam and housing activity should be boosted as more people get a paycheck.
In addition, home prices are showing signs of reaccelerating after slowing for much of 2014. That should lift more homeowners out of "underwater mortgages," giving them more equity in their properties and allowing some to put their houses on the market.
"Housing sales may be going nowhere, but with prices rising it looks like the deceleration in prices that had occurred for most of 2014 is largely over," said Joel Naroff, chief economist at Naroff Economic Advisers in Holland, Pennsylvania.
"That is important as the sector is suffering from a shortage of inventory, which may be due, at least in part, to a lack of equity. The better the price gains, the more homes that can be brought to market."

Get that? : prices are going up faster which is good news because it will bring more inventory, which is good because we lack of inventory, even though demand is down due to prices being too high.
Or said differently: We are going back to the bubble levels where idiots bought their homes, which is good so they will be able to get rid of the over-priced properties by passing them to the next generation bag holders.

Logan Mohtashami says

Good talk though! It shows people can have a civil economic discussion on the net

Boring...

anonymous says

John R. Talbott

What happened in 2003-2006 was very unique you had net peak SAARS at 7 million and new home sales at 1 million driving up prices well beyond the historical averages of the MI2MP model

You had an excess of homes at high prices with debt leverage which created a whole mess because unlike the stock market bubble margin debt falls 1 to 1 with a down turn in the economy

Many of us from 2003-2006 where trying to point out that debt leverage taken from housing not only created a distorted housing market but helped fueled consumption spending in the cycle as well

There is a professor in Chicago Booth names Amir Sufi who wrote a book the House of Debt and we have spoken twice at economic conferences about these debt leverage consumption levels during the housing crisis

Here is a clip of the San Francisco economic conference where he goes over that

https://www.youtube.com/watch?v=ns4bxXfqOow

He comes to me the private sector views of things because he was very skeptical of the demand growth thesis

So I broken down a lot models for him to show him why the demand growth curve is really held up by rich Americans using this model

PITI inflation rate
Adjusted to a more real DTI factor model
Against real median incomes with LTI factor base

It's very complicated but after that he totally got why housing demand was the worst we had on record in terms of mortgage but the best we have in terms of cash.

When we talk about housing economics we have to use many variable factor models and then counter them to what is going with the U.S. economy as well. This is a daily break down of 43 different economic metrics to come to a conclusion which is then broken down line by line to see where the demand can come from.

So, after 6 years of data the core thesis of my main thesis has vindicated due to the fact that economy has produced 10 million new jobs but with demographics and the model above it hasn't create the net demand that economist and housing pundits have thought it would

Logan Mohtashami says

anonymous

I break down the economic charts daily here in my facebook page https://www.facebook.com/Logan.Mohtashami

Consumer Confidence
Unemployment claims
Real median incomes
Retail sales
Industrial production
GDP per capita

and every single report out there with a look at what is going on outside the U.S.

I have to look at all variables and update them daily with the new economic data

Call it Crazy says

The bottom line is that prices are rising even with low demand. Obviously that points to a supply issue. There is absolutely no other way to frame it.

This is actually a funny statement

Logan Mohtashami has said for years 2013, 2014 and 2015 home prices will increase because supply is low and demand is strong from the Rich who aren't price point constraint because they are rich

Now I am supposed to debate against my own-self because "There is absolutely no other way to frame it"

So in theory I have to ask myself why am I debating my own self even though I have been clear on that thesis for years

I can't make this stuff up, this is truly priceless

2014 prediction

2. As much as I hate to say this, in 2014 home prices will continue to rise. I predicted 2-5% rise in home prices for 2013, but the market, driven by very low inventory, rose between 5-12% depending on whose metrics one uses (Zillow, Corelogic, Case Schiller and others). Inventory will improve in 2014 — I believe we can get to 6 months on sale inventory for the nation—but that still won’t be enough to prevent home prices from rising. I predict a 2-5% increase in home prices.

2015 prediction

6. For home prices – I predict a modest increase of 1-4%. The low supply of homes on the market gives pricing power to sellers even with the soft demand. I expect inventory of available homes to reach a balance point of 6 months at some point in the year. Year over year price gains are cooling down and this is a good thing as the housing inflation in terms of price gains was simply too much for main street America.

Even when it's written down, I still in theory or in the mind of others have to debate my own-self

Orange County will be going up 15% in 2015. Wait and see
San Francisco 20%

Strategist says

Orange County will be going up 15% in 2015.

My folks put there home on the market to sell asking for 2 million
interesting process it has been

Strategist says

Orange County will be going up 15%

peak 2006 prices was 2.5 million. I have had clients with homes over 1 million get their homes appraised over their peak 2006 prices but that is only on the upper end of the market place and closer to water

Logan says
"My folks put there home on the market to sell asking for 2 million
interesting process it has been"

Did it sell?

Strategist says

Did it sell?

They just put it in the market place 10 days ago.

Strategist says

Did it sell?

Another selling item. Literally all my attached neighbors sold their homes in the last 6 months
1 bedroom condo below me went for $379,000
2 bedroom condo non distress went for $506,000
2 bedroom condo sold in Auction for $492,000 that buyer listed it at $564,000 sold it for $537,000

Call it Crazy says

What, 10 days ago and it's not had multiple offers???

They put the home in the market last September and got no offers and took it off in December
and just put it back on.

For bigger homes not going to get much action after the summer but they didn't listen to me!

We did sell our commercial building and that did get multiple offers because the Chinese need commercial buildings in Irvine.

Irvine is really 2nd home destination for the Chinese when you look at the commercial lots near the new homes