patrick.net

Here is where you and I differ

1. My writing is about economics, you know that. So I know you like to bring it on these post. However, I am probably not suited for that type of back and forth.

2. Median new home sale price is falling in 2015, that doesn't mean it's a bad thing. Make up shift of data either means incentive on the high end or middle to lower end homes are selling. So, prices can fall and still have sales growth due to the low bar metric of adjusted sales

Here is an example

Wells Fargo and many other new home sale prediction had a range of 24% -41%, let's just say I don't agree with that in real net term demands for 2015

A more realistic call was for 8%-12% sales growth but if median price does fall you can have better growth YoY

Now most people don't actually read the new home sales report, which I understand why, that's kind of boring. However, the revisions for new home sales lower goes a long with the rise in rates from 3.625% - 4.125%

So, in real terms unless you have a strong total report in the next new home sales report with better revisions. That means 97% of new home sale prediction will come below estimates again

Now this data work might not appeal to you but for some people it does

Very low adjusting to population metric for new homes, slow and steady is the call on the demand curve

Also we aren't really talking about anything meaningful in price drops either, just a mild prevention of the uptick of price inflation for new homes, which most likely has to so with the make up of homes being sold than anything else

Here is the last report from census

http://www.census.gov/construction/nrs/pdf/newressales.pdf

As everyone can see even in year 7 of the economic cycle with rates 3.625% -4.125% the total net sales are low, hence why a lot total sales predictions
were 26%-41% from a 437K level.

I do understand why everyone had such high expectations for total net sales this year. However, you would need to see 2 things to get to those numbes

1. Stronger headline number
2. Revisions need to be higher not lower
3. New home purchase applications have to grow again, they have had 2 months of negative trends, that is more a forward looking metric and we only have 6 more months left of reports

bgamall4 says

the Chinese could pull back from buying in Cali

I have done some work on the Chinese home buyers, it's only roughly 150K homes a year out of 5.7 million we are going to see this year

bgamall4 says

And you can't tell with the Chinese because they may have family buying.

There is a definite so cal bias for the Chinese to buy. Living in Irvine I get to see it first hand.

I can say this on another personal note. My parents selling their 1,950,00 home have had 11 Non English Chinese buyers look at the home
Next door neighbors sold their homes 2.5 million and 2.45 million, South Americans and Russian buyer

Logan Mohtashami says

I liked all your charts, especially this one.
It shows housing can only go in one direction. If the stocks don't quickly recover, investors will park even more of their money in real estate.

Strategist says

I liked all your charts, especially this one.

It shows housing can only go in one direction. If the stocks don't quickly recover, investors will park even more of their money in real estate

Proper response is that due to the low level of sales in the last 5 years and with the demographic profile getting better for housing in 5 years. The downside is limited ( X out) the next recession of course.

Come years 2020-2024 ownership cycle looks better than what we saw in the past 5 years. Rental demand is about to take a 2nd level boom right now

Logan Mohtashami says

Proper response is that due to the low level of sales in the last 5 years and with the demographic profile getting better for housing in 5 years.

Yup.

Logan Mohtashami says

The downside is limited ( X out) the next recession of course.

Your previous remark pretty much guarantees a recession in housing will not take place this decade. The ball has started rolling, it's gathering steam. Move out of the way, or get crushed.

Strategist says

Your previous remark pretty much guarantees a recession in housing will not take place this decade

Demand always gets hit in a job loss recession. Unless rates totally sky rocket which I don't see that happened, the demand curve should be a lot better years 2020-2024

Lack of inventory has put further pressure on the housing market. For example Marin County real estate continues to excel as lack of inventory persists. Inventory in Marin is still the greatest challenge for buyers. The number of properties for sale is down about 14% from last year, which was already limited compared with previous years. Prices though have already surpassed 2007 highs.

While employment and housing are improving, global economy, specially China seems to be in trouble and Fed is caught wondering what it should do. I believe if China problems persists and its growth is further hampered then we could see lower rates in coming months despite indications by the Fed that it could start increasing rates this fall. http://themarinrealestate.com/blog/the-fed-doesnt-know-what-to-do-now/

Behzad says

The number of properties for sale is down about 14% from last year, which was already limited compared with previous years. Prices though have already surpassed 2007 highs.

This is a national not a certain county inventory. We still have nationally more inventory today and the last 2 years than we had from 1999-2005.
Of course the demand curve was much different back then because real time renters were buying homes and demographics to own homes was good from 1996-2007

Now for new homes much different market place we are 5.4 months supply

For new homes it's much different as the term inventory it's this

"A house is considered for sale when a permit to build has been issued in permit-issuing places or work has begun on the footings or foundation in nonpermit areas and a sales contract has not been signed nor a deposit accepted."

Hey Logan,
How was your vacation? I'm so jealous.

with some US companies having up to 50% revenue exposure to china and other markets, i don't see how anyone can really think that jobs will be stable over the next few years.

if equities don't recover, then real estate prices will follow them down. not necessarily a crash, but definitely a retreat.

i believe logan's timeline for real estate turnaround is correct (~2024), but that will be the beginning of the next cycle at a low point in pricing and a high point in vacancy - just before the next run-up to "start it all over again."

Strategist says

Hey Logan,

How was your vacation? I'm so jealous.

Best vacation we ever have had. It's a gem of a place and not that expensive. Ritz at Dorado Beach Puerto and they need dollars too!
Take your family sometime, it's great

Sunrise view from our private beach

I told the Wall Street Journal I would give them a heads up of what I found out in Old San Juan and first photo I tool was a working ATM, unlike Greece.
All Debt crisis not a like

3 Points that I found

1. Inflation hitting them now
2. Taxes are going up
3. Drought has impacted certain people a lot, one lady only had access to water twice a week

Sunset

Food was amazing everywhere, the resort itself had great places to eat

bgamall4 says

That is assuming the Millennials decide to buy, right? There are so many houses for sale now in Las Vegas that it is a joke. How prices are staying where they are is perplexing. It is like magic is holding them up.

logan has a bunch of good charts on who will buy, but from my perspective it seems to be a whole food chain kind of movement - those who sell need a place to go as well. with inventory and price levels currently, a lot of sellers are sort of trapped in place unless they are retiring, renting, or buying one of the luxury new homes.

the "magic" you observe seems to me, to be what is actually speculation. you can even read a lot of it on this board.

One thing about the demand curve come years 2020-2024

Right now first time home buyers are 30% of the market, 10% below historical trend

Now even if they stay at the same % in years 2020-2024. Still the supply of college educated dual income Americans having kids will be much higher those years than what we had in this cycle.

It doesn't get talked about enough, but one of the reasons for the lack of sales is that demographics to own were dreadful from 2007-2019. It takes some time showing people this model and how it works. In short a lack of supply of 28-40 in this cycle that had the capacity to own.

Simple supply of this group much more in the next cycle

Ages 12-29 Big

Ages 21-25 the biggest

Prime working age is finally starting to grow again

You guys all know me, I never sugar coat the adjust to population demand curve, my thesis since 2010 why home sales would always disappoint in this cycle.

Years 2020-2024, X out the time of the next recession. We will simply have more mortgage demand, again this cycle was just dreadful for that. X out cash buyers even in 2015 net demand are at Great Recession Low for Existing home sales. For years that extra % cash buyer has held up sales.

Finally in 2015 cash buyers fall, mortgage buyers grew. It's not great but it's a start

Logan Mohtashami says

Ages 12-29 Big

Ages 21-25 the biggest

Prime working age is finally starting to grow again

i suppose the number increases, but many of these folks are still going to be dependent on wage growth - and that's something that's been on a downward trend for years.

one thing i notice about that group that may help, is the fact that their parents are currently holding the bag of wealth.

landtof says

i suppose the number increases, but many of these folks are still going to be dependent on wage growth - and that's something that's been on a downward trend for years.

one thing i notice about that group that may help, is the fact that their parents are currently holding the bag of wealth.

The supply is simply going to more than what we have

Who are these 30% first time home buyers now?

College educated dual income families

I am taking the worst case scenario that the supply itself won't boost the numbers per higher % of buyers. I am taking the same worst demand % curve from first time home buyers going into the next decade and still the demand curve gets better

it makes sense, i get you - but my concern is that the increase in supply within those demographics creates further competition for shrinking wages (which puts even more pressure on non-elite worker wages). so even though the buyer pool expands, the affordability simultaneously contracts.

Logan Mohtashami says

Strategist says

Hey Logan,


How was your vacation? I'm so jealous.

Best vacation we ever have had. It's a gem of a place and not that expensive. Ritz at Dorado Beach Puerto and they need dollars too!

Take your family sometime, it's great

Becoming empty nesters very quickly will allow us to travel more. Next month we are off to Toronto and Niagara Falls.
So many vacation spots, so little time.

landtof says

(which puts even more pressure on non-elite worker wages). so even though the buyer pool expands, the affordability simultaneously contracts.

There is a huge gap between those who have the capacity to own and those who don't

High school drop outs, non college educated Americans = renters in big mass real terms

For 20 years I have seen renters financial profiles and ownership financial profiles and there always has been a gap and that gap is growing

Here are some numbers

BACHELOR’S DEGREE MAJOR MEDIAN STARTING SALARY 2015

Business $49,035

Engineering $64,367

Liberal arts and Humanities $36,237

All $45,478

The thesis is that dual college educated income home buyers will be more in years 20202-2024

Rent, Date, Mate & Marry economic model I have for them, has years 2020-2024 being the sweet spot

By that time frame we will have more college educated income dual factor model which will be 75 -120K income by that time frame for them

We have such a low level of adjusted to population sales now that it's not a very hard metric to break we have added supply of college educated dual income into the equation

Longer time frame for the young to buy add that to equation as you will get higher numbers in those years. I know it's 5-9 years away but that is what I am looking at and hence why I knew back in 2010 when I started to write about housing economics that this cycle wouldn't see the strong demand curve like so many predicted in terms of total net sales

Not all the demand during the housing bubble years was fake, demographics were great for homeownership back then, you just had massive speculation and fake buyers which fed on itself in 2004-2006 time fame

bgamall4 says

But this chart should scare the hell out of banksters and realtors, Logan:

We finally started to go positive again on birthrates here in America. The recession took a bite out of us on that data line. Still a way to go on this data point

A slight miss in new home sales and only a light revision lower, not great but good enough. Still Looking for 2015 to the be 3rd year in a row of missed sales expectations

Updated report adjusting to population down -50% compared to 1963 levels, this can been seen as bullish because it's so dam low

Strategist says

Strategist says

This report for you

White Paper from the MBA

http://mba.informz.net/MBA/data/images/15292_Research_Growth_White_Paper.pdf

Done the math, to met sales expectation we would need to see 574K print for the next 5 month report and revision need to trend higher

Hence why new home sales will miss estimates for the 3rd year in row, but, YoY growth will happen due to a low bar 437K print work off number

Logan Mohtashami says

If this were median cost of all home purchases or median cost of first time buyer home purchases, it would be more useful. First time buyers have to pay something proportional to their income (adjusted by interest rate). The only exception would be people with inheritance, but these people wouldn't impact the median too much. If you look at repeat buyers, their purchases are linked to their income, but are skewed by recent gains / losses in the housing market. If housing had doubled in the previous 10 yrs, these repeat buyers would be flush with housing gains, and that would affect prices paid. When you limit the chart to new homes, there could be all sorts of things affecting the median. How do the incomes of people buying new homes relate to the incomes of people buying existing housing? I would guess that the new home purchasers are in a higher income bracket. If so, you should be tracking the income of that income bracket on the x axis.

YesYNot says

it would be more useful. First time buyers have to pay something proportional to their income (adjusted by interest rate)

First time home buyers are only 15%-20% for new homes, out of 500K, very small portion of homes bought new

YesYNot says

How do the incomes of people buying new homes relate to the incomes of people buying existing housing?

New homes are much more expensive that existing homes, but the buyer profile is very strong. The strong middle class and rich people buyer. This is the reason why adjusted to population sales are so low even in year 7 of the economic cycle with rates below 5% since 2011. Supply is over 5 months, so the product is there to buy, it's just a limited pool of buyers

YesYNot says

you should be tracking the income of that income bracket on the x axis.

New homes median square footage back in the year 2,000 was roughly 2,000. Now it's 2,500 which means they homes they're selling bigger homes so they can make their profit margin. That's a big reason why Median sales is so much bigger than existing homes

Homes over 400K broke the line compared to homes under 200K

Logan Mohtashami says

New homes are much more expensive that existing homes, but the buyer profile is very strong. The strong middle class and rich people buyer. This is the reason why adjusted to population sales are so low even in year 7 of the economic cycle with rates below 5% since 2011.

Incomes in the upper quintile have increased much more than the median. So, the ratio of new home price to median income would be much more constant if you focused on the incomes of the people who are buying those houses.

YesYNot says

Incomes in the upper quintile have increased much more than the median. So, the ratio of new home price to median income would be much more constant if you focused on the incomes of the people who are buying those houses.

Sales expectation for new homes have missed for 3 years in row.

Back in 2013 they were pushing 725K in sales by 2015 and now we are fighting to break over 500

There is a reason why New Home Sales have had their worst sales number post WWII and have missed sales expectation for 3 years running now

1. PITI Inflation model is based on Real Incomes and Liquid asset

2. The thesis that lower rates would supply the strongest new home sales cycle was flawed from the start because that would imply a higher portion of Americans
Who actually had 20% down to start off with

( Pool) of strong middle class and those who can afford a new home is simply a lot less that what everyone thought

Hence why Adjusting to population New Home Sales in year 7 of the economic cycle with 4% rates are -50% below 1963 levels

I understand the bar for sales is low and the 50 year average is 715K but the amount of people that can buy a new home is not as big as the housing pundits think.

You should see my new home buyers profile. The cream of the crop in America. A lot new home buyers since 2013 have moved to existing homes because

A. A lot cheaper
B. Geographical advantage over a new home in any city

Not even the lowest bar in home sales and rates being below 5% since 2011 could get new home sales back to it's 50 year avg in 7 years, we aren't even close to that level yet

Ironman says

Strategist says

Becoming empty nesters very quickly will allow us to travel more.

Just make sure you change the locks when they leave, otherwise they will return!!

Darn pests.

Logan Mohtashami says

Strategist says

Strategist says

This report for you

White Paper from the MBA

http://mba.informz.net/MBA/data/images/15292_Research_Growth_White_Paper.pdf

The bottom line from the article:::
"Bottom Line
The Great Recession had a clear impact on household formation, and therefore on demand for housing, in ways that should unwind as unemployment continues to decline and real wages rise. Over the next decade demand for housing will grow significantly and warrant housing construction and financing of all kinds
— both owner-occupied and renter-occupied, multifamily and single family."

The article focused mostly on the demand side of the equation. What we know for sure is the housing supply has been severely suppressed for the last 8 years. The gap between housing demand mostly due to demographics, and suppressed supply continues to expand. What is needed is a catalyst to start shortening that gap. It's just a matter of time when that happens, and when it does, home construction, purchases and RE activity will go through the roof.
Housing is also the largest sector of the economy, which will result in healthy economic growth. The stock market will follow to with new records, and the world's largest economy will lead the rest of the world to sustained economic growth. China is just a side show, with unnecessary over reactions.

Strategist says

will go through the roof.

You won't see through the roof ... but the demand curve for ownership will be better years 2020-2024

The question for the builders is when do they cry uncle and start really building out starter homes, I still see that has a 2020-2024 storyline