patrick.net

Year 8 of the economic cycle and new home sales on a nominal level are still in recessionary total demand levels

and adjusting to population we are back to the early 1980's when rates were north of 10%

let me try again, and you tell me why low inventory doesn't matter:

landtof says

let me try again, and you tell me why low inventory doesn't matter:

Don't over think this one

Inventory

Sales

We have more inventory now than the housing bubble years but we have a lot less demand

In fact existing home sales once you exclude the extra 15%-20% cash buyer in this cycle would be under 5 million every single month this cycle barring the 2010 home buyer tax credit month

Logan Mohtashami says

We have more inventory now than the housing bubble years but we have a lot less demand

In fact existing home sales once you exclude the extra 15%-20% cash buyer in this cycle would be under 5 million every single month this cycle barring the 2010 home buyer tax credit month

I'm not sure making comparisons with a bubble period is really useful. There was obviously overstated demand skewing any comparisons.

Saying we have less demand now vs. 2005 is like saying unemployment in 2009 wasn't that bad compared to 1933.

tatupu70 says

Saying we have less demand now vs. 2005 is like saying unemployment in 2009 wasn't that bad compared to 1933.

1999-2005 take any year you want

Lower inventory and a lot more demand, not by a little a lot more demand

Now the peak to bottom should never be used for anything in economics

New home sales fell 82% from the peak

What I am talking about is pure net economic cycle demand curve economics

One of the reasons why this is happening is that demographic economics wasn't great for housing in this cycle but in years 2020-2024 it will be

Mortgage demand numbers today is back to late 1990's levels with rates 4% lower

Even with lower rates and higher inventory.... Not this cycle

This was the core thesis of all my writings since late 2010

This economic cycle doesn't have the proper demand curve behind it to have a strong housing demand curve. It has a great renting back drop but the demographic economics for housing doesn't get better until years 2020-2024 .....

The Big X variable is always rates ... for the 2% lower to continue it will need to print out a 1.25% -2.25% 30 year fix, now I am not saying that can't happen, that would be following the 35 year trend... but you get my drift.... it's asking a lot

Debt for some sure is a problem. But people aren't going to be risking their lives to move up knowing how shitty it may turn out for them in the next crash. You have a whole generation of people many of whom at some point lost housing due to the hubris of the bubble and collapse. Those people aren't going to take stupid real estate risks anymore. Next generation will be stupid again like we were, and will repeat the mistakes, but that's 20 years out.

FortWayne says

next crash

I don't believe we will see a housing price crash, of course when inventory gets over 6 months price have down side capacity. However, the nature of the down turn during the housing bubble years (PoP) it was a lot leverage on non capacity owning debt.

This cycle has been the best home buyer quality I have seen in ever in my 20 years and there is no exotic debt in the system. So, much like the next recession, I don't believe it will be dramatic in any nature like we saw after the housing bubble

Historically bubble aren't back to back in the same sector of the economy

Logan Mohtashami says

Mortgage demand numbers today is back to late 1990's levels with rates 4% lower

Demand is driven more by wages than interest rates.

What "should" demand be at? Purchase index of 300? 200?

I still don't agree that using purchase index is a good reflection of demand either--it assumes unlimited supply.

tatupu70 says

Demand is driven more by wages than interest rates.

Wages are growing ....

We all have to remember housing economics lives off Demographic economics... because home buyers in mass are ages 28-42 ..

This economic cycle even today

Ages 21-29 are massive
Ages 21-26 biggest age group in America

People make the mistake thinking that all the demand for housing during the housing bubble years was fake demand, not the case a portion of the demand from 1999-2005 was but not all of it

Prime age labor force growth peaked in 2007

Then Gen X got whipped during the bubble and we haven't seen any boom in boomerang buyers

Old, Young and the middle got whacked with foreclosures...

We never had it in the first place to have a strong demand curve cycle

Years 2020-2024 will be different

By that time you will simply have a higher supply of more age appropriate home buyers and people having kids

If I could give one website to everyone to study it's the Census population Live tracker

If you look at my economic predictions

2% GDP trend job creation numbers are very in line to what the final numbers were.. Labor force growth key for economics

If you take my new home sales predictions over the last few years it beats every single wall street analyst and economics by a long shot because they thought since we are working from the lowest bar of sales ever recorded in the U.S. ... that meant sales would be booming in this cycle

Worst demand curve on record ever, we don't have any data to compare how soft this cycle is for new homes

The one time rates rose to 4.5%

2014 = negative growth in existing homes
2014 = 22%-25% miss in new home sales ended up only 1.9%

Both markets had higher inventory ... and rates fell through out the year as well...

That huge miss in 2014 set the low bar for 2015 to beat and even with that low bar new homes sales missed by 10%-15% hence why the builder had that correction because everyone was priced for much higher growth .... Except me I had 8%-12% sales growth with up side if median price cooled down and it did... we got 15% growth

Put it to you this way

1999-2005 vs 2012-2016

2012-2016

- Higher wages
- Lower interest rates
- More inventory
- One of the longest expansions on record post WWII

= A lot less sales and being held up by a 15%-20% extra % cash buyer

So what you're saying is that it's not the low inventory, it's the high prices ?

How is the effect that lower prices have on demand any different than the effect that higher wages has on demand ?

Or put differently, if prices are too high, would not an increase in supply help allow prices to fall ? Certainly at some level of inventory this is the case.

Affordability is just as much a function of housing prices as it is of income.

marcus says

would not an increase in supply help allow prices to fall

A lot people thought inventory would be getting stronger in 2015-2016 because we are nominal back to bubble peak

What my thesis has been is that you need a lot more higher prices to bring inventory out and there is always going to be a catch 22 here because

A. Move up buyer is always going after a bigger home
B. He or She or them needs at least conservatively 28%-33% equity to be able to move up after paying transaction cost. ( conservative estimate)
C. If they can't put 20% down then they have to buy a bigger payment by taking on a bigger loan amount with PMI

This is what happens when price deviates so much like we have seen in the last 20 years

Then the builders aren't helping because they want to build bigger and bigger homes for the sake of profit margin

This is all new territory for everyone and everyone should adjust their economic calls accordingly.

Since I work in the Biz I get a first hand economic glimpse of all this and what has happened over the last 20 years.

Best way to fight housing inflation... dual incomes ... you get dual incomes into the equation almost all my models flip to much more affordable, even here in CA too.

But until then, the thesis ... not low inventory holding housing demand back, plenty of inventory to buy but it's economics, demographics, incomes, assets, debt, the core things that matter

Logan Mohtashami says

But until then, the thesis ... not low inventory holding housing demand back, plenty of inventory to buy but it's economics, demographics, incomes, assets, debt, the core things that matter

high/rising inventory would be a sign that the market is weaking. This moron is too stupid to even see that most basic principle of economics, applied to housing.

They are called the LAWS of Suppy and Demand for a reason.

youareworthless says

This moron is too stupid

Then you disagree with the thesis brought by many that said housing demand is held back because inventory is too low. Which I disagree with. Which is main thesis of this article,

We have more inventory, low rates, higher wages and still a lot less demand.

Then again, all you care about is prices not sales...

2 different worlds, as always, inventory under 6 months = price gains, never strayed from that thesis

In fact rates are 2% lower and we have had higher inventory this entire cycle more than 1999-2005

- Higher Inventory
- Lower Rates
- Higher Wages
= Less demand

This with the extra 15%-20% cash buyer

Imagine if that wasn't in play, total existing home sales would be under 5 million every single month

That's just the reality of it

you are conflating. "demand" does not necessarily mean "mortgage application volume" or "sales volume"

housing - in its current channel - is in high demand, lower inventory, higher velocity of absorption, and rising in value. for those that can afford it, it is chugging along just fine. you know this, because the builders are playing the market at the luxury end.

it's just operating at a smaller scale but a higher value.

here's your flawed logic: ferrari sells less cars than toyota, so ferarri is weak and no one wants one.

landtof says

you are conflating. "demand" does not necessarily mean "mortgage application volume" or "sales volume"

The thesis is very simple here

"For years we have heard a thesis that low inventory and tight lending are stalling the U.S. housing market. In the six years I have written on housing economics, I have been battling these two myths. Instead the true villains of the housing market are not low inventory and tight lending but demographics, housing debt, lack of strong wages, lack of liquid assets and poor affordability"

I can't even count the amount of times I have heard this thesis

"Home sales are held back because nobody can find a home to buy"

"Low inventory is holding back sales"

On that context .... this is where the battle fields are drawn

Not everyone agrees with the weak home sales being a inventory problem and a tight lending problem

“Weak home sales are ‘much more of an income problem than a credit problem,’ said David Blitzer of S&P Dow Jones Indices.

‘I don’t think there is a housing shortage…It’s strictly a matter of low demand, said’ “NAHB Chief Economist Crowe: #housing #NAR @NAHBhome”

A lot this weakness at first was blamed on tight lending then pushed on low inventory.

Remember

Existing home sales have missed badly from projected home sales metrics

New Home Sales are having the worst demand curve on record

Why?

Why have housing demand numbers missed so bad... or as Warren Buffet said, I am shocked that home sales are this low but more surprised about car sales doing so well

landtof says

ferrari sells less cars than toyota, so ferarri is weak and no one wants one.

That's a horrible example, A Ferrari would never sell below a Toyota

New single-family home sales are about 13% below the 1963 start of this data series. The population-adjusted version is 49.6% below the first 1963 sales and at a level similar to the lows we saw during the double-dip recession in the early 1980s, a time when 30-year mortgage rates peaked above 18%. Today's 30-year rate is around 4%.

The same thing with new home sales as with existing home sales, higher inventory ... a lot less demand this cycle

1999-2005 has a similar lower inventory but much higher sales volumes back then

Have to remember, I was the only person last year that came on CNBC and warned that the builders were over hyped for 2015 because their sales metrics were too high

24%-41% sales growth estimates at the start of the year... By March rate of sales were falling from a level that was peak 22% ... hence why we had that correction in the builders, Back to Back years 2014 and 2015 were new home sales missed by double digits

I was looking for 8%-12% growth with some upside if Median home prices cooled down and they did, that gave a little bit more demand, make shift sales model of price

https://loganmohtashami.com/2016/01/25/home-builders-new-homes-sales-and-the-affordability-myth/

Apologize for my naivete here Logan, but I'm trying to better understand the point you're trying to make here and in the article. Months of housing inventory are, as your included graphs show, low. With fewer months of housing inventory, we have low inventory. I'm not really sure how that's not a simple, direct relationship.

At least where I live - the bay area - the months of housing supply have been exceptionally low. While looking for homes, they were coming in at a complete trickle.

Are you making an argument about a particular segment of housing inventory? Smaller starter home inventory is obviously low here in the bay area. Is the argument that we have a glut of housing supply for larger more luxurious homes? If that's the case, I think that may be somewhat irrelevant as a lot of folks are looking for homes in that very (more affordable) segment.

If demand is low, it's definitely not something I observed in the bay area. The trickle of homes in my price range was regularly being bidded in by 3-6 people. That wasn't slowing down as we worked our way out of the winter months.

You've generally seemed like a fairly well spoken and intelligent individual on here, so I wanted to be sure I could wrap my head around what precisely you were arguing here, as it doesn't seem to even align with the graphs you provide in the article itself.

wut says

I'm not really sure how that's not a simple, direct relationship.

First, I am talking national data not a specific city or area, like all my articles they're based on national data.

2nd

It's not the thesis I use, it's the thesis that has been used for as the excuse to why are national home sales are low and missing their estimates and why is mortgage demand so low. That the main reason why home sales are low is because inventory is too low, "People can't buy homes because there isn't enough out there"

I know all the economist that track housing, we have all had discussion on this over the years on the topic and not all believe it's low inventory holding housing back, some believe like I do that Americans don't have the capacity to own the debt as some have thought hence why the numbers have missed for 3 years in a row

Examples:

“Weak home sales are ‘much more of an income problem than a credit problem,’ said David Blitzer of S&P Dow Jones

‘I don’t think there is a housing shortage…It’s strictly a matter of low demand, said’ “NAHB Chief Economist Crowe

Mortgage Demand ( this has been my core thesis) Mortgage demand in this cycle won't be enough to be considered in a recovery

- Demographics weren't great for housing ownership
- De leveraging from a housing bubble, too much debt in the system
- Foreclosure and Short sale factor
- No More exotic loans in the system, no more fake demand

2014 adjusting to population the worse year every recorded since the data has been collected
2015 adjusting to population 2nd worse year every recorded since the data has been collected.

The point of the article is to expose the flaw in thinking that the reason why we have low demand was due to a lack of inventory

Years 2012 -2016 we have always had more inventory than any period from 1999-2005

Not a lot people know this data, they just go off what people tell them on T.V.

Example: Inventory numbers

Existing Home Sales Numbers

With this data, it's hard press to make the thesis that the reason why home sale numbers are low or haven't met demand expectations are due to inventory. We had less inventory from 1999-2005 and more sales that from 2012-2016

This is for existing inventory

New home sales are even worse, in fact new home sales have missed badly on their sales estimates double digits 2013,2014 and 2015

Same story line..

Inventory numbers

New Home Sales Number

We have more inventory but a lot less sales

- More inventory
- 2% lower interest rates
- Higher Wages
- A long economic expansion cycle

but a lot less sales in homes...

Demographic economics matter, this cycle we are very young and very old, the middle have been impacted by the previous housing bubble burst. A lot of these sales estimates were really based on a notion that demographic economics don't matter. Come years 2020-2024 in that time frame we will have an massive uptick in supply of

College educated Americans having kids ages 28-42... We are massive now but ages 21-29 ( especially) ages 21-26 ... these aren't home buyers these are renters and people going to school

So, I disagree and others do as well that the soft sales numbers are due to low inventory, inventory is higher now than the bubble years but we just have a lot less sales...

Thank you for the detailed explanation Logan.

FortWayne says

Thank you for the detailed explanation Logan.

Best part about Pat.net that it's time stamped because my wife screams at me to go to bed and I tell her, I am writing a detail answer to a question dear :-)

On another note, Bill Mcbride ( Calculated Risk) and I are having fun with the U.S. Economy Is About To Crash article I wrote which tricked so many people... :-)

http://www.calculatedriskblog.com/2016/04/sunday-night-futures.html

DieBankOfAmericaPhukkingDie says

If anyone can afford to live indoors, the market is underpriced

Housing Inflation story is hot on rent and prices, but we are no where near bubble territory for existing homes, adjusting to inflation we are still 19% below the peak the housing bubble for existing homes.

Plus the home buyers in this cycle are the best I have ever seen in 20 years, no exotic debt in the system, limits the down turn once the next recession hits

Can't say that statement about new homes which are very big and expensive

Logan Mohtashami says

Housing Inflation story is hot on rent and prices, but we are no where near bubble territory for existing homes, adjusting to inflation we are still 19% below the peak the housing bubble for existing homes.

Plus the home buyers in this cycle are the best I have ever seen in 20 years, no exotic debt in the system, limits the down turn once the next recession hits

So what's your forecast on home prices in the next year and two? National and California.

Strategist says

So what's your forecast on home prices in the next year and two? National and California

5. Home Prices

Home prices still have the legs to run higher in 2016, like they did in 2015, because inventory is high enough nationally to provide choice but not so high to cause price declines. In fact, from 2012 -2015 the annual months of inventory were higher than at any point from 1999 – 2005.
We would need 6 months of inventory and a job loss recession creating a fresh wave of distressed sales, in order for any meaningful national downturn in prices to occur. Inventory is nowhere close to 6 months and only states dependent on oil and mining are seeing recessionary type job losses. I predict existing home price growth of 1-4% for 2016.

All my Housing Economic Predictions are here for 2016

https://loganmohtashami.com/2015/12/28/2016-housing-economic-predictions/

Logan Mohtashami says

I predict existing home price growth of 1-4% for 2016.

Strategist forecasts....
US home prices increase by 5% plus
California home prices increase by 10% plus

Strategist says

So what's your forecast on home prices in the next year and two? National and California.

Thesis with prices is still the same always, inventory over 6 months and a recession is the back drop for price declines nationally.

Nothing new here, in 2012 during that year that's what happened and

where inventory got under 6 months solidly. Inventory is the key if you're only a price metric person

2013
2014
2015
2016

Housing Prediction articles which I only write one a year at the start of the year all had price gains.

I get it that all you guys care about here is price, however, I don't have the luxury of only talking about that.

Housing Starts
Housing Permits
New Home Sales
Construction Jobs
Job openings for constructions jobs
Mortgage Purchase applications

HMI Index

When it's about economics, can't be held down to variable factor.

Like when I warned about the Builders in 2015 and then said in 2016 this is entry point for them because rate of sales are higher in 2016 than 2012/2013 that's based on a sales demand thesis

Plus did anyone take on my KB Homes call? around $10 bucks

Logan Mohtashami says

I get it that all you guys care about here is price

In the end that's all that matters. Home prices and stocks.

Logan Mohtashami says

Plus did anyone take on my KB Homes call? around $10 bucks

How about you?

Strategist says

How about you?

No, position here in KB Homes, HP ,TWTR , Z, MASI , WTW Spec play is UNXL The rest are index invested. I always in every month, Never a time a leave the market of course long term portfolio is different than short term trading .

The only reason the builders got whacked last here was that the sales estimates were too high, the year ended out with 15% gains on sales, but people were looking and pricing for 24%-41% sales growth and super strong price gains... that didn't happened, doesn't mean the cycle is dead, it's how much you want to pay up for that sector

The same thing happened in 2014

Sales estimates were at 20%-33% and it ended up at 1.9%

Which made 2014 & 2015 both double digit misses on sales estimates

Where I and you can looked had 8%-12% range sales estimate

2016 looking for 4%-8% growth with up side if median prices stay cool

So far both sales report are negative year over year, so we need to start people the numbers in the next 4 months

The YoY comps are much easier as the rate sales decline last started in March of 2015 with the trend of negative revisions.

So, the key is to beat the YoY marks for the next 4 months, as long as that could happen, you can get some growth in sales this year. If we have negative prints YoY with sales revisions lower in the next 4 months, then even my 4%-8% growth call is in Jeopardy

Strategist says

US home prices increase by 5% plus

Remember, I don't see the lack of price gains in 2015 for the builders as a bad thing because it's part of the make up shift model, in fact it's a reason why I give the sales demand curve higher rates of sales because of the fact the builders were only pushing higher end homes early on

Strategist says

How about you?

Spec Play UNXL I said on April 10th up 25% today

Logan Mohtashami says

Strategist says

How about you?

UNXL up again 20% that makes it 50% since we talked ;-)