Barron’s Cover Calls Housing Bottom (Yet Again)

Barron’s is at it again, making a third call for a Housing recovery since 2008, saying “After an ugly six-year decline, home prices are starting to look up. Why the rebound is for real.

The article has a number of problems with it, and I detail these below. But first, I want to get to a meta-journalistic error, and explain the fatal flaw of the article before it even begins: Using the same author who has made multiple Housing turnaround calls before — all too early, all wrong.

The mistake in doing that is the analysis begins with a chip on its shoulder: The writer is not looking objectively at the data, but rather, has something to prove. Human nature is such that we all want to be vindicated, to be proven right — hence, all objectivity is lost. This is clearly reflected in the errors and omissions within the article.

Thus, not only was the July 14, 2008 Barron’s cover story by the same writer — Bottom’s Up: This Real-Estate Rout May Be Short-Lived — terribly wrong, but it sets up the flaws in the following two pieces. Beyond the basics of Human psychology, we see this revealed by the latest article’s headline: “Happy at Last.”

Beyond the author’s desire to be right (rather than accurate), this latest article has three major flaws/omissions:

1) Foreclosure abatements have ended (never mentioned);

2) The impact of Zero percent Fed interest rates on mortgage rates (also omitted);

3) Home Builders stock prices are confused with home prices.

Also omitted from this list are several other factors: Weak job creation, flat wages, low household formation. But let’s just discuss these three for today. The article begins with a discussion of home prices, but leaves out the actual, causes (items 1 and 2 above), along with the seasonal elements. Let’s get into the details of these.

Barron’s mentions the drop in distressed home sales as a percentage of total units sold, but astonishingly, leaves out the reason for this: The voluntary foreclosure abatements that took place during the robosigning settlement discussions. The foreclosure machinery was idled for over a year while the resolution of this mass Banking felony was worked out. Its not that the RRE market has improved, rather, its that foreclosures were frozen due to government action. With that now resolved, foreclosures have begun moving higher again. They still appear lower on a year-over-year basis, but only if you ignore the context.  The timing of this process is imprecise, but it is not unreasonable to expect significantly more distressed sales showing up before year’s end.

The current result of the abatements is simple: There are 25% less distressed sales than usual. They sell at 20-30% less than an identical home down the block. Distressed sales fell from 38% to 28% of existing home sales. The missing distressed sales account for a significant percentage of home price increases. To discuss distressed home sale and omit this context is, IMO, simply inexcusable.

Noticeably omitted from this discussion is the single most important element driving home sales: Zero percent interest rates, and their impact on Mortgage costs/purchasing power. It is even more astonishing that an article about a home price recovery can omit any mention of the Fed and Ben Bernanke. Mark Hanson has looked at this, and he notes that the Fed’s QE/Twist programs have driven mortgage rates appreciably lower, now down to 3.625% from over 5.0% when the Fed started theirshort term bond purchases. Anyone who uses a mortgage — ~70% of all buyers — have been gifted a 15% increase in purchasing power for a house on the same monthly payment. Despite this huge increase in buying power, home prices are up less than half of this. (Incidentally, I think Hanson is too bearish).

ZIRP and nearly free money are unsustainable conditions, and while we have been told rates will remain low til 2013, they cannot stay at zero forever. What happens to home prices when rates eventually start to rise? I imagine a short term spurt as some buyers rush to take advantage of rates before they increase. After that, the free lunch is over. The support that the Fed has been affording housing (and the banks still festooned with dubious mortgages) flips from a tail wind to a major headwind.

Finally, the Home builder’s issue. The elements that drive their stock prices are very different than what drives home prices. The builders have written-downs over-priced land purchases; They have already taken their lumps on their foolish funding of bad buyers. And, they have moved aggressively into the construction of multi-family and rental units — perhaps the hottest sector in residential real estate. We saw the same erroneous logic during the initial phase of the RE crash, from 2006-09 — every uptick in Homebuilder was met with a cheer from the Housing turnaround crew. They were wrong then, and they are most likely wrong now.

I could speak to the decline in inventory, but let me point out what Jonathan Miller of Miller Samuel has explained: A big part of the reason for the inventory decline is low home equity. “Sellers are buyers after they sell, but if they don’t have enough equity for the next purchase, then they sit.” Hence, the decrease in inventory is due to a negative factor — suck sellers. It is not the positive that it appears to be.

One last aside, I have to mention this astounding WTF line in the article: “Some keen observers of the real-estate market, such as Moody’s Analytics’ Mark Zandi . . .”  Really? Zandi is a very nice guy, but with no disrespect, I do not think there is a single US economist who has been less right about Housing than Zandi. His annual housing bottom calls placed him in our pantheon of PWBC — they have been nothing short of horrific. Anyone who thinks Zandi is a keen observer of real estate is, well, likely to have called a bottom in Real Estate 2008. And 2009, and again in 2012.

The nicest thing I can say about Housing is that after an enormous amount of government & Fed action, it has stabilized. The rate of decline has fallen, but it is driven not by market forces, but unnatural ones.

As the expression goes, a broken clock is right twice a day. If Barron’s keeps putting articles on its cover calling for a recovery in Housing, they will eventually get it right.

Just not this week . . .

This post was originally published at The Big Picture and is reproduced here with permission.

6 Responses to "Barron’s Cover Calls Housing Bottom (Yet Again)"

  1. Kshitij   September 11, 2012 at 1:41 am

    Well written. Good stuff

  2. Phoenix   September 11, 2012 at 1:47 am

    If Barry could throw some light on this also, "Home Builders stock prices are confused with home prices."

  3. Ben Leet   September 11, 2012 at 1:26 pm

    The EPI report "Putting America Back to Work" (Sept. 2011) has 11 proposals, the last being mortgage refinancing. "Fannie Mae, Freddie Mac, the Dept. of Veterans Affairs, and the FHA could require loan servicers to send applications for easy refinancing to eligible borrowers." The logic is reduced interest payments frees up consumption on other things which generates new employment. ". . . would increase employment by between 62,000 and 248,000 jobs annually." As this article shows, unnatural supports are holding housing prices steady, but the props may disappear. I don't understand all the details, and would like to read a fuller article about the proposal.

  4. lisa   September 12, 2012 at 8:46 am

    How about doing an article that compares whether American citizens, living and working in the US are new purchasers of homes with or without mortgages, or is it just wealthy(???) international aliens that may or may not be applying for US citizenship, or on visas etc., etc., purchasing in the US(depending upon individual state and US laws), kind of revealing the new international trickle-down economic global non-strategy.

  5. lisa   September 12, 2012 at 9:08 am

    OOh, I forgot to throw in those good ole REIT investment groups, too. It would be great to actually list some key names of human beings in the investment groups rather than just little tidbits that include those corporate/regulating agency acronyms that allow non-disclosure of any real, supposedly-responsible-for-any-of-their-actions-human-being. Yeah, I know, some citizens just never seem to have to assume any responsibility for any results or any implication of any of their actions according to US federal/state laws. Yeah, I know, there seem to be a few little fishes that seem to get caught and fined somewhere, somehow, and then get to go back to doing whatever, whenever, somewhere else, like in another country/nation. The interest rates will start to go up when they(uh, whoever, "they" are) have gotten everything they want to get from everyone else. Yeah, I know, that may be never, too. And, yeah, I know everything I've written has more relevance- maybe somewhat off from the original article that I'm commenting to- than any of the hype in Barrons. Barrons just likes to maintain a generic message of "hope" , and pat whomever-at-the-time on their back. Yeah, I know, Barrons just ain't gonna rock-the-boat, regardless, and would never mention any chance or suggestion of anybody's boat every sinking. Even if it sank, there would be a report of an exceptional treasure ship found intact by some well-supported explorer elitist. Actually, National Geographic is a better read, than Barrons anyday, and that includes real estate topics.