Why a Bottom in Housing Is a Long Way Off
By: Rick Ackerman
Thursday, 16 September 2010
(One of the sharpest investors we know, a local stockbroker who is also a close friend and collaborator of economist David Rosenberg, thinks the housing market is nowhere near a bottom. In the essay below, one of several we have presented by the same author, he amply supports his thesis, pausing along the way to draw an insight from the Kodak Super 8 movies that his grandfather used to run in reverse. RA)
Over the last few weeks there have been a larger number of articles written about the housing market. The increased volume is probably attributable to recent data showing that home sales have dropped off sharply since the Home Buyer Credits expired. In addition, we are witnessing increasing foreclosures and a general lack of success in mortgage modification efforts. Certainly economic recovery and housing market recovery go hand in hand, so the spin on housing has tended toward the affirmative in most analysis. Most articles place an emphasis on affordability, which is at or near record levels by most measures, as the primary reason for optimism. The primary deterrents to a more robust turnaround (in addition to the unemployment dilemma) are typically identified as more stringent underwriting conditions and a deflationary mindset among qualified buyers, causing them to hold off on making offers.
What seems to be missing in the analysis is the obvious fact that the overwhelming majority of potential homebuyers also have one to sell. While that has typically been the case, there are several factors that make it substantially more critical to market dynamics now than it has been in the past. When we were experiencing a secular bull market in real estate combined with a secular credit expansion, having a home to sell was an enormous positive because the capital gain on the current home was the source of the increased equity needed to move to a more expensive pad. Between first-time, move-up and second- home buyers, we had a virtuous food chain. Things are much different, post-bubble.
Downsizing Is Where It’s At