March 15, 2017

US Housing may have peaked

While few might be interested in concerns Wednesday, real estate maven Mark Hanson shares some of his concerns:

My bearish demand and price ideas for 2017 were supported over the past two weeks in the "January" high-frequency housing data (yet multiples continue to expand).

Weak "new home sales" and "pending sales"--both coincident, or leading indicators--indicated that this housing cycle is not only tired, but injured due to the rate surge.

An outlier, "existing sales," an extreme lagging indicator that beat expectations last week, was due to nothing more than a "pig in the python" effect that pumped up the headline print because of the heavy annual, January-specific seasonal adjustments.

The "December Case Shiller," so lagging it's virtually worthless, as it measured house shopping, purchase and pricing decisions from as far back as the summer busy season in August, was buoyed due to certain markets with a high percentage of fully rehabbed repeat sales comps, which artificially pushed regional index values through the roof, lifting the national numbers.

Virtually all the tailwinds that drove housing for years--especially those "unorthodox" in nature that I believe blew Bubble 2.0 in near the same manner as Bubble 1.0--have turned into headwinds.

-    end-user, shelter-buyer affordability at post-crisis lows;
-    effective house prices to end-user shelter-buyers up nearly 15% from a year ago due to price increases and the rate surge;
-    institutional demand for single-family rentals off sharply and some beginning to liquidate;
-    foreign capital for rentals and lock boxes drying up;
-    middle-high to high-end, core markets experiencing a sharp decline in demand and double-digit list price haircuts;
-    multifamily rental demand and prices dropping, vacancies rising, and a flood of supply to hit over the next two years;
-    a Fed in reverse;
-    an unknown outcome for U.S. immigration, especially H1B and EB5 visas, which drove housing in core, STEM-centric markets;
-    and first-timers saddled with so much student, auto and card debt, a large percentage are indefinitely sidelined.

I struggle to come up with bullish catalysts going into the pivotal spring and summer "busy season," when most of each year's house price mark-ups and demand increases traditionally occur.

Bottom line: The evidence continues to mount that this housing cycle is already past its peak, both in demand and prices. This year will bring about the stiffest year-over-year comps since 2006 and several months of weaker year-over-year demand and prices. Yet, housing and related stocks are rising on the widely accepted belief that "rising rates are great for housing" and multiple expansion.

There is a huge air pocket under core, leading-indicating housing markets right now just looking for a catalyst, which will come when it does.