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The Next US Housing Crisis
A Confusing Picture From Fannie Mae
Signs of Optimism
The Fannie Mae National Housing Survey for August 2012, showed optimism on the part of those consumers surveyed. Although slightly off their peaks, expectations for elevated and rising prices were higher than those for falling prices.Consumer expectations about their economic situation continued to hold up.
The optimism on housing was not reflected in optimism about the economy however. In fact,opinions that the economy was on the "wrong track" were higher than those for the "right track". Optimism over economic improvement seemed to be increasing in the first half of the year, but this evaporated over the summer.
In August, consumers started to get a little more negative; and started to increase the "better time to sell" attitude. This may be a signal that the bubble is deflating again.
It is hard to generalize from this survey, however it seems that even though some consumers are turning sellers of housing and are pessimistic about the economic future, they still believe that house prices will rise.
Given that the housing sector is such an important barometer of the US economy, how can there be such a divergence in opinion and expectations?
There are some technical factors in the housing market that are creating a rising price environment. Rising prices therefore beget rising price expectations, even though the consumer is fundamentally negative on the economy.
Technical Factors Supporting Home Prices
The first technical factor supporting house prices is the decline in mortgage delinquencies. As delinquencies fall, the necessity to liquidate and sell falls. This observation also supports Fannie Mae's findings that consumers were currently confident about their financial health. In the future however, if Fannie Mae's consumers' expectations of the economy are correct, then things will get worse.
The second technical factor supporting house prices is the foreclosure rate. Banks have stopped foreclosing and some have even begun to modify loans. The tsunami of foreclosed properties has thus been arrested.
These technical factors have given banks the confidence to hold out for higher prices; and to keep homes on their asset books at higher mark to market values than they were in 2008. In addition, the whole pyramid of mortgage backed securities, is supported by the higher values of the underlying homes.There are powerful financial incentives to hold inventory off the market.
Going forward, these technical factors may not hold.
Fundamental Catalysts For The Next Leg Down In Housing
Vulture investors, who were hoping to exploit foreclosures and distressed sellers; have been frustrated by the lack of housing inventory available for purchase. Rather than chase the offer side of the market higher, they have decided to become developers. There is considerable private capital on the sidelines, that was earmarked for property investment. Warren Buffett remarked that it was the best investment opportunity currently available in America. This wall of money will now find its way into property development; and will start to show up as supply in the next eighteen months to two years. No doubt before then, banks sitting on foreclosed properties will elect to head for the exit; causing the fall in the prices which were the profit signals for the developers to initiate construction in the first place.
There is also tangible evidence that the Federal Reserve itself will trigger the next leg down. The Boston Fed released a paper which opined the economic benefits of expunging all the housing debt and attendant oversupply. The vast amounts of liquidity that the Fed has put into the banking system, were intended as a cushion to the impact of this liquidation phase on the banks. The Fed also anticipated the playing out of this phase in its communications to extend the Extended Period of low interest rates out to 2015. This scenario also seems to play well with the Fed's objective of breaking the banks up into smaller entities that are no longer too big to fail.
When the banks see the developers coming to market and join the dots with what the Fed has communicated, they will then liquidate; and the next leg downwards in home prices will begin.
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