This post first appeared on Minyanville.
Three years of wrong predictions notwithstanding, perma-bears are emerging from a winter’s hibernation with tall tales of another impending collapse in home prices. They could not be more wrong.
For pundits, academics, bloggers and others who get their market “color” from crunching numbers and poring over 50-page long analyst reports, the situation is dire: Foreclosure machines are whirring again with the big attorney general settlement behind us, employment conditions remain tepid and getting a mortgage isn’t getting any easier.
And while we may be years away from renewed, sustainable appreciations, there is little actual evidence to support the thesis that home prices are about to implode again. All the above statements by the likes of Zero Hedge may be true, but they only tell half the story and amount to a thinly veiled attempt at fear-mongering, whose real time for glory was in 2006, not 2012.
Here are my top five reasons why the housing market will not crash (again):
1. Foreclosure demand far outweighs supply
The supply numbers aren’t pretty. Recent reports show that “shadow inventory,” the supply of potential foreclosures in the pipeline at banks like JP Morgan, Bank of America, Wells Fargo and Citigroup, is approaching 10 million homes. And with the settlement between big mortgage servicers and state attorney generals over the robosigning debacle behind us, it is true that lenders are again foreclosing at rapid rate.
But what about demand? Buyers of foreclosed homes are literally lining up at auctions to outbid each other. Talk to anyone who is actually in the business of buying and selling bank owned properties and they will tell you that, in most markets, demand far outweighs supply. Any property priced even remotely well sells above list with multiple offers. The demand pool is deep, and now there is a new buyer in town with very, very deep pockets: Wall Street.
Earlier this year, the Obama Administration announced a pilot program to try and turn the vast inventory of homes owned into rentals. Big investment houses, including Wall Street titans like Fortress, Barclays and UBS are launching funds to snatch up big pools of homes to rent and hold. Notably, these firms’ longer term outlook and modest cash flow targets enable them to pay 10-15% higher prices than your average house flipper.
These funds all well capitalized and are being joined by scores of family offices, smaller operators and other investors who, short of any novel investment ideas, are following the “smart money.” This deep demand pool is more than sufficient to sop up foreclosure supply for the foreseeable future. Whether this trade will go well is, however, another story for another time. (Spoiler Alert: It won’t.)
2. Rents are up, rates are down.
As household formation gains momentum in the wake of the Great Recession and real housing inventory remains tight in most metro areas, rents have been rising steadily for the past two years. Combined with low interest rates, those fortunate few who do qualify for financing are finding that the rent vs. buy calculation is tipping back in the favor of buying. Mix in a strong stock market and rising consumer confidence, and there is real, actual homebuyer demand in certain markets that will help prevent another cascade collapse in prices.
3. Homebuilding Remains Uneconomic
Until home prices rise again, building new homes will remain an uneconomic prospect; the likes of Lennar, KB Home and Toll Brothers are breaking ground on precious few single family home projects. And while multifamily housing starts are hitting record levels to try and keep up with breakaway rental demand, without new home inventory coming to market, inventory of existing homes will remain relatively tight in the near term, supporting prices.
4. Political Will
There are few things on which politicians these days can actually agree. One of those few is that foreclosures are bad. Or, at the very least, a homeowner who loses his home is less likely to vote for the incumbent than look elsewhere for political leadership. And whether we agree or disagree with the relative merits of housing support schemes, politicians and regulators alike have shown remarkable resolve when it comes to propping up the the housing market. As I wrote in 2009, and continue to believe today, “Betting on another all-out collapse in residential housing prices is akin to betting on the bankruptcy of the US government. Could it happen? Sure, but that certainly isn’t the base case.”
The housing market is driven, in large part, by Americans’ view of their own economic future. If we tend to believe that we’ll keep our jobs, find spouses, be able to afford kids and will be economically OK, buying a home becomes a more appealing option. And while demographic trends surrounding both the Baby Boomer and Millennial generations don’t paint a rosy picture for home prices in the long run, improving confidence doesn’t support the notion that home prices are about to collapse, either.
Minyanville’s Todd Harrison is apt to say, “we must trade the tape we have rather than the tape we want.” Housing bears clinging to either past glory in predicting the market’s demise or hopes of future glory predicting another collapse would be well to remember this quip. It may be true that falling home prices could be a boon for the middle class, as prospective homeowners could get in at lower prices. Indeed, the quicker backlogged inventory clears, the quicker the market can get back to trading truly on fundamentals.
But we live in an environment where an imminent collapse in home prices is just not likely. In fact, it could now be considered a Black Swan, if it weren’t for the fact that everyone is looking for it, rendering it no longer as such.
Lastly, for those of you who do a quick Google search on me and find my begrudging association with the National Association Realtors, you will find two things. First, I am not a Realtor shill, and have staked my reputation on that fact. Second, my business would actually benefit from falling housing prices and a cooling of the real estate market in general.
In short, I am calling it like I see it — not talking my book. I challenge housing pundits to do the same.