These 12 Real Estate Stats Scream One Thing (Part 1)
| May 27, 2011
The latest report from the National Association of Realtors reveals that residential real estate prices are more affordable than they’ve been in almost a decade.
The median price for existing homes fell by 5% year-over-year and now stands at just $163,700.
Score one for homebuyers.
In addition, money is cheap. Mortgage rates fell for the fourth week, with a 30-year fixed-rate loan hitting a yearly low of 4.63%, according to Freddie Mac (FMCC.OB).
Score two for homebuyers.
These two factors alone – depressed prices and cheap money – normally lead to rampant speculation.
But we’re not living in normal times. And if you’re tempted to jump back into the housing market now, you need to get your head checked first.
The truth is, the real estate market is overrun with terrible fundamentals. And I’ve compiled 12 stats to prove it. I’ll share the first six with you today and the next six tomorrow.
And just so you don’t kill the messenger, I’ll also provide some ideas on how you can profit from – or at the very least, reduce the pain of – further price declines.
So let’s get to it…
Hope isn’t Enough to Eliminate Excess Supplies
On the supply side of the equation, there’s so much housing inventory that no silver bullet solution exists.
The only answer to absorb it? The passage of time – lots of time. Consider…
Supply Glut #1: Existing Homes
At the end of April, there were 3.87 million previously owned homes for sale. That represents a 9.2-month supply at the current sales pace, up from an 8.3-month supply in March.
Supply Glut #2: Foreclosures
There are currently 2.25 million homes in the foreclosure process. That’s equal to an extra 5.3-month supply, based on the current sales rate.
Supply Glut #3: Shadow Inventory
There are currently 1.8 million homes in shadow inventory, according to CoreLogic. Shadow inventory includes homes that are seriously delinquent (i.e. at least 90 days past due), homes that are in some stage of the foreclosure process and homes that banks have already repossessed, but haven’t put back on the market for sale. That’s equal to an extra 4.3-month supply, based on the current sales rate.
Add it all up and we’re looking at about 18.8 months worth of supply that needs to be worked off.
And that, folks, is where basic economics applies.
That much excess supply is bound to lead to lower prices. All the government subsidies, home affordability programs, or cheap money in the world can’t overcome that fundamental principle.
So how about the demand side?
Even If We Give Homes Away, Demand Won’t Perk Up
Sadly, demand conditions aren’t too rosy, either. Consider:
Demand Destroyer #1: Underemployed and Underpaid
With unemployment resting at 9% and wage growth stagnant (up just 0.1% in March), millions of consumers can’t afford to buy a new home. Not to mention the fact that tighter credit restrictions are also severely limiting the pool of potential buyers.
Demand Destroyer #2. Consumers Not in the Mood
Even if consumers could afford to buy a home, they’re not in the buying mood. The latest National Housing Survey from Fannie Mae (FNMA.OB) reveals that 36% of Americans believe buying a home is risky nowadays. By comparison, only 17% thought so back in December 2003.
As Anthony Sanders, a professor of finance and real estate at George Mason University, says, “Risk is always a bad thing for the housing market.” Simply put, consumers buy when they’re confident, not afraid. And they’re clearly afraid now.
Demand Destroyer #3: Prisoners in Our Own Homes
Even if Americans wanted to buy a new home – and could afford it – they can’t. Not without coughing up a serious amount of cash at closing. Why? Because an estimated 11.1 million homeowners are sitting on negative equity. And close to five million are sitting on more than 25% negative equity, according to CoreLogic.
It’s All About the Fundamentals
The fundamentals don’t add up to an imminent rebound in real estate prices. On the contrary, in fact. Excess supply and historically weak demand point to nothing but lower prices ahead.
I know that’s a tough pill to swallow, given that real estate prices are already off 29.5% from the peak in June of 2006. But it’s true.
In my next post, I’ll provide six more stats to convince you once and for all. And then I’ll share some ideas on how you can actually fight back against the declines. So stay tuned.
The median price for existing homes fell by 5% year-over-year and now stands at just $163,700.
Score one for homebuyers.
In addition, money is cheap. Mortgage rates fell for the fourth week, with a 30-year fixed-rate loan hitting a yearly low of 4.63%, according to Freddie Mac (FMCC.OB).
Score two for homebuyers.
These two factors alone – depressed prices and cheap money – normally lead to rampant speculation.
But we’re not living in normal times. And if you’re tempted to jump back into the housing market now, you need to get your head checked first.
The truth is, the real estate market is overrun with terrible fundamentals. And I’ve compiled 12 stats to prove it. I’ll share the first six with you today and the next six tomorrow.
And just so you don’t kill the messenger, I’ll also provide some ideas on how you can profit from – or at the very least, reduce the pain of – further price declines.
So let’s get to it…
Hope isn’t Enough to Eliminate Excess Supplies
On the supply side of the equation, there’s so much housing inventory that no silver bullet solution exists.
The only answer to absorb it? The passage of time – lots of time. Consider…
Supply Glut #1: Existing Homes
At the end of April, there were 3.87 million previously owned homes for sale. That represents a 9.2-month supply at the current sales pace, up from an 8.3-month supply in March.
Supply Glut #2: Foreclosures
There are currently 2.25 million homes in the foreclosure process. That’s equal to an extra 5.3-month supply, based on the current sales rate.
Supply Glut #3: Shadow Inventory
There are currently 1.8 million homes in shadow inventory, according to CoreLogic. Shadow inventory includes homes that are seriously delinquent (i.e. at least 90 days past due), homes that are in some stage of the foreclosure process and homes that banks have already repossessed, but haven’t put back on the market for sale. That’s equal to an extra 4.3-month supply, based on the current sales rate.
Add it all up and we’re looking at about 18.8 months worth of supply that needs to be worked off.
And that, folks, is where basic economics applies.
That much excess supply is bound to lead to lower prices. All the government subsidies, home affordability programs, or cheap money in the world can’t overcome that fundamental principle.
So how about the demand side?
Even If We Give Homes Away, Demand Won’t Perk Up
Sadly, demand conditions aren’t too rosy, either. Consider:
Demand Destroyer #1: Underemployed and Underpaid
With unemployment resting at 9% and wage growth stagnant (up just 0.1% in March), millions of consumers can’t afford to buy a new home. Not to mention the fact that tighter credit restrictions are also severely limiting the pool of potential buyers.
Demand Destroyer #2. Consumers Not in the Mood
Even if consumers could afford to buy a home, they’re not in the buying mood. The latest National Housing Survey from Fannie Mae (FNMA.OB) reveals that 36% of Americans believe buying a home is risky nowadays. By comparison, only 17% thought so back in December 2003.
As Anthony Sanders, a professor of finance and real estate at George Mason University, says, “Risk is always a bad thing for the housing market.” Simply put, consumers buy when they’re confident, not afraid. And they’re clearly afraid now.
Demand Destroyer #3: Prisoners in Our Own Homes
Even if Americans wanted to buy a new home – and could afford it – they can’t. Not without coughing up a serious amount of cash at closing. Why? Because an estimated 11.1 million homeowners are sitting on negative equity. And close to five million are sitting on more than 25% negative equity, according to CoreLogic.
It’s All About the Fundamentals
The fundamentals don’t add up to an imminent rebound in real estate prices. On the contrary, in fact. Excess supply and historically weak demand point to nothing but lower prices ahead.
I know that’s a tough pill to swallow, given that real estate prices are already off 29.5% from the peak in June of 2006. But it’s true.
In my next post, I’ll provide six more stats to convince you once and for all. And then I’ll share some ideas on how you can actually fight back against the declines. So stay tuned.
These 12 Real Estate Stats Scream One Thing (Part 2)
In yesterday’s column , I sounded the residential real estate alarm. Specifically, I said that the market is set for further price declines, despite two pieces of good news recently. I based my prediction on six supply and demand statistics – and today, I’ll provide six more figures that really drive the point home.
However, this isn’t Wall Street Depression Daily. And as promised, I’ll share some ideas on how you can profit from – or at the very least, reduce the pain of – additional price deterioration.
So let’s get to it…
Insiders Are Voting With Their Feet
In the face of excess supply and weak demand in the housing market, the only thing that would convince me of a potential rebound would be if housing industry insiders were optimistic.
But that’s not happening.
Statistic #1 – Insider Sentiment
Take PulteGroup (NYSE: PHM), for example. The company has slashed almost 75% of its employees since the housing market peaked.
And yet, the company recently announced another consolidation plan… but this time, in the executive ranks. It doesn’t bode well for a rebound when the nation’s second-largest homebuilder is still firing, not hiring.
And while PulteGroup’s decidedly bearish actions are speaking louder than its words, other homebuilders are vocally bearish, too.
One of them is Toll Brothers Inc. (NYSE: TOL), the largest U.S. luxury homebuilder. Its CEO, Douglas Yearley Jr., says spring sales have been “disappointing” and that “people are still scared.”
And of the housing market, Bill Wheat, Chief Financial Officer of DR Horton (NYSE: DHI), says, “We feel it could still be a struggle in 2012.”
Additionally, no insiders at the three homebuilders mentioned are backing up the truck to buy their own company’s shares at depressed prices. So clearly, they don’t have any faith in a rebound yet.
And that’s the feeling among analysts, economists and industry experts, too.
Can You Say “Consensus?”
Believe me, as a longtime contrarian investor, I tried to find an exception.
But I couldn’t dig up one single expert who’s predicting a rebound in real estate prices in 2011. Instead, they’re all decidedly negative. Consider:
Statistic #2 – More Price Declines This Year
Jason Kopcak of Cantor Fitzgerald says prices could fall another 10% to 15% this year.
Statistic #3 – No Housing Bottom Until 2012
CoreLogic expects prices to drop another 5% before bottoming out in 2012.
Yale University economist, Robert Shiller (of the S&P/Case-Shiller Home Price Indexes), weighs in, too, stating that although it’s unlikely, “a 30-year decline in home prices [adjusted for inflation] is certainly a possibility.”
I’m all for being a contrarian. But in this case, banking on a real estate rebound isn’t contrarian… it’s stupid.
And it appears that investors who were previously betting on a rebound are finally waking up to this reality, too.
Premature Speculation is Waning
If we take a closer look at the homebuying that is actually occurring, one trend immediately stands out: Investors’ interest in residential real estate is wavering.
Statistic #4 – All-Cash Transactions
All-cash transactions dropped to 31% in April, down from a record level of 35% in March. And because investors account for the majority of all-cash purchases, the drop suggests that they’re waking up to the poor fundamentals and waiting for more attractive entry points.
Statistic #5 – Homebuying Activity
If we take purchase activity overall, the trend is pointing down there, too. In April 2010, for example, investors only accounted for 15% of purchase activity. In March 2011, that number had risen to 22%. But last month, the figured dipped to 20%.
Simply put, investors jumped the gun. They thought that prices a year ago represented an attractive entry point and starting buying. But now they’re tapping the brakes. Coincidence? I think not.
Don’t Fight the Trend
So what if you doubt every statistic I’ve provided both here and in yesterday’s column?
Well, there’s one set of numbers that you can’t refute. And that’s the actual trend in residential real estate prices. After all, momentum is a powerful market force – and in this case, it’s headed in the wrong direction.
Statistic #6 – A Miserable First Quarter
Zillow.com reports that home prices fell another 3% during the first quarter – the biggest quarterly decline since 2008.
As Stan Humphries, Zillow’s Chief Economist says, “Home value declines are currently equal to those we experienced during the darkest days of the housing recession.”
He adds, “With accelerating declines during the first quarter, it is unreasonable to expect home values to return to stability by the end of 2011.”
Bottom line: Real estate prices are still declining… and headed lower still. So don’t fight it… just accept it. And then do something about it.
Here are a few ideas to consider…
How to Hedge Against – Or Profit From – Falling House Prices
The overwhelmingly weak fundamentals make a compelling case for selling short or buying puts on the iShares Dow Jones U.S. Home Construction Index Fund (NYSE: ITB).
As David Resler, Chief Economist at Nomura Securities International, says, “We’re still in the doldrums in the housing market.” Clearly that’s terrible news for the bottom lines and share prices of the 28 homebuilders and homebuilding-related companies included in the ETF.
Other more advanced options include trading futures contracts on CME Group’s (Nasdaq: CME) exchange. Contracts on home prices in 10 metropolitan areas are available. You can find out more information about these products on CME’s website or by visiting market maker, Jim Dolan’s, website: HomePriceFutures.com.
And if you’re actively looking to buy real estate, two firms – Home Value Protection and Property Value Insurance – plan to start offering products that allow you to purchase an insurance policy against a drop in home prices at closing. It will cost you about 1.5% of the sale price and they should be available within the next year, if not sooner.
Whatever you do, though, don’t rush to buy residential real estate. As I’ve hopefully demonstrated by now, prices are headed one way from here – down. So even though local markets differ, chances are you’ll get an even better deal the longer you wait.
However, this isn’t Wall Street Depression Daily. And as promised, I’ll share some ideas on how you can profit from – or at the very least, reduce the pain of – additional price deterioration.
So let’s get to it…
Insiders Are Voting With Their Feet
In the face of excess supply and weak demand in the housing market, the only thing that would convince me of a potential rebound would be if housing industry insiders were optimistic.
But that’s not happening.
Statistic #1 – Insider Sentiment
Take PulteGroup (NYSE: PHM), for example. The company has slashed almost 75% of its employees since the housing market peaked.
And yet, the company recently announced another consolidation plan… but this time, in the executive ranks. It doesn’t bode well for a rebound when the nation’s second-largest homebuilder is still firing, not hiring.
And while PulteGroup’s decidedly bearish actions are speaking louder than its words, other homebuilders are vocally bearish, too.
One of them is Toll Brothers Inc. (NYSE: TOL), the largest U.S. luxury homebuilder. Its CEO, Douglas Yearley Jr., says spring sales have been “disappointing” and that “people are still scared.”
And of the housing market, Bill Wheat, Chief Financial Officer of DR Horton (NYSE: DHI), says, “We feel it could still be a struggle in 2012.”
Additionally, no insiders at the three homebuilders mentioned are backing up the truck to buy their own company’s shares at depressed prices. So clearly, they don’t have any faith in a rebound yet.
And that’s the feeling among analysts, economists and industry experts, too.
Can You Say “Consensus?”
Believe me, as a longtime contrarian investor, I tried to find an exception.
But I couldn’t dig up one single expert who’s predicting a rebound in real estate prices in 2011. Instead, they’re all decidedly negative. Consider:
Statistic #2 – More Price Declines This Year
Jason Kopcak of Cantor Fitzgerald says prices could fall another 10% to 15% this year.
Statistic #3 – No Housing Bottom Until 2012
CoreLogic expects prices to drop another 5% before bottoming out in 2012.
Yale University economist, Robert Shiller (of the S&P/Case-Shiller Home Price Indexes), weighs in, too, stating that although it’s unlikely, “a 30-year decline in home prices [adjusted for inflation] is certainly a possibility.”
I’m all for being a contrarian. But in this case, banking on a real estate rebound isn’t contrarian… it’s stupid.
And it appears that investors who were previously betting on a rebound are finally waking up to this reality, too.
Premature Speculation is Waning
If we take a closer look at the homebuying that is actually occurring, one trend immediately stands out: Investors’ interest in residential real estate is wavering.
Statistic #4 – All-Cash Transactions
All-cash transactions dropped to 31% in April, down from a record level of 35% in March. And because investors account for the majority of all-cash purchases, the drop suggests that they’re waking up to the poor fundamentals and waiting for more attractive entry points.
Statistic #5 – Homebuying Activity
If we take purchase activity overall, the trend is pointing down there, too. In April 2010, for example, investors only accounted for 15% of purchase activity. In March 2011, that number had risen to 22%. But last month, the figured dipped to 20%.
Simply put, investors jumped the gun. They thought that prices a year ago represented an attractive entry point and starting buying. But now they’re tapping the brakes. Coincidence? I think not.
Don’t Fight the Trend
So what if you doubt every statistic I’ve provided both here and in yesterday’s column?
Well, there’s one set of numbers that you can’t refute. And that’s the actual trend in residential real estate prices. After all, momentum is a powerful market force – and in this case, it’s headed in the wrong direction.
Statistic #6 – A Miserable First Quarter
Zillow.com reports that home prices fell another 3% during the first quarter – the biggest quarterly decline since 2008.
As Stan Humphries, Zillow’s Chief Economist says, “Home value declines are currently equal to those we experienced during the darkest days of the housing recession.”
He adds, “With accelerating declines during the first quarter, it is unreasonable to expect home values to return to stability by the end of 2011.”
Bottom line: Real estate prices are still declining… and headed lower still. So don’t fight it… just accept it. And then do something about it.
Here are a few ideas to consider…
How to Hedge Against – Or Profit From – Falling House Prices
The overwhelmingly weak fundamentals make a compelling case for selling short or buying puts on the iShares Dow Jones U.S. Home Construction Index Fund (NYSE: ITB).
As David Resler, Chief Economist at Nomura Securities International, says, “We’re still in the doldrums in the housing market.” Clearly that’s terrible news for the bottom lines and share prices of the 28 homebuilders and homebuilding-related companies included in the ETF.
Other more advanced options include trading futures contracts on CME Group’s (Nasdaq: CME) exchange. Contracts on home prices in 10 metropolitan areas are available. You can find out more information about these products on CME’s website or by visiting market maker, Jim Dolan’s, website: HomePriceFutures.com.
And if you’re actively looking to buy real estate, two firms – Home Value Protection and Property Value Insurance – plan to start offering products that allow you to purchase an insurance policy against a drop in home prices at closing. It will cost you about 1.5% of the sale price and they should be available within the next year, if not sooner.
Whatever you do, though, don’t rush to buy residential real estate. As I’ve hopefully demonstrated by now, prices are headed one way from here – down. So even though local markets differ, chances are you’ll get an even better deal the longer you wait.
No comments:
Post a Comment