Both Goldman Sachs and JP Morgan have published long lists of reasons to be bullish about housing.
But when you start pairing the data together, you start to see warning signs you would’ve learned about in economics 101. Specifically, you’ll see signs that supply is outpacing demand.
In the wake of yesterday’s huge housing starts report, Wall Street Examiner’s Lee Adler noted that starts appeared to be outpacing sales.
TD Securities economist Millan Mulraine, who remains bullish on housing, also pointed to similar warning signs in a research note today.
“The exceptionally strong surge in residential construction activity and building permits approval in September has caused us to question whether homebuilding activity is beginning to edge too far ahead of the market’s capacity to absorb the new supply,” wrote Mulraine. “Particularly given the current weak economic outlook in the medium term.
“The key risk is that prices in this segment of the market could come under pressure in the near term unless demand for new homes pick up more meaningfully in the coming months, justifying the optimism among builders.”
Check out the spread between housing completions and new home sales:
…the non-annualised pace of new home completion has outpaced sales activity in this segment of the market every month this year. Up to the end of August, the accumulated gap between completion and sales this year has widened to 144K, and at the current pace so far this year, the gap appears likely to widen to around 200K. While this is not a particularly worrying level of inventory, the acceleration in the pace of starts in September, if sustained, will push the level of new homes supply well over twice the current pace of sales activity. To close this gap, new home sales will need to double from the current pace of 373K.
Another problem for the new homes market is the attractiveness of the existing homes market:
Existing homes make up 90 percent of the market, partly because new home sales are down. Reports have been publicized of spot shortages of inventory.
Zimmerman gave several reasons why a shadow inventory persists, due to people with underwater mortgages holding their houses off the market, people who want to retire waiting for prices to improve, and banks keeping houses on their books while people live in them for as long as five years.
“A lot of ugly foreclosed loans are sitting on bank balance sheets” while people sit in the houses, he said. (This should raise questions as to the actual capital standing of the banks, whose trade associations and compliant regulators blare that the condition of the industry is much stronger than in 2008.)
Zimmerman lamented that the housing finance market is “still dysfunctional.”
When the Fed announced QE-infinity in September, it said it would purchase $40 billion of mortgage backed securities per month. The aim was to lower the mortgage rates offered to consumers.
But there’s been some concern that this hasn’t passed through to the real economy.
In a note titled “Mortgage Originators Not Playing Nice”, TD Securities economist Gennadiy Goldberg writes that average decline in mortgage rates (the interest on a mortgage) since the QE3 decision have lagged the decline in mortgage-backed securities (MBS) rates by an average of 50 percent. Remember, MBS rates refer to the rates at which a pool of mortgages are sold to investors in the bond market.
The difference between MBS yields and mortgage rates
Goldberg explains that there are three factors behind the weak pass-through:
- Lag: Mortgage rates often respond slower to policy changes than the MBS market. “In a similar pattern to what was observed following the previous QE announcements, MBS yields fell more sharply post-announcement, as mortgage rates continued to adjust lower slowly.”
Gary Shilling, president of A. Gary Shilling & Co., talks about central banks’ monetary policies and U.S. housing.
As transportation costs rise like clockwork each year, there’s new evidence that consumer income hasn’t been able to keep up.
In the largest 25 U.S. metros, consumers have paid 44 percent more for housing and getting around over the last decade alone, according to a new study by the Center for Housing Policy. Middle-class family incomes, meanwhile, have only seen a 25 percent bump.
Here’s how the top 25 metro areas stacked up: