Why Housing Markets Are Heading South ... Again

Why Housing Markets Are Heading South ... Again



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In previous articles over the past two years, I have emphasized that a rising percentage of home buying has come from all-cash investors. I argued that this was not a sign of a housing recovery. Rather, it showed that the traditional housing market led by trade-up buyers purchasing with a mortgage was still on life support.

Evidence is now widespread that rising prices in last year's hottest markets have caused investors to cut back their buying. In addition, the sharp rise in mortgage rates since FRB Chairman Bernanke's QE tapering remarks last May has had a huge impact on traditional home buyers.

Online brokerage firm Redfin explained in an important February 18 report that sales across the 19 major markets it covers "hit the lowest point in at least four years, falling 9.9% year over year."

For example, Las Vegas was one of the hottest markets last year with the median price-per-square-foot for existing detached homes up by 25%. However, sales started to weaken last fall as mortgage rates climbed. By November, sales volume fell to the lowest level for any November in the past five years. Sales of existing single-family homes in January of this year were down 7.3% from a year earlier. New home sales really tanked – 28% lower than January 2013.

Actually, home sales had started to weaken in August 2011 and have been trending downward since then. The pundits hardly noticed because they were completely focused on rising prices. Yet the volume of home sales is at least as important as median home prices.

According to DataQuick, home sales in January were actually bifurcated. Sales of houses under $200,000 were 28% lower than a year earlier. That is primarily due to the continued plunge in sales of foreclosed properties as well as short sales. However, sales of homes over $200,000 were 33% higher than January 2013.

Another interesting fact is that 27% of purchases were by people living outside of Nevada. Half of them were California buyers. Forty-seven per cent of all homes were sold to all-cash buyers, down from 53% a year earlier. Eleven per cent of all home purchases were to buyers who bought two or more properties. That was 20% fewer than in January 2013.

In Southern California, DataQuick reported that total January sales were the weakest in three years and down 10% from a year earlier. After the bubble peak of seven years ago, average sales in January have never exceeded the average number of sales recorded since 1988. Sales in January 2014 were 17% below that 25-year average.

Similar to Las Vegas, southern California was a tale of two markets. Because of the plunge in foreclosure sales and short sales, purchases of properties under $300,000 fell by 37%. Those which sold for more than $500,000 soared by 26%. The growth in the sale of expensive homes was greatly aided by a loosening of underwriting standards for jumbo mortgages.

Nearly 30% of all sales were purchased with cash. That was down from the record 37% in February 2013. So-called "absentee" buyers – almost entirely investors – accounted for 27% of all sales. This was much lower than the record 32% of a year earlier. Both of these statistics still pointed to a housing market that was anything but normal.

Redfin's Latest Question: Where is Everyone?

The report issued by Redfin on February 18 was extremely revealing. Remember, they are an online brokerage firm operating in 19 major housing markets. The title of the report showed their puzzlement: "2014 Housing Market: Where is Everyone?"

It starts by pointing out that both buyers and sellers "seem to have gone missing." Demand has softened, though one Redfin agent in Washington D.C. called the downturn uneven. As he described it, "the undesirable properties that would have sold in a few months last year aren't selling at all. The biggest change is in between, with the sort-of-desirable homes. Last year, these homes got multiple offers and sold quickly. Now, they are getting only one offer during the first week, sometimes having to reduce their price, and the home is taking three to six weeks to sell."

I pointed out in more than one article last year that listings had plummeted because potential home sellers were keeping their homes off the market. Why? They saw rising prices and thought that they could get a better price by waiting.

That is now confirmed by a Redfin agent in northern Virginia: "Home sellers are in no rush this year. They feel confident that their home will sell easily and at a higher price between March and May, so they see little incentive to list before then."

In the report, the CEO of a national firm which provides real estate photography services said that demand for their services is strong. As he put it: "Early demand feels like a tsunami warning. In January, our business was up 15% compared to last year. We are ramping up in all markets because we are anticipating a huge spring for new listings."

With regard to the media focus on the awful weather and its impact on the economy, the Redfin report pointed out that the bad weather discouraged home sellers, not buyers. Listings in January fell the most in those six cities -- Boston, Philadelphia, Chicago, Washington D.C., Long Island and Baltimore – which were hardest hit by the frigid cold.

As I predicted last year, sellers who had delayed listing their properties will be putting them on the market this spring. I have seen this in town after town in Connecticut where I live. In January, total listings in the state were up more than 5% from a year earlier and were up by more than 11% in Hartford County.

MBA Purchase Mortgage Index
Since 1990, the Mortgage Bankers Association (MBA) has published an index of mortgage applications. It shows the direction of mortgage application activity, both for home purchases and refinancing. On February 26, the MBA announced that its index of purchase mortgage applications plunged to the lowest level since 1995.

The report garnered little media attention, but it is extremely important. Let's take a good look at this index which I wrote about last year. The index figures are through the end of 2013 and were posted by the blog Calculated Risk.

 
 

You can see that since it peaked during the bubble madness of 2005, the index has been on a steady decline. The only temporary uptick was in 2007 before the sub-prime collapse had really set in. Now we just learned from the MBA that it has collapsed to levels not seen since 1995, nearly 20 years ago.

What does this alarming news tell us about housing markets? Plenty. Mortgage applications for purchasing a home are roughly 1/5 of what they were during the speculative madness peak nine years ago. The steady rise in the index from 1990 to 2005 was when housing markets were strong. Taking out a mortgage was the standard way in which the overwhelming majority of Americans bought a home.

That ended with the housing collapse which began in 2008. I have argued repeatedly for the last three years that the destruction of what had been how homes were purchased in this country has been catastrophic for U.S. housing markets. The emergence of millions of all-cash buyers merely kept housing prices from collapsing further. It has done nothing to return us to a flourishing housing market.

Redfin Home Buyer Survey
On February 27, Redfin published its latest Real-Time Buyer Survey. The report shows the results of a survey of nearly 2,000 buyers using Redfin's services taken toward the end of February. This chart taken from the report is very revealing.



Among those current homeowners looking to buy another home and move, 39% said they planned to rent out their current home rather than try to sell it. Only 27% indicated that they would buy a home first then sell their current home.

Why would so many homebuyers want to rent out their current home after buying another home rather than selling it outright?  They must not have considered the difficulties of playing landlord after they moved. Haven't they heard any horror stories about the tenant from hell – especially the tenant who stays forever without paying rent? Or the one who trashes the property?

While we can't be certain, of course, I would argue that many of them have homes which are still underwater. Because they are unwilling to bring cash to the table to pay off their mortgage, their only real alternative is to keep their home and rent it out. The hope is that prices will continue to climb until their current mortgage is no longer underwater at which time they can safely sell. As I see it, many homebuyers in the last two years have been doing just this.

My conclusion: Redfin and its agents have been taking the pulse of major housing markets for several years. These two reports seem to confirm that pent up desire of sellers to list their property will soar this spring just as demand is weakening. That can only mean serious trouble for housing markets in the coming selling season.

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