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Wednesday, June 10, 2009


beware false bottoms in housing

on a day that saw business week declare an end to the housing bust, field check blog with some antidote to seasonal euphoria.

In my April 30th report entitled ‘Housing (bottom) Update’ I highlighted the reasons why some of the hardest hit MSA’s might do well over the near-to-mid term:

  • artificially depressed supply through gov’t and bank-specific foreclosure moratoria;
  • artificially low rates and temporary tax benefit;
  • foreclosure mix-shift creating an artificial skew higher in reported
  • median and average prices;
  • And fleeting seasonal demand.

Essentially, everything is artificial and so should the bottom that comes out of it. I have been looking for this false bottom phenomenon to play out for months and believe it is here.

The San Diego MSA is a perfect example of a market experiencing a false bottom. It is a very interesting and unique market that I believe will show a bottom in reported house prices as soon as the next Case Shiller report. It may even report a decent sized increase in median and average house prices.

the end of the foreclosure moratorium is something already discussed here. but i think it's important especially, focusing on mark hanson's third point, to remember that nearly 50% of all home sales nationally are foreclsoures at the moment -- and that foreclosures, initially a subprime problem disproportionately affecting lower income households and lower-end housing stock nearer the brink of disaster, have become with the help of unemployment and the option-ARM a prime loan problem affecting higher-end housing stock. the mix of housing going into foreclosure is becoming more expensive, and as this stock now accounts for half of all sales one can expect the average price of all sales to begin to climb as it feeds through the pipeline. hanson examines san diego in detail:

Mid-to-high end loans and the home attached to them are where the real trouble lies in the near-term. The two charts below show the monthly new loan defaults and foreclosures for mid-to-high end properties.

Mid-to-high end NOD and foreclosure counts stand between 35% and 40% of total counts but account for only about 20% of total sales. This means that foreclosure-related pipeline supply is 100% greater than demand in this segment. This is a major supply/demand imbalance that will bring serious trouble to this market over the near-term. Especially considering that this particular foreclosure related supply only makes up approx 10% of total mid-to-high end supply with Ma and Pay Organic homeowner once again making up the rest.

In this market segment especially, first timers and investors have little impact — organic sellers need to be able to sell and re-buy in order to keep demand stable and strong.

This will promote significant house price and rent compression over time that may put in jeopardy the low-price housing stability seen today.

Bottom Line: Headlines are about to get wild, as the age of false bottoms in real estate is upon us.

UPDATE: to reinforce the point, via clusterstock, pragmatic capitalist with a chart that should scare the hell out of all homeowners.

UPDATE: calculated risk with a revised recast chart.

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