By John Galt
April 11, 2011
And 2020 might be conservative….
Despite the prognosis from the mouth flapping pantloads of D.C. and Wall Street, the American real estate market is close to a decade away from recovery; if not longer. The popular proclamations from the National Association of Realtors is that the existing home sales should increase 5 to 10% this year which is akin to saying we’ve climbed ten feet up from the bottom of a one hundred foot well we’ve fallen into. The reality of what the U.S. housing market is facing is much more complex than just the involvement of the Federal government in financing the industry or if supports should be placed underneath those facing expulsion from their homes thus accelerating the decline in prices and the corresponding number of strategic defaults.
The truth is going to shock the politicians with a clue and those homeowners who think their slice of heaven might be safe from the coming second eye wall of the storm as it crosses our nation. To start with, let’s refer to one of the NAR’s favorite statistics, the pending home sales index, both seasonally and non-seasonally adjusted to get some perspective as to where the markets are and where they need to be using their data:
The area shaded in green is my estimation of where the index will have to stay for several quarters to even begin to shave off close to 20% of the shadow inventory plus vacant homes available for sale if the market was even close to recovery mode. Using the NAR’s own optimistic outlook, one also has to consider that approximately 35% of all mortgage applications submitted will now be declined due to the applicant being unqualified. Add the other factor into the equation, the staytirees (retirees electing to stay in a home that is paid off or nearly paid off versus selling at an inflation adjusted loss or for little profit and relocating to a new location and purchasing another home) refusing to accept a new commitment to long term debt and enjoying the remaining days of their retirement using vacation rentals, etc., and the baby boomer home purchase wave that many in the industry expected may well not occur in this decade; especially when one considers the economic uncertainty and severe losses many incurred in their retirement accounts.
Real estate has another considerable headwind which will extend the housing crisis even further in the form of unqualified buyers and an uncertain financing system. The Federal Government is either going to have to seize total control of all mortgage lending to individuals or withdraw from the market completely to insure some modicum of stability.
The current system of socializing losses for the banks without any risk to the equity investors or bondholders is an unacceptable program which will collapse on its own, yet the longer the government and Federal Reserve continue to extend this model, the harder this crash will be. If the Federal Government does in fact elect to remain the primary financing solution for first time or questionably qualified buyer, then the United States will eventually have to accept a higher cost for selling its debt in the form of higher interest rates or higher inflation; possibly even a combination of the two. If the government and Fed elect to allow the GSE’s to be liquidated and the private sector resume its historic role as financier of first resort, then the system will experience a dramatic crash in housing prices, possibly another 25% on a national average; further in some areas which escaped the initial crash. Thus as the debate between which course to take is delayed for another administration or Congress, the crisis only builds momentum with foreign investors losing faith in the viability of our housing market and financial stability along with the people most qualified to purchase a home staying out of the market, not wishing to purchase the proverbial falling knife.
To correct the errors of the 1990′s, the housing market, when adjusted for population and economic considerations is in dire need of further contraction and consolidation. The chart below reflects the heart of the discussion and how a simple social experiment gone awry by design must contract to even begin to find a “bottom” in the housing market:
While I am a proponent of “The American Dream” I also believe it should not be financed using Marxist ideals cloaked as Keynesian economics. The program to provide seed money, down payments, or preferential financing to unqualified home owners must come to an end, and the people who advocate this ideal removed from the decision making process. If the markets do not return to a historic norm, somewhere around the 62% level for home ownership which in my opinion is still five to seven percent too high, then the government will remain the largest landowner and eventually the largest landlord in our economy. Knowing this fact it is hard to defend the processes proposed thus far to correct the excesses of the housing welfare programs created by the banks and Clinton administration with the assistance of both political parties. A five percent correction may not seem extreme to the naked eye but the numbers would mean a decline in total home ownership in the United States to levels unseen in almost thirty years which might finally eliminate the excesses of our manipulated economy since 1988.
To take the perspective of what a reduction in home ownership rates would mean to the overall market, the analytical eye must look at the data for home vacancies in a historical perspective:
Without any education on the subject, anyone with one working eyeball can visualize that this chart is progressing in the wrong direction and has been at an accelerated pace over the last decade. That chart however needs one more layer of data to really add the impact of what has happened since the crisis began in 2007:
Keep in mind, this is U.S. Government data from the Census Bureau which does not include that “shadow inventory” being held off the market by the banksters in an effort to hide their true financial losses and the millions of homes still waiting to be foreclosed on if the government will accept the responsibility for either purchasing those homes or protecting the losses of the banks and investors; domestically or overseas.
Thus when you take all of the information presented above into consideration, without even discussing the impact of a constant devaluation of the U.S. dollar and the increase in commodity prices putting constraints on the ability of the average citizen to save the required ten or twenty percent down for a new home, the crisis is much much worse than the financial infomercial media or political elites would ever let the sheeple know. The government’s bungling of the situation by not allowing a natural correction to occur after 2008 with an economic depression, severe as it would have been, plus the elimination of upwards of 40% of the existing banks has insured that the situation will remain both unstable and unresolved for a decade or more looking forward. Considering the current political climate the problems will be postponed till long after the 2012 elections if not later and the markets will struggle along with homeowners who had equity in their homes seeing it obliterated by others who engage in strategic or economy driven defaults.
At some point there will be a bottom but I do not share the optimism of the real estate industry and their paid hacks; the bottom will not occur until the system resets and private enterprise is allowed to return as the dominant and primary force in housing finance. Thus at the earliest this crisis will not be resolved before 2020 and quite possibly five to ten years later as the historical precedence for such events have happened in U.S. history.
If you do not believe that last factoid, refer to the housing market in Florida from 1946 to 1979, where people had enough common sense to understand the consequences of the 1920′s land speculation which occurred here and was just replicated in numerous states across the nation in the last decade.