Is Housing Going Bust? It Looks Like It.

Bryan Crabtree
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Posted: Mar 25, 2016 12:01 AM
Is Housing Going Bust?  It Looks Like It.

The housing industry is an emotional sector of our economy.  It functions in a year, like the stock market does in a day.  It’s a reflection of confidence in the future.   But, it’s very difficult to read and fundamentals get ignored in expedient conclusions resulting in reactionary news headlines.  


This week, on the heels of bad resale-home data from February, the headlines would have you thinking housing may be going bust.  “Is this it?”  “U.S. Home Sales Tumble.”  It’s a “Warning sign for Housing.”  There are dozens of headlines just like these.  So, is housing about to come unglued again?  


As the fed raised their target-interest rates in December 2015, I suggested then that a lot of people would take it as a cue to buy a home sooner than planned.  In my view, they did.  December and January experienced a migration from new-home sales (as sales were down) and a trend toward existing home sales.  Buyers wanted to close soon at the lower rates while believing they would soon go higher.  The reverse occurred in February.   


This reversal occurred because of the prevailing wisdom that mortgage interest rates would go higher in 2016.  The opposite has occurred.  Fed Chair Janet Yellen recently intimated that rates will not likely be raised more than twice (instead of four) times this year, and that if conditions required it, would be lowered again.  Rates have remained mostly below 4 percent thus far in 2016.  


Emotions run wild when it comes to housing, given that it's where big money meets lifestyle.  It’s where people live, it's their biggest investment, and in many ways it embodies a symbol of achievement in America.  This combination of factors makes housing almost toxic for some Americans who put their emotional desires ahead of logical ones.


Anytime interest rates appear to be on the increase, a segment of future-homebuyers will advance their planned timelines for purchasing a home and buy sooner.  This phenomenon is a reflection of emotions related to cost.  In 2004 to 2007, we saw rapidly rising prices creating an unprecedented urgency.  It was an emotion leaving many with the feeling of missed opportunity if they didn’t buy more homes - and quickly.   These emotions caused under-qualified and unprepared families to purchase homes they ultimately could not maintain or afford.  


For many years, I’ve suggested that using any speculation of future data (future needs, interest rates, cash flow or value) other than what is a certainty, is very risky to long-term financial strength.  This is especially true in housing.  


The recent resale-numbers report showing a significant decline on existing home sales is the first in many months.  However, it’s nothing more than the effect of the Fed’s interest rate increase in December. We've seen this at various points during the housing recovery, including the first-time buyer credits offered by the federal government in 2009.  Prior to that program, the ongoing housing crash had caused sales to be extremely weak.  Sales volume spiked significantly during the months it was offered, stabilizing prices and demand.  The incentives paused the market’s free-fall.  When the credits expired, they were followed by a far worse decline that lasted for many more months.  


The government incentive simply borrowed sales from the future in 2009 leaving 2010 and 2011 with more declining values.  And, the Fed-rate spike did the same for a very short period in December through January of this year.


There is no fundamental issue in housing right now.  The only reason housing appears to be fracturing is a result of misleading headlines reporting a single month’s sales declines without fully explaining the reason.  In most markets, if you paid cash for a home in 2006, it’s worth the same today as it was then.  That’s pretty bad.  In that context, we’ve had no appreciation for ten years.  But, we will likely see more appreciation for the next 12-24 months followed a modest decline during the next recession or rising interest rate environment.


There are some reports that housing is struggling due to lack of inventory thus the reason for a decrease in sales.  Wrong!  There are plenty of homes for sale - most buyers are just not willing to buy within their means.  Their emotional wants and needs place them in conflict with what they can afford.  


There are only two indicators necessary to predict the next housing decline:  Either a spike in layoffs or a sustained spike in interest rates where rates surpass 5-6 percent.  Such a spike would cause a 10 to 20 percent reduction in what buyers can afford to finance.  Neither seems likely for the next 12 months.  


However, if wage growth occurs, prices will rise even further.  


The media loves a headline, but the recent flurry of ‘housing bust’ headlines is nothing more than media pundits commenting on something they narrowly understand.  


The best real estate investing advice is simple.  “Buy when the market needs buyers, sell when the market needs sellers.”  Be careful if you’re buying in 2016 that you don’t pay more than it’s worth, because now is the time to sell.