Wednesday, April 8, 2009

Recession Causing Relatives to Move in Together & Sharp Drop off in Divorces. Housing Bubble 2.0 Coming? (Not)

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Let me preface this entry by saying I was an early and loud housing bust proponent when (a) the Kool Aid of the day was "housing prices could never fall nationally because... they never have & (b) this is just a subprime issue (ignoring the Alt A loans, option ARM loans, and indeed prime loans). [Mar 19, 2008: Alt A Mortgages Beginning to Break Down] I called for housing prices to drop dramatically - against the grain. [Dec 8, 2007: Analysis - What Should Housing Prices Be Today?] And in the past 12-15 months I've said government will do everything in its power to once again prop up prices from where they should go. And so the white knights have tried to reflate a tired bubble.

Most regional housing recessions take many years to play out... 6 to 8 years. We peaked as a nation (housing prices) in 2006, so we are roughly entering year 3. While all the government actions to prop up housing prices will help to some degree, this is still going to take a long time to play out. Lower mortgage rates artificially prop up prices which is the government's go to plan this entire decade. Other people are now enjoying government modified mortgages (taxpayer subsidization) which make their payment 31% of their income, even if that means their new mortgage rate is 1-2%. Whatever it takes to make sure people who took out loans they had no business getting, for houses 2x as big as they can afford, get to stay in them. [Mar 5: WSJ - Mortgage Bailout to Aid 1 in 9 Homeowners] With that said, this is what I believe and in the stock market it is not about what is correct or what I believe; it's about what the herd believes. And the herd is on about its 4th iteration of "housing shall rebound .... in 6 months". Hence we have some housing exposure in the portfolio.

Surely home prices cannot keep falling 20% year over year for another 3-5 years - we are already back to 2003 prices. [Feb 13, 2009: US Home Prices Fall to 2003 Levels] In places where home prices have dropped to reasonable levels - we are finally starting to see a pick up in units sold. [Mar 28, 2009: Some Real Estate Markets Warming Up] Unfortunately, a great many people in the country still live in concentrated urban areas where housing is still too expensive for average Joe. [Sep 26, 2008 : 15% of Americans Spend 50%+ of Income for House Payments]

So while free money is handed out by Federal Reserve and D.C., we still have a myriad of issues
  1. Thus far we've had an atypical "stoopid (sic) mortgage" housing bust, we are just entering the typical cyclical "recession" housing bust
  2. By doing said "stoopid mortgages" we drew in the natural pool of buyers that should be emerging now into the 2005-2007 time frame. This was the same path the auto makers did when they ran out of prospects to buy cars - they lowered credit requirements, went from 4-5 year loans to 6-8 year loans, offered massive rebates, along with 0% interest rates. This drew in natural buyers and propped up sales. That worked for a while - until it collapsed. Same story in housing.
  3. Americans have not saved for the past decade. The pool of qualified buyers who have 10%+ down payment to put down is nowhere near where it would be in the 1990s or 1980s or indeed 70s, or 60s. The solution will be to push as many people as possible through FHA loans at 3%ish down payments. i.e. we will repeat the same mistake we did during the middle part of the decade when you essentially make a home a rental since people have very little skin in the game - these will be the future walkaways of 2012-2015 that your grandchildren will pay for.
  4. Most rationale people don't enjoy buying an asset at risk of falling 12-20% within a year; especially when it is the biggest purchase of their life. But that is the path most regions are still on - despite the green shoot talk, not only has the home price degradation not improved, one could argue (depending on survey) it's accelerating. Eventually, it will slow - but if you are making a bull case about people antsy to buy an asset that is "only" dropping 5-12% a year (a GREAT improvement over 12-20%), well I'd still argue that is flimsy.
  5. Our real unemployment rate is somewhere between 12.5-15% and our underemployment / unemployment rate is 20%ish. These are not people looking for homes or taking any risks.
  6. We made a national push to get home ownership up from the traditional LONG TERM 64% of households - it hit upper 60%s at peak of bubble. To make a solid case for a recovery you'd want to see a home ownership rate of 60-62% so that "getting back to normal" would take us to our long term historical rate. That has not happened, we are still near 67%.
  7. 1 in 5 Americans is now trapped in their home [Mar 4, 2009: 1 in 5 Houses Underwater] - we are heading to 1 in 4 as home prices continue to fall. By trapped, I mean they are underwater. Which means they need to bring savings (which many don't have ...see point 3) to closing just to ESCAPE their current home. And then you want them to have a down payment for their next home? Hmmm....
  8. Aside from first time buyers, you need to SELL a home to BUY a home. With 45% of all sales in America now foreclosures (read: empty houses) which not only continue to drive prices down, but compete with homes with people in them, that makes it difficult to sell even for those who are not trapped underwater.
So these are the facts I can think of, off the top of my head - I am sure I forgot some. We'll be swamped in Kool Aid about housing bottoms, and as I said above - I have some positions in the portfolio to take advantage of what I consider extremely premature thinking. And no, a slowdown in degradation in prices and unit sales is not the same as a rebound. This will be a long journey, as we scuttle along a bottom in many regions for a long time.

A few other points to add to those above:

First, and I lost the story somewhere in my archives, but the United States is infamous for inward migration - people moving from one part of the country to another for work. So even when new (government created transfer payment) type of work is created - many people will have a very difficult time moving to it. Because many are trapped in underwater homes.

Second, inventories remain extremely high - you want to see a 6 month inventory. We are still north of 9 months DESPITE record low interest rates, DESPITE banks not taking back some number of homes due to being backed up foreclosing, DESPITE foreclosure moratoriums, DESPITE prices back to 2003 levels. And this is before the "unemployment" stage of the housing bust really takes effect. We've lost 3M+ jobs just in the past half year - many of these are potential foreclosures coming down the pike. As are those who have been using credit cards or drawing down on 401ks to make their payments. And yet the homebuilders continue to build new homes as 19 million units sat empty as of the end of 2008. (when foreclosure moratoriums were prevalent due to holidays)
  • A record 19 million U.S. homes stood empty at the end of 2008 and homeownership fell to an eight-year low as banks seized homes faster than they could sell them.
  • The share of empty homes that are for sale rose to 2.9 percent, the most in data that goes back to 1956. The homeownership rate fell to 67.5 percent, matching the rate in the first quarter of 2001.
There are only 130M housing "units" of any sort in the U.S. so you see the scope of 19M.

Third, as the economy worsens some people are moving back in with relatives - which will empty more homes AND reduce the demand for current homes even further. Certainly, impossible to measure but coming from a state which has been in a many year recession and couple of year depression I can say I see it a lot here. Adult kids moving in with parents, or vice versa - whomever has the best financial condition... the other moves in with them. Via WSJ
  • Families around the country are weathering out the recession by hunkering down with relatives and friends. It's not just a lower-income phenomena either. The homeward bound are former white-collar and blue-collar workers who believe they might have a better chance finding work in their hometown because they know more people, who, in turn, know still more people. But with jobs scarce, that doesn't always work, and rumors of jobs are just that. At home, though, they can at least get help with food, shelter and clothing.
  • More adult children are living with their parents -- about 6.2 million in March 2008, the latest figures available -- up from 6.1 million the year before, continuing a gradual upward trend from 2000. The latest number doesn't include the most recent and most intense series of layoffs from the last three months, and is likely to be significantly higher now, says Mr. Toedtman.
  • The duration of home stays may also increase if the economic downturn persists. Envisioned as short-term layovers, some are turning into long-term engagements.
  • Kin is becoming the safety net of last resort in part because overwhelmed social-service agencies are reaching their giving limits. Across the country, waiting lists are mounting for people who need help paying for food, rent and utilities. Agencies are seeing more demand just as the traditional sources of revenues -- individual, foundation and government support -- are cutting back.
Last, you know it's bad when even those who want to get divorced are sticking it out together because they cannot afford to move out. Another area where potential homeowners are not to be found.
  • Call it sleeping with the enemy. Or at least, living with him or her. For married couples who want to part ways, breaking up is not only hard to do, it's so out of the question these days that many are staying together under one roof to wait out the recession.
  • Couples who fall out of love may not even have a job anymore, much less the funds to hire an attorney to make their split legal. With housing prices down, they can't afford to sell off the real estate and go their separate ways. So some are biding their time by tolerating the other's company on their home turf. It's faux separation, recession style.
  • Nationwide, the number of divorce filings is down substantially. When the American Academy of Matrimonial Lawyers polled its 1,600 members, nearly 40 percent said that filings were down by 40 percent. "There is a lot of fear, so people are staying put," says Gary Nickelson, president of the Academy. "People look at their assets and their liquidity, and they realize they don't have any."
In summary, other than all that I listed above - trust me, the housing recovery is just around the corner. Just as I was told a year ago as we pointed to the "huge recovery of the Spring 2008 House Hunting" season.

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I said this in 2007. I said this in 2008. I will repeat it in 2009. Most on Wall Street live in a parallel universe, especially of the socio-economic type. They misunderstood the nature of this recession from day 1 (most denied it would ever happen in fact), and they misunderstand the "dog eat dog" lack of safety net culture we've built under the premise of "who would want to be like those damn socialists! It's evil!". So in return, the greatest concentration of wealth in the upper "small sliver" since the 1920s has cross pollinated with the greatest amount of capital given to shareowners and taken away from workers. [Dec 8, 2007: Do the Bottm 80% of Americans Stand a Chance?] Those that did save had much ripped away in multiple Wall Street bubbles (early decade, and late decade) and in the middle a nice housing bubbles courtesy of all parties involved. Median wages have stagnated for a decade while downward mobility has increased. 1 in 11 nationwide on food stamps during 'good times' (up to 1 in 10 now); 4 in 10 without healthcare - we'll do anything to avoid that nasty label... you know... "European".

Call it what you will - but please don't call it an imminent recovery. This is structural, generational, and exposing what has been happening below the surface for a long time. We've been building to this - it's a long time coming. Talking financial heads on TV still don't get it, and I doubt ever will - for most, this is simply not their world. Maybe some are finally seeing it with comrades let go from the Lehman's or Bear Stearns of the world but I suppose until you are immersed in it you can whistle past the graveyard and think rosy thoughts while ignoring data.

With that said, I look forward to the months upon years of commentary re: "the great recovery is soon here". Please never let facts get in the way of a good thesis to drive stocks up. Let's do this - buy stocks. And houses.


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