Some Thoughts on Housing - The 4 Forces

Posted by urbandigs

Tue Dec 1st, 2009 11:56 AM

A: Its been a while since I took a step back and did a general thought piece on one market in general. So, I would like to discuss thoughts on some of the hard hit housing markets out there and how the temporary confluence of 4 forces may provide a good entry point for those ready, willing & able buyers that are still waiting to pull the trigger.

This is not a Manhattan micro piece.

homebuyer-tax-credit.jpgWhile every market is local and experienced their own degree of severity against the deflationary forces out in the world since 2006, we can try to take a step back and look at housing in a more general sense given the unique nature of the current environment. Some things that pop into my head include:

1. Unsustainable plunge in pricing - where are we today compared to where we came from; nothing goes in a straight line
2. Artificially Low Lending Rates - ZIRP + fed buying of residential mortgage backed securities and agency debt
3. Government Tax Credits for Buyers - no explanation needed here
4. Government Credits for Developers - see above
5. Fed Engineered Bank Recapitalization Environment - leading to a reflation mentality and a extremely positive carry trade with the dollar as the funding currency for money to chase yield
6. Unemployment Still Rising Yet Likely Near Its Ultimate Peak - a bold statement yes, but not a crazy one

Every single one of what I see as positive driving factors of housing markets across the country is a temporary one. The main negative is the continuing deterioration in labor markets and the number of unemployed out there. But with hard hit markets trading down some 40-50%+ from peak levels, I think we can argue that a good portion of this cycle has been priced into those markets. The main government programs that allowed for the temporary homebuyer and developer tax credits are i) Worker, Homeownership, and Business Assistance Act of 2009, ii) American Recovery and Reinvestment Act of 2009, and iii) 2008 American Housing Rescue and Foreclosure Prevention Act.

The only element I would even remotely consider as "a rock building a foundation" for future sustainable housing activity is #1 - an unsustainable plunge in pricing. That was the healthiest thing that happened and the major reason why buyers are stepping in to purchase homes. Kind of like a reset button on a EA Sports Madden game. Umm, prices went too high, game over, lets start again! Now policy is in place to stop prices from falling, stabilize housing, motivate lending, and keep rates as low as possible to keep the party going for new purchases and debt refinancings.

With that said, I consider now to be one of the better times to buy real estate in many hard and moderately hit markets. Why you ask, given the weak foundation that seems to be supporting current markets? Because of what I will call the 4 main forces and how all four are working together at the same time right now:

FOR A LIMITED TIME ONLY ---> THE 4 FORCES

1) Homes can be bought for much more affordable prices with some markets trading down 38-50%+; Las Vegas -55%, Phoenix -52%, Miami -46%, San Diego -38%, etc..
2) Lending rates right now are at all time record lows; 30YR rates averaged 4.78% last week
3) The government just extended & expanded the homebuyer tax credit
4) Supply is still high when counting the shadow/foreclsoure inventory that is still lurking; options and control are there for buyers

It is the temporary CONFLUENCE OF THESE 4 FORCES that combine to make for a very nice opportunity should the buyer be able to afford it and is buying for the right reasons. Its still a buyers market out there and there are still real fundamental pressures that sellers have to deal with to move property. The trader in me looks at this as buying on a downtick with free gifts at the same time.

Its really the first time in about 3 years that I have felt this way about hard hit markets across the country; and its a strange feeling because I am against so much of what is making this temporary environment exist in the first place. Speculative investors will always be out there looking for action and some will always be caught naked when the tide eventually does go out - its the nature of markets and the players that play them. The successful speculative players understand risk management and the importance of discipline applied to their investment philosophies.

I may not agree with government tax credits and stimulus for everything and anything. I may not agree with the fed's tampering with rates to maintain the recap environment. But that doesn't matter because what the heck can I possibly do about that? All I know is that these four forces will not all be working together at the same time forever as we are yet to see what the future world without the govt/fed steroids will look like.

This doesn't mean prices are on a one way trip back to new highs. Far from it. Rather, try to think about it in terms of what happens when....

a) there is no more government tax credit for buyers? How far and for how long will sales volume dry up now that we pulled forward demand to take advantage of the govt offer?

b) our fed removes liquidity and eventually talks about potentially draining excess reserves from depository institutions to make sure lending does not get out of control with the crisis behind us? what happens to lending rates?

c) when most of the shadow foreclosure supply has been eaten up? That pressure still exists and will continue to exist for many months ahead but at some point, and largely due to the stimulus efforts, the pipeline of foreclosures will start to head down.

d) will 'a' & 'c' cancel each other out????

Sure this is talking years out but that is what this piece is all about. You may decide to wait another year focusing on price action alone, and prices do in fact turn out to trade a bit lower, but now your lending rate is much higher (maybe 5 7/8s instead of 4 7/8s) or the tax credit expired or your options are narrower without severe foreclosure pipeline pressure working in your favor. Of course if you are an all cash buyer and rates do ultimately rise, you could be in a better position down the road to grab a property when rising borrowing costs is affecting affordability. But lets be real here; most people buying a home look to secure some portion of financing to do so.

I'm in that very odd position of not agreeing with policies taken to stem this crisis yet cognizant of the fact that the confluence of these 4 forces makes for a very interesting opportunity in hard hit markets; of which there are many across this country! Get the low price or the foreclosure price --> get the record low rate --> get the many options available to find the right home --> and get the homebuyer tax credit.

Always make sure you know your job security and your local market very well before making any decision; and always know what you can and cannot afford! If we do have a double dip and a payback period of consequences, you need to be prepared with a safety net - no safety net, don't buy yet!

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