LIVE wiki notes:   2012 Annual Housing Update

 

HOUSING BUBBLE: Very rough, LIVE wiki notes from annual #housing forecast from #MIT housing #economist http://realestatecafe.pbworks.com/w/page/50492485/2012%20Annual%20Housing%20Update #realestate

 

Restoring balance to the US housing market

 

55-65%

Ownership soared 1995-2005 from 64% to 69%

?M

 

What will happen to homeownership depends on what will happen to foreclosures

 

Two alternatives

 

If moving another 3M owners in renting, then rents will spike "horribly"

 

Strategy:  Investors buy up foreclosures and rent them, Bloomberg:  HedgeFunds moving into housing market to buy foreclosures, convert to rentals

 

Balanced:  CANFLAZ?

CA

FL

AR

NV

 

National stats are horribly biased, and CS worse than horribly balanced:  40% of CS in cities where 

 

Impacted states:  2nd home states, rampant building, overbuilding 2000-2007

 

Housing policy:  

 

Theory that banks on holding onto a huge inventory of housing: not so, they are all in the MLS? 

 

Balancing housing and the Economy: When will we need supply

 

Currently, housing market is only building 1/3rd of long term unit demand (500,000 units per year, longterm is 

 

Cyclical household:  1-1.2M down from high of 2M in 1980's

 

Aging of population boost the rate of HH formation

 

There HAS to a housing recovery, really, really HUGE -- 300% increase, from 500K to 1.5M

 

How much surplus do we really think there is?

 

Rental apartment vacancy rate really 

 

Homeownership rate:  rose from 63% in 1965 to 69% in 2004

 

Policy alternatives:  

Pro-ownership:  65.5%

Pro-rent:  64ish?

 

Rents more up and down with prices until the boom cycle --2000-2006 -- as ownership drops rents began to rise in 2010

 

Labor economist talking about 

 

Ratio of rent to prices

2000-2005

Most states have a positive in prices relative to rents

Lots of markets had 20% increase in price to rent ratio

 

Alternative Models:

 

In Boston, the decline isn't any worse than after the S&L crisis

Different forecast

One says market go back up

One says go down

Another in the middle, flatten, then rise more slowly

 

What does the model say should have happened from 1998 to 2009

Think of this 

50% increase in LA

30% increase in prices in Boston over what was expected

If do for cities across the country, big 

 

All of the models you used in the past don't explain the housing bubble period

 

"I'd be loth to put any credibility into this forecasting model -- every single one way off

 

Most FL markets under-forecast by more than 100%

 

What drives prices & rent

1.  The ratio of sales to inventory

What is assumed basis for inventory of housing, all units or listed in MLS?

 

Tight relationship of inventory to prices

 

Change in real SF price, %

 

The number of units per sale, as it drops and comes back

 

What really drive prices 

 

How long does it take you to sell a house

 

Real change in 

 

If you want to improve house prices, you need to increase prices and reduce the inventory for sale

 

2M units for sale in boom period, peaked over 4M in 

 

Sales rate in 2011

5M

 

2008 real price change dropped 10%, on sales of 5.5M

 

Was there really a sales rate of 9M units in 

 

What were the types of sales?

Duration starting to recover in 2008

 

Investment tax credit in 

First time home buyers moved up their purchases, maybe three years

 

Duration shot back up

 

Existing SF 2007

 

Peak of the boom, 4.5 months, went to 11 months

 

Duration of determinants

What determines 

Ration of inventory to sales

 

Duration determinants:  US Gross Housing Flows (AHS)

 

Owner to owner: 2.249M (lists & sales)

US Housing Gross Flows (2001)

Types really important:  Sales between ten year categories, when someone moves from becoming a owner to renter, ADD to the inventory of homes for sale

 

When someone moves from renting to owning, two prong effect in reducing duration

 

Lots of units vacant but NOT for sale

Availability: offered for sale

Some occupied units:  

Availability rate & vacancy rates tend to track fairly directly

 

US Housing Gross Flows (2001)

New owner HH: 564,000 sales

Renter to owner:  2.46M

Owner to owner:  2M

 

Some flows have dramatic effect

 

1.  Number of listings = owner exists 

2.  Sales = new owns, 

 

The change in the inventory is 92K

 

What really matters is new home construction

 

Net owner change 2nd 

 

National Association of Realtors says the 

 

Key to recovery:  Sales that also reduce the inventory

First time homebuyers

Newly weds have double positive impact

 

Flow model:  

What's going to happen to sales

 

#MIT #housing #economist

 

What's going to happen to the homeownership rate?

One more year of a slight decline of homeownership rate, prices bounce back and stabilize

 

Sales gradually recover to 4.8M

 

Inventory continue to fallu, duration come down to six month

 

positive price growth by end of year, come back over the next five year, but no were near the bubble

Increase in construction

 

Projections based on previous relationships

 

No input into model except what's going to happen to homeownership rate & mortgage rates

 

Delinquency rate always 4-5.5%

Transition to foreclosure:  History 5%, but rose to 9% at peak 

 

Do we have a looming number of strategic defaults?

Shadow inventory of strategic defaults

Perfectly rationale thing to do

Negative equity of 30-40% in existing house, never going to recover value, rational homeowner says, "we'll walk," rent from investor, save up over 5 to 7 years, go back into the housing market

Dominant response in some markets

"Only" damage credit for 5-7 years

 

BoA concerned about housing markets where housing values have dropped by 50%

 

As soon as one person in your neighborhoods walks from their mortgage, others begin to do

Chicago economists say this is like a title wave, could be 1-3M more foreclosures

 

RECafe:  What role might reVRM play in making sense of this?

 

Who owns these houses?

Not people who had subprime loans, where owners lost their jobs, they've already been foreclosed on

 

Buyers who bought at the peak of the housing market

 

In last six months, lots of original documents where analysts say these loans do not make sense

Internal memos from good analysts say:  

 

What is it in the capital markets that made them take risks in the past, in the face of internal memos from 2004 on.... "Looks like a bubble. banks still went ahead, an agency problem 

 

Next set of slides

Bad double dip scenarios: 2-3M more foreclosures, requires 2.5M people walking away from mortgages

Homeownership rates falls through 2015, down from 66% to 63% via a second rate of foreclosures

Prices don't turn positive, fall another 10-16% through 2017

Construction begins to rise in 2017

 

Flow model:  Scenario from strategic defaults

Conversions responsible from the rental stock

35-40M rental houses

65-70M ownership (2/3rd ownership)

 

Rental stock

180 demolitions in 

Building 

Ton of condo conversions from rental to ownership in 2004

No hard data, have to estimate

conversion to rent, negative numbers -- 750,000 units per year

 

Rental supply being reduced by much more than rental construction

 

AHS

Track conversions

 

If conversions had not happened, prices would have been higher

in 2006, conversion from OWNERSHIP to rental, 750,000 to 

 

Conversions 

40% of all rental ownership in US is single family houses

Less than 1/2 of apartments in US are apartment complexes

 

Miami: 

Had a huge condo boom in bubble, Goldman & other investment companies bought rentals, now 20-30,000 young people living in downtown Miami, not New Yorkers who vacationed in their 2nd homes as in the past.

 

If all it takes to begin a mass migration from a location where prices are already 30-50% upside down

 

OPTION 1:  Maintain Home Ownership

Relatively little loan restructuring to date - 600-800,000 mortgage so far, why?

Borrowers often re-default -- 40% estimate in Boston?

Delinquencies often self-cure

Lowers the advantage to loan modifications

Explains lender interest, servicing costs

 

What about mortgages for loans underwater?

Mortgage restructuring for  

 

One of several policy proposals to maintain homeownership

Write down the mortgage to the current value of the house

Write a contingent value contract, share appreciation upon future sale

Lender gets current value + contingent claim

Borrower gets lower mortgage + some upside

House remains occupied with no moral hazard

 

ALTERNATIVE PROPOSAL

Option 2:  Allow falling homeownership but move supply to keep duration normal and balance for rents / prices

 

Current calculated own-to-rent conversion flows are HUGE (0.5-0.7M annually?)

 

Who are investors -- Spring research

 

Conversion incentive proposal

Investors get an accelerated depreciation purchase an existing ownership unit, KEEP in rental housing stock for five years

Like 1980's but will Congress bite?

$1-$3B tax expenditure -- 

 

RECafe:  Important of reVRM / HSID for renters

 

50% of foreclosures in four states, representing 20% of US population

50% of underwater loans are in this four states

 

Homeownership:  went up 

 

Investment vs ownership

2nd home, or investment

8% to 16% nationally doubled

Share of investment, 2nd home was as 20-60% 

 

RESULT:

Housing bubble 

7 of 20 metro areas in CS housing stats

Other 13 cities only up 30% down 15%

 

Assessing 2nd home markets

Vacant seasonal

Vacant other

 

Went from 8% in 1978

to 16% in 2008

 

Who owns homes in cities like Phoenix

 

Don't know how investors behave when they are faced with foreclosure notice

Will they HOLD, or get out all at once

 

Uncertainty

 

1998 made interest on second homes tax deductible!

Why should 2nd home mortgages be tax deductible?

If you're credit is destroyed on your 2nd home, takes you out of the 2nd home mortgage but not negatively impact your primary residence

 

Last imbalance

HH formation always greater than growth in population

Except for pass decade

 

2020:  HH formation, likely to be LARGER than population growth

Pent up demand likely to cause 1.3-1.4 new households per year

ONLY constructing enough housing --- 500,000 housing units -- to house one in three of new households in the pipeline

At some point, will 

 

What's equilibrium?

Historic equilibrium:  build 280,000 more units than household, 80-100,000 demolitions per year, plus 2nd home purchases

 

Supply surged 2005-2006

Now not creating enough supply for future demand

 

Could be that a BIG stimulus will be generated by recovery of housing 

 

Most of current problem with the housing market is in CANFLAZ.  Rest of the country more like a typical strong recession:  1981-83, 1990.

 

WithOUT strategic defaults, a recovery in sales and prices about ready to start in 2012

 

With strategic defaults, housing prices experience a "double dip" dropping another 5-10% in 2012

 

Housing shortage looming

Pent up household formation will experience strong recovery when recession ends

With demolitions, 2nd homes, yearly total demand is 1.4M

Conversions can help balance rent-own flows, but new construction has to eventually triple

 

In short-term, very important to balance ownership to rental flow

 

As shelter, ownership has a vastly advantagous 

Lots of consumption reasons to own rather than invest in housing

 

If you want to own a home, much better to own now than 5 to 10 years ago

Best time to buy a house is at the bottom, not at the peak  - if people are rational, now is the best time

 

Are we seeing "around bottom"

 

Job growth in housing around Boston has been robust for past two years, Boston economy ahead of national economy.  Looks 1991-1992, 20% drop in prices, don't grow really fast, but were near the bottom.  Good places in suburbs and around the city beginning to rise

 

In long run, our 

 

Probably last year was the ideal time to buy a house in Boston

 

At today's prices, the cash cost of owning is not a lot different than renting

$200K house in FL, not a lot of houses that you can rent per year for $675-$750/mo for 1,500SF house in FL 

 

Rents in Boston: $2,000 for 1,000SF

$2,000 buys you a $500K house

More expensive to own in JP

House prices here have only dropped 20%

 

If long-term horizon, 2-3% per year appreciation, than still good decision to buy if mortgage more expensive than rental in Boston

 

Housing is a good investment if you combine the inputted rent as well as an investment

 

As a long-run strategy, don't want to encourage 2nd homes; but as a short-run fix to housing market, bringing international investors to four impacted states would create an effective fix

 

HOUSING BUBBLE: Very rough, LIVE wiki notes from annual #housing forecast from #MIT housing #economist http://realestatecafe.pbworks.com/w/page/50492485/2012%20Annual%20Housing%20Update #realestate

 

Secondary bubble:  Increase in construction 

 

Construction never causes a bubble, so not have a recovery in housing construction will help the market recover faster

 

Normal assumption is that rise in housing prices will result in rise in construction.  More likely that housing construction and housing prices will begin to recover by the end of this year.