Housing Smoke & Mirrors (17) – “Dude Where’s My Housing Recovery?”

Written by , KeySignals.com

In Housing Smoke and Mirrors “Re-tuning the HARP” and “Name That Tune” the dissonant tones, in relation to the condition of the housing market, became louder. This dissonance has become too loud to bear for the weaker hands in the market.

Source: John Burns Real Estate Consulting Analysis & Forecast, 167 Markets, (Pub: Jun-2013)
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John Burns Real Estate Consulting recently reported that investor activity is too high[i].

Source: Bloomberg Economic Calendar
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The Q2/2013 GDP data suggested a return to the old days of the Housing Bubble; when it was believed that the housing sector was driving the US Economy. House Price Inflation, thanks to QE and tight inventory, is now running at 11% per annum.

Source: Calculated Risk, Q2 GDP: More Weakness, Data below FOMC June Projections
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This inflation is being conveniently framed as real economic activity; just as it was in the years of the Bubble. Investor activity is driving the inflation that is presumed to be real economic growth. The real truth is that GDP remains stagnant, appearing to have grown from 1.1% in Q1/2013 to 1.7% in Q2/2013. When one factors in the downward revision of Q1 from 1.8% to 1.1%, there has been no growth at all.

Source: Bloomberg Economic Calendar
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The real inflation picture is also indicating that Deflation is the risk.

Source: Calculated Risk, Comment on House Prices: Real Prices, Prices-to-Rent Ratio, Cities
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Source: Calculated Risk, Comment on House Prices: Real Prices, Prices-to-Rent Ratio, Cities
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Nominal and Real House Prices are back at 2008 levels, signalling that there is significantly more room for this sector to appear to recover and grow. The new Housing Bubble is still in its infancy.

Source: Sober Look, Ycharts
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There are signals that the speculative interest in the housing market is starting to wane, despite the new Bubble being young. Homebuilder Shares have experienced significant selling interest, which commentators have identified as being triggered by the “Taper” talk rather than a genuine collapse of the nascent bubble[ii].

Source: The ISI Group
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This weakness is all the more interesting, given that the value of new home sales is still rising. Builders are managing supply in order to sustain rising prices, but shareholders are beginning to doubt the strength of this strategy. In Housing Smoke and Mirrors “Style Drift” the strategy of the Blackstone Group was seen drifting, away from property ownership, towards lending against rental property assets[iii]. This style drift has continued, with Blackstone Group now signalling its intentions to issue a covered bond against its rental property portfolio. Blackstone is hedging itself against a rise in interest rates that will reduce its profit margins; by effectively locking in its borrowing costs and maintaining the option on raising rents. Blackstone is not exiting the sector, so clearly it still believes in the early bubble thesis; it is however positioning for rising inflation and rising interest rates.

Source: Calculated Risk, HVS: Q2 2013 Homeownership and Vacancy Rates
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Supporting Blackstone’s positioning is the latest Q2/2013 Home Ownership Data; which suggests that Americans are still evolving into a nation of renters[iv].

Source: Calculated Risk, HVS: Q2 2013 Homeownership and Vacancy Rates
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The Rental Vacancy Rate is now breaking down to new levels not seen since the mid 1990’s.

Moving to the Existing Home sector, CoreLogic reported that the foreclosure rate began to pick up in June[v]. This was a 2.5% increase from the level in May. The decline in Household Formation has also been cited as a significant factor vitiating against the recovery[vi]. The Census Bureau reported that new household formation in 2013 is running at 500,000 per year compared to 1.4 million in 2012.

In Housing Smoke and Mirrors “It Looks Ominous”[vii] the Special Inspector General of TARP (SIGTARP) was observed to be taking a very dim view of the Federal Government’s alleged progress on reducing the footprint of the GSEs in the housing market. SIGTARP was also reported in Housing Smoke and Mirrors “Name That Tune” as complaining that HAMP was broken; and leading to an increase in re-defaults[viii]. It is becoming clear that SIGTARP is protecting the Taxpayer; and is disdainful of the use to which the Federal Government has put taxpayer funds in the housing market. This disdain has continued in SIGTARP’s latest commentary on the attempts by the FHFA to introduce private capital by the raising of Guarantee Fees (G-Fees)[ix]. The FHFA is raising G-Fees, allegedly to reduce the pricing edge that the GSEs enjoy over their private sector competitors. The issue is far more pervasive than the FHFA opines however. The GSEs have used pricing power, through lower G-Fees, to subsidize their more risky lending. They have thus built up a riskier lending profile which is based on subsidy rather than correct pricing of lending risk. The raising of G-Fees, will thus allow private capital to compete in the less risky sector of the market; but will still leave the GSEs with riskier legacy portfolios which have been mispriced. It is unlikely that private capital will ever move into these riskier sectors, until the G-Fees are so high that they become prohibitive to borrowers. The GSE footprint will therefore not only remain in housing, but it will remain in the riskiest sector of housing.

The concept of Eminent Domain was introduced in Housing Smoke and Mirrors “Sell Your House in May and Go Away”[x]. The New York Fed in its paper entitled “Paying Paul and Robbing No One: An Eminent Domain Solution for Underwater Mortgage Debt”[xi] framed the issue as a legal solution to the derelict property problem. This solution is now starting to be applied by some local authorities, much the annoyance of the Mortgage Bankers Association[xii].

Going into Q3, we now have a situation in which the Federal programmes, namely HARP and HAMP are broken; and local authorities are taking the law into their own hands to solve the housing problem. A confrontation between Federal and Local Government is being set up; and the Federal Reserve (or at least the New York Fed) can be seen as being instrumental in the process of legal confrontation.



  1. Investors Now A Concern, John Burns Real Estate Consulting, by John Burns, July 26, 2013
  2. Homebuilder Shares Point to Lost Momentum in Residential Construction
  3. Housing Smoke and Mirrors (14) – “Style Drift”
  4. HVS: Q2 2013 Homeownership and Vacancy Rates
  5. Foreclosures Increase Again in June – CoreLogic
  6. Weak Household Formation Hampers Housing
  7. Housing Smoke and Mirrors (8) – “It Looks Ominous”
  8. Report: 26% of HAMP Borrowers Re-defaulted, Rate Continues to Worsen
  9. Smaller G-Fees for Riskier Loans and Bigger Lenders
  10. Housing Smoke and Mirrors (11) – “Sell Your House in May and Go Away”
  11. Paying Paul and Robbing No One: An Eminent Domain Solution for Underwater Mortgage Debt
  12. Richmond Escalates Eminent Domain Plan with Loan Offers


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