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Housing Double Dip Represents ‘Patient’ Opportunity

Posted by Larry Doyle on June 1, 2011 9:30 AM |

While various and sundry soothsayers have been touting the relative merits of our housing market for the last few years, I did not have a constructive comment about housing until just six weeks ago when I wrote, Is It Getting Time To Buy a House?. Housing price data released yesterday confirmed that our nations’ housing market has, in fact, suffered a double dip.

Is my positive commentary on housing premature and akin to ‘catching a falling knife’? Why was I negative for so long? Why do I think the bottoming process will be prolonged? What do I see as a compelling reason why homeownership is becoming increasingly attractive? Let’s navigate.

1. Why was I negative for so long?

Uncle Sam’s numerous failed attempts to support the housing market (HAMP, allowing banks to inaccurately account for housing related securities and loans, et al) have done nothing more than forestall the continued decline which we are now experiencing. The market has never been allowed or compelled to ‘clear’ because the policies themselves have forestalled housing supply from coming onto the market.

If that had occurred the banks would have taken larger initial hits to capital requiring an even greater recapitalization of the system or a larger government bailout. What has Uncle Sam in the persons of Ben Bernanke and Tim Geithner chosen? Buy time, allow the banks to ‘cook their books’, put up a wave of smoke and mirrors, and pray, hope, and cross their fingers that divine powers from above may intervene to support housing. Markets do not work this way.

2. Why do I think the bottoming process will be prolonged?
The continued decline in home prices is a function of the significant and largely unknown size of the shadow housing inventory that has built up and is being held by the banks. Unless and until banks are truly willing to bite the bullet and move inventory, which I do not project happening anytime soon, housing will not recover in the near future. While this is troubling for the multitude of homeowners trapped ‘underwater’ by their current mortgage, this scenario represents a real opportunity for future generations of homeowners. Why?

3.What do I see as a compelling reason why homeownership is becoming increasingly attractive?

People need to live somewhere, correct? I think so. People can either rent and maintain flexibility or purchase a home and build equity in the process. While many who have been burned by the ‘perceived’ value of homeownership never want to entertain the idea of owning a home again, I would encourage people to understand and appreciate the benefits of homeownership along with the requirements.

People need to have the ability to service their mortgage debt. This ability is directly correlated to both job and income security. Additionally, people need to have the wherewithal for an initial down payment to qualify for mortgage financing in the first place. I would also comment that people need to evaluate the relative ‘liquidity’ or lack thereof of the home they may purchase. Can you foresee yourself living there for a protracted period? Can you sustain a hit to your capital if you were forced to sell in a hurried fashion? These factors must be weighed prior to purchasing a home. These factors require real patience and long term discipline. Dare I say virtues which America has abandoned all too often.

Given these hurdles, why might I think homeownership is becoming increasingly attractive? What is the cost of the alternative, that is renting? The Financial Times highlights the difference between owning and renting this morning in writing, Nothing Going Up But The Rent,

Chart

The wacky thing is, people should be tripping over themselves to become homeowners. For the first time since at least 1981, the median monthly rent in the US is now higher than the median monthly mortgage payment, Capital Economics points out. (LD’s highlight)In the UK, the interest rate on many mortgages is lower than inflation. Yet the opposite has occurred. US home prices in the first quarter fell 2.5 per cent compared with the previous quarter, almost as much as falls during the middle of the recession, and rental vacancy rates have fallen about 15 per cent since the start of the crisis. UK prices have stayed essentially flat.

Homebuyers have been scared away by a combination of high unemployment, economic uncertainty, and a lack of finance. In both the US and UK mortgage lending sits around half the pre-recession level. Indeed, two-thirds of non-homeowners in the UK believe they have no prospect of buying a home, according to a study sponsored by lender Halifax.

The winners are buy-to-let investors. The rental yield on a US house is creeping towards 5.5 per cent, the highest level in a generation. If home prices fall further, yields for new investors will increase accordingly. Sounds great, but the profits are reserved for those with plenty of cash reserves.

What is one to do? For those in a position to do so and for those thinking about purchasing a home, build cash, be patient, and stay on top of the market.
I view this opportunity as requiring real patience but being a long term generational type opportunity.

Navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

 

  • Floyd

    Housing is going down, down, down. I think in five years a house that sells for $200,000 today will be selling for around $30,000 or less. Same with the stock market. Can you envision a stock market that approaches zero? Well, that’s where it’s headed. Ditto bonds. I keep my money in cash in vaults.

  • Mike

    I am living with my parents until the housing market comes down further. Now, I am building up money for a nice down payment instead of slaving away to some landlord. My student loans will also be paid off by then too.

    I hope Floyd is right that 200k homes will be worth 30k.. perhaps a bit extreme but hey who knows. I think my friends are idiots who pay $1000+ per month just so they can say they live “in the city”. OVERRATED!!!

  • Siddan

    Even though you are no doubt very happy doing what you do presently, am curious to know if you would serve this president or any future president if asked? How about it.

    • LD

      Siddan,

      Surely you jest!! I have no interest in getting swallowed into the cesspool that encompasses so much of our political landscape. I have every interest in promoting the truth and helping people by promoting investor protection and investor education. Tell me how to most effectively get that done on a large scale and I am all ears.

      I do love this blog and and the voice it provides.

      Thanks for your support and keep spreading the ‘sense on cents’!!






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