The market was ecstatic on Wednesday in anticipation of Friday’s big job’s report. But while the market rallied 2.5%+ there was a potentially far more important story than the census driven job’s report: the real estate data. While the data came in “better than expected”, primarily due to the end of the home buyers tax credit, there was an underlying red flag. As the end of Spring buying season coincided with the tax credit the buyers have literally become non-existent in the housing market. This was clear in the most recent mortgage applications data also released on Wednesday. Diana Olick at CNBC has done a fantastic job covering the housing market. She had the details yesterday:
“Mortgage applications to purchase a home began to sink. Now, four weeks later, mortgage purchase applications are down nearly 40 percent from a month ago to their lowest level since April of 1997. Yes, you can argue that a larger-than normal share of buyers today are all cash, but those are largely investors.
That means real organic buyers are exiting in droves.”
And she isn’t the only one noting the red flag. In Thursday’s missive David Rosenberg also pointed to the plummeting mortgage applications:
The good news at least is that U.S. mortgage applications for refinancing purposes rose 2.4% during the May 28th week "” the fourth increase in a row and while hardly a major boom that should cause any forecast shift and it does add a bit of coinage in household pocketbooks. But the big problem is with housing demand given that the homebuyer tax credits are behind us "” mortgage applications for new purchases fell 4.1% and down for four weeks running. This is where the rubber meets the road for new home sales "” a fresh 13-year low.
The year-on-year trend in purchases is -34% and that is compound off a late-May 2009 trend of -20%. How bad is that? And this is with mortgage rates at 4.83%? No doubt there are scars left over from the misery of being a homebuyer following the detonation of the last bubble and attitudes towards debt and housing have been altered semi-permanently.”
Is the housing market already double dipping? That certainly appears to be the case – and exactly on cue as the government steps aside. While the mortgage applications are no guarantee of a renewed trend the warning flags are popping up all over the place. In addition to the negative seasonal trends ahead of us, we are also seeing lumber prices off 33% in the last month, continuing high historical inventories, a slew of mortgage resets in the coming years, and the biggie – the end of government intervention.
Earlier this year I detailed my outlook on housing and why I believe the real estate market is on the precipice of a double dip. I said we were likely in for further declines of 7-15% starting with the end of government stimulus:
“House prices decline 7%-15%. This is the most probable outcome in my opinion. In this scenario the private sector remains weak, labor markets rebound slowly, wage growth remains tepid, the economy grows below trend, government stimulus stops bolstering markets in 2011/2012, the economy perhaps double dips or re-recessions in 2012, and house prices ultimately succumb to the laws of supply and demand and decline another 15% or so.”
Investors are keenly focused on the potential time bomb in Europe, but housing is the domino that set the whole collapse in motion in 2007. The housing market was largely stabilized by government intervention. The consumer is likely to move in tandem with their largest asset. If we experience the 7-15% price decline over the coming 24 months that I expect we should see a retrenchment in consumer balance sheets and further tightening of the credit markets.
I have maintained that the housing stimulus was an enormous waste of money and nothing more than price fixing that would temporarily stabilize the markets. The government is about to find out why bailing out the losers ultimately works to the detriment of markets. Let’s just hope the downturn isn’t more severe than I suspect. And let’s all pray it doesn’t coincide with increasing contagion across Europe…..
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The biggest problem with a double dip is that the government is not going to sit idly by. Get ready for another extension of the housing credit. And then another stimulus program, and then QE2 and QE3 by the Fed. And with each successive program, expect the effect to be weaker and weaker.
I’m afraid this will not end well.
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boatman Reply:June 4th, 2010 at 6:52 AM
if i wasn’t retired mostly and found TPC,…. or if i was working in the private sector,…….i would be past afraid…….
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Iluvatar Reply:June 4th, 2010 at 10:10 AM
Way past…
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TPC Reply:June 4th, 2010 at 11:42 AM
I’m not trying to scare you guys. Just passing on what I see as reality and fact….
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boatman Reply:June 4th, 2010 at 12:48 PM
oooh, i don’t read these pages for paranoia,and i was even more pessimistic before i found this place.there were some “ifs” in my comment that was agreed to by lluvatar
if anyone gonna get more pessimistic it might be you listening to me.
keep em’ comin’ cullen,we are big boys,…….. i blow by outa breath 30-yr-olds everyday.
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TPC Reply:June 4th, 2010 at 12:55 PM
The dominoes are certainly lining up….
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Steve NewHampshire Reply:June 4th, 2010 at 7:34 AM
Greater Fool is on top of this one.
You have to think the problem through as if you were a Fed official. If they let residential and commercial real estate go down, a terrible cascading wave of poop will reveal all the major banks to be insolvent and then all the Politicians and Financial Elite will be pushed aside and lose their influence.
No chance of that happening so expect everything Fool said. Housing/CRE will “stabilize”, but you’ll be paying $120 to fill up your car and dinner at the Olive Garden will cost $200.
Very sad state of affairs. I think the Feds and elite will still fail, but there’s no end to the lengths they’ll go to print money and thwart deflation.
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Iluvatar Reply:June 4th, 2010 at 10:18 AM
This is why I like Mosler’s approach. You establish a payroll tax holiday.
Heck, how about a moratorium on all Federal taxation for a year or two?
How about other schemes that puts money back into the hands of the private sector? I am sure we could scheme up some really neato tricks! Like, hummmm, how about a $50K credit to businesses who hire a person. Crazy stuff like that…
So folks who have some chance of deleveraging can do so at an accelerated rate. Or, walk away and rent. Housing prices are still way too high in many areas (but in Orlando they seem unreasonably low??). They have been propped up and that needs to end – the sooner the better.
We need to shake out the system and attain a stable equilibrium from which we then can depart. My 2 cents.
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not in the bay area. house price is still insanely high that single 6-figure income family still has hard time to buy a reasonable house.
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5 yr. old 4/3 homes outside warm quaint tropical ft. myers, FLORIDA, begging for $50,000……..thousands of them…..you should see the colors of the plants you can grow there……saw a 2/1 for $19,000………
my buddy just bought a 8 yr. old foreclosure 3/2 in porpoise point,st augustine,fl, you can see th water on THREE sides from the deck upstairs, he’s only 1 house off the intracoastal….for 208,000 the bank had 800,000 in it……
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