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Are Housing Markets Still Clearing Out the Trash of the Last Bust?

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Tags Booms and BustsFinancial Markets

01/20/2020

The SPDR S&P Homebuilders ETF closed the other day at 45.65, poking higher than February 2006’s 44.70. The conventional wisdom is:

“Teamed with a resilient job market, low mortgage rates have helped boost home buyer demand,” Matthew Speakman, an economist at real estate data provider Zillow, told CNBC. “An extreme shortage of for-sale listings, particularly at lower price points, remains a concern and may ultimately result in a sharper re-acceleration in home prices than expected.”

So everything is okeydokey in housing-land. Well, here in the Sunbelt, the housing price rebound looks to have topped, and it could be rolling over like it did in, say, 2006. WolfeStreet.com gives us the pictures.

In Phoenix:

House prices in the Phoenix metro rose 0.5% in October from September and were up 5.8% from October last year, the fastest year-over-year growth among the metros. And it's closing in on the craziness of 2006. House prices have nearly doubled in the eight years since September 2011:

phoe
In Las Vegas:
The Case-Shiller index for the Las Vegas metro ticked down in October from September and was roughly flat for the past four months. This whittled down the year-over-year gain to 2.3%, the smallest such gain since August 2012, when prices began to emerge from the collapse. House prices have skyrocketed 118% since March 2012:
 
vegas
In San Diego:
House prices in the San Diego metro edged down 0.2% in October from September and were essentially flat for the past five months. They’re up 2.9% year-over-year:
diego

Housing writer Keith Jurow claims 25 million mortgages have been modified and millions of homeowners haven’t made a payment in years. He told Real Vision,

I've seen reports with a show that some of these people haven't paid five, six, seven, eight years and nothing is done with them. You may say, well, haven't they moved out and the places are empty? No, a lot of them are still living in these properties and I just pictured them laughing. Wouldn't you?

Jurow says millions took cash-out refis (refinances) and that despite the rebound in home prices these folks still don’t have any equity. To refresh our memories, Jurow says,

2006 was just insane. 320 billion dollars taken out in cash just in that year, and boy, the debt helped the economy continue, even though things were showing signs of real problems.

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Many mortgages have not just been modified once, but twice, and sometimes more. A decade after the crash, loan servicers are holding higher-end mortgages rather than foreclosing. Thus, there is plenty of shadow inventory lurking, waiting for the next crash.

french

To that point, “If you take 25 million mortgages, and you prevent them from having been foreclosed, well, that's going to affect the market and it did start to turn around prices around 2012,” Jurow said. “Some markets didn't turn around until 2013, but that did turn it around and gee, a lot of people thought the worst is over.”

french
Source: Fitch Ratings, using loan performance securities data.

The stock market has lost touch with earnings and reality, Homebuilder stocks included. This mass forbearance stands in the way of the required market correction. Murray Rothbard explained:

The “depression” is actually the process by which the economy adjusts to the wastes and errors of the boom, and reestablishes efficient service of consumer desires. The adjustment process consists in rapid liquidation of the wasteful investments….[T]he depression is the process by which the economy returns to the efficient service of consumers. In short, and this is a highly important point to grasp, the depression is the “recovery” process, and the end of the depression heralds the return to normal, and to optimum efficiency. The depression, then, far from being an evil scourge, is the necessary and beneficial return of the economy to normal after the distortions imposed by the boom. The boom, then, requires a “bust.”

Engineering away a full clearing of the first housing boom will ultimately make housing crash 2.0 just that much worse.

Author:

Doug French

Douglas French is former president of the Mises Institute, author of Early Speculative Bubbles & Increases in the Money Supply, and author of Walk Away: The Rise and Fall of the Home-Ownership Myth. He received his master's degree in economics from UNLV, studying under both Professor Murray Rothbard and Professor Hans-Hermann Hoppe.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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