Eurozone credit default swap spreads hit a new high this morning.
Last week's expiration of the California first-time homebuyer tax credit (Assembly Bill 183), which was regardless of income and worth up to 5% of the home's price or $10,000 (whichever was less), will likely weigh on home turnover and prices in the months ahead.
This is important, and few housing observers have mentioned the potentially adverse effect on the national housing price figures, which have been positively skewed by the California home tax credit.
For example, Case Shiller reported that home prices in San Francisco, San Diego and Los Angeles rose by about 3% in October, though the total country (20-city composite) reported a 0.8% drop in prices.
National home activity/turnover volume was also skewed because of the California tax credit. For example, California single-family new-home sales rose by nearly 40% in November, as nationwide new-home sales increased by only 5%. (The Northeast dropped by 27%!) During the same period, existing sales in the West rose by 13%, even though the national activity was flat.
Ergo, a combination of the judicial uncertainty, the expiration of the California tax credit, lower available credit and higher mortgage rates suggest that national home activity and home prices are headed for a fall in the months ahead.
We should all be mindful, however, that, with few exceptions, many (if not most) observers -- and that includes Ben Bernanke -- missed the 2008-2009 downturn, despite the clear and accumulating evidence of economic uncertainty and growing credit risks (and abuses). The analysis of multi-decade charts and economic series convinced most (along with other conclusions) that home prices were incapable of ever dropping, that derivatives and no-/low-document mortgage loans were safe, that there was no level of leverage (institutional and individual) too high and that rating agencies were responsible in their analysis. Importantly, they also failed to see the signposts of an imminent deterioration in business and consumer confidence that was to result in the Great Decession and credit crisis of the last decade. Many of those who are now expressing more extreme levels of optimism were in the above camp and experienced significant pain in the last investment cycle, while The Edge profited in those years.
Indeed, as I recently wrote, many investors seem to be similar to victims of Plato's allegory of the cave, a parable about the difficulty of people who exist in a world shaped by false perceptions to contemplate truths that contradict their beliefs. This is why so many investors were blindsided by the last downturn and, from my perch, continue to wear rose-colored glasses.
-- Doug Kass, "Where I Stand" (The Edge | Dec. 17, 2010)
I truly continue to marvel at the confidence in the forecasts of strategists and economists given, their recent inability to come anywhere close to what actually transpired in the economy, stock and credit markets during 2007-2009.
Coincident with higher stock prices, the cheerleaders (within Wall Street and the Obama administration) are in force (e.g., Fed member Yellen's assertion that quantitative easing will produce 3 million jobs).
In the realm of realists, Pimco's El-Erian calls the current cycle "The New Normal," and Carmen Reinhart and Kenneth Rogoff write that This Time It Is Different.
Regardless of the term used (and though P/E multiples are approaching their historic mean), this is not your father's economic cycle.
From my perch, tail risk and an abnormal amount of hard-to-measure moving parts characterize the current backdrop, leading to the possibility of a wider variety of economic outcomes as compared to prior cycles. You wouldn't detect this, however, from the conviction and lack of caveats within the bullish cabal (even despite Friday's weak jobs report).
Case in point: housing.
Under normal conditions, housing would be poised for a dramatic turn to the upside.
* Until recently, mortgage rates were at generational lows.
* New-home production has been on the descent for three years, and current levels of production are at historically low levels.
* With mortgage rates low and home prices 30% below 2006-2007 highs, affordability is at a multi-decade high, and the benefit of home ownership vs. renting is at 15-year highs.
* Continued migration into the U.S., steady population growth and normal household formations should provide meaningful pent-up demand against the aforementioned underproduction of new homes.
Unfortunately, there is nothing normal about the current (and past) housing cycle.
* Abusive mortgage lending (low-document and no-document loans) and death-at-birth mortgages (pay option ARMS, interest-only and ridiculously ballooning mortgages) coupled with the Great Decession provided a toxic cocktail and produced an unprecedented drop in home prices.
* Owners and prospective buyers were in shock, and a large shadow inventory of foreclosed and (very) delinquent began to emerge.
* As home prices began to decline, the speculation in housing subsided, and, as home prices slipped more precipitously, the speculators (and "daytraders of homes") were eliminated from the marketplace.
* Houses were dumped into the market, and the shadow inventory grew geometrically.
* In the end, the shock effect of a Black Swan-like 30% drop in home prices has soured traditional buyers away from home ownership in favor of renting (a market that is now thriving/booming).
* The tail risk of housing's last cycle emerged as abusive lending practices (and "shortcuts") surfaced, robo-signing mortgage-gate disrupted the housing market, and available credit was steadily withdrawn, among the increased confusion, in the mortgage market.
Contrary to CNBC's revolving door of 'experts' who relentlessly downplayed the impact from yesterday's verdict through shoot-from-the-hip, on-air, instant analysis, it is a huge deal. To this day, I don't understand what that channel has to gain by hurting investors in this manner. This was exactly what they did during the subprime crisis in 2007 and ended up missing the whole thing -- getting serious about big events only after they occurred -- because they spent all their broadcasting time every day trying to downplay and bullishly rationalize what was really happening. Sometimes the glass just ain't half full.
-- Mark Hanson
The latest sword placed in the heart of the housing market occurred on Friday with the first high court ruling against banks and in favor of homeowners in Massachusetts, which ruled that there was no legal right to foreclose because assignment was not done properly -- again, questioning the integrity of the home title chain, the legal right to have foreclosed on 3 million homes since 2007 and the right to foreclose on another 8 million homes that are currently in the distressed/foreclosed pipeline.
In addition to this verdict's immediate impact, it brings about death by a thousand cuts ... the litigation phase of the foreclosure crisis is going to get out of control. Homeowners, originators, underwriters, trustees, servicers, title companies, MI firms and everybody else involved in the origination, funding, securitization, servicing and insuring spaces will be suing everybody else. Multiple, big cases will come from state AG's, and class action suits will be announced daily.
-- Mark Hanson
Massive legal confusion and uncertainty now surrounds the housing market, and with the recent rise in interest (and mortgage) rates, how anyone can make an optimistic housing forecast (or any forecast at all!) is beyond me.
For housing, it's (very) different this time.