Housing bears are roaring about the volume of mortgage applications. The rate of purchase applications is a leading indicator of demand for housing. Demand for mortgages are down, demand for housing must be down, and that’s bad. Right?

Apparently not. Demand for mortgages is down. But the data keep telling us that demand for housing is not subsiding (as of the first week of March, 2014.) Specifically:

  • All cash deals are high and climbing. 47%(!) of home purchases were all cash in December up from 27% a year ago. Here’s the important point on this phenomenon: LESS leverage is HEALTHY for a market. This is a good thing, from a price stability standpoint. Bubbles are financed with too much leverage, not too little.
  • Even if mortgage demand is weak, demand for housing is still very high. Housing demand, as measured by some of our proprietary metrics, is a only little softer than last year at this time. But last year’s crazy demand levels resulted in a huge 15% price rally. Based on real-time market measurements, Altos Research forecasts home prices to climb 10-12% in 2014. Housing demand has not subsided.
  • Interestingly, contrary to most casual observers’ opinions, the big institutions are not driving the cash purchases. Even with the tens-of-billions of dollars in investment firms like Blackstone, Colony, and Waypoint, that financial power amounts to around just 5% of the overall home purchase market. Buyers are cash-rich consumers and small-time investors buying a second or third property.
  • Interest rates are actually falling. What?! Yes, after the spike a year ago, rates have drifted lower again. This implies that the bull market for US real estate has room to run when leverage increases again.
US 30-year mortgage rates
30-year fixed mortgage rates, from samples across the Altos 20-city composite. Mortgage Interest rates peaked in July 2013 and have been bumping lower since.

 

So what to make of the low rate of mortgages in US Housing? I attribute it three factors:

  1. Cash-poor consumers are afraid. They have been beaten into assuming they can’t get a loan. And with competition for the low inventory so intense, they’re not even trying.
  2. I suspect this cash-heavy real estate investment phenomenon is a symptom of high uncertainty and mistrust in the global financial system. Americans are afraid of the country’s financial condition and an un-leveraged, income-producing asset is a wonderful thing to have in times of trouble.
  3. It also seems to be tied with the income growth disparity in this country. First time homebuyers may be losing out to small, cash-rich, investors.

 

Low mortgage application volumes may be indeed be bearish for the long term outlook for the housing market. It may signal fear of the global financial system. But for the time being, housing demand is strong and we’re looking at another bull year for home prices.

 

If you pay attention to your Altos data, you’ll know that the housing market bottoms between the second and third week of January every year, like clockwork. You’ll also know that one of my favorite leading indicators of home prices for the year is the median price of the New Listings. Each week we track all the properties that got listed for sale. The prices of those properties are a marvelous “wisdom of the crowds” example. Realtors, in aggregate, know exactly where to price homes.

This year we have a few notable points in the data.

  1. The housing recovery is marching into its FOURTH year after bottoming January of 2011.
  2. We’re starting the year 12% above last year at this time. In past years, this early indicator carries around the same level through the whole year.
  3. The first weekly uptick is strong, seasonal, and expected. No sign yet of higher mortgage rates or new qualification requirements hurting home prices.
Home prices January 2014
Median Price of newly listed single family homes across the Altos 20- City national composite. Weekly data (red) and 90-day rolling average (green). Click for full size image.

 

New Listings are the first of the pricing indicator dominoes to fall. Look for the headlines to catch on to spring strength in April or May.

Here’s a surprise for you, the National Association of Realtors doesn’t know how many homes are for sale. Yesterday’s existing home sales announcement included NAR’s estimate that there are 2.2 million homes for sale. Our data shows that it’s overstated by a third.

There are actually approximately 1.7 million homes on the market (active inventory) right now.

Existing Home Inventory Altos Research tracks homes for sale in the 900 most populous counties (colored blue above) around the US.

 

NAR doesn’t disclose precisely the methodology they use, but their data is sourced from participating MLS organizations. NAR’s estimates are influenced by the reporting structure in those member associations. Incidentally, Realtor.com claims to have 4.7 million homes for sale, but that’s clearly a meaningless marketing number (more is better, right?) It includes duplicates, empty land, and other flotsam. Disregard that number.

The truth is that all these numbers are estimates. The best way to know for sure is to count them all.

When we count our data, and adjust for those counties, the total is closer to 1.7 million. (Altos Research covers 90 million residential homes in all 50 states. It’s not *everything* but the rest is very rural, so it’s really useful, see map.)

Why are they over estimating? No, it’s not because the scoundrels are trying to trick you. My guess is that some of these estimates include properties that already have offers. The number properties in “pending” state can be as high as 100% of the active inventory in many markets this year. As listings get offers quickly, then take a month or more before the transaction closes, these properties sit in pending state. The hottest markets this is most true, for example Las Vegas and San Diego have had screaming demand and price appreciation this year. They have huge stocks of properties “pending”. Different regions give different labels to the condition, but the result is the same. The sale hasn’t “closed” so the listing is technically active. But the property really isn’t for sale any more.  Is that active inventory? Our take is that these are not active. If you’re shopping for a home in that market, your Realtor isn’t going to show you a house that is already in some stage of contract with another buyer.

The lesson, as always, is read the headlines with a critical eye. Also, give us a buzz if you want the full scoop on the active housing inventory every week.

 

 

Housing prices as of June 2013
Median Days on Market for Single Family Homes across the US. Note peak of activity at the end of June. By July, DOM starts climbing again. Homes moving super fast right now.

 Days on Market cycles since 2009

The last week of June is the seasonal peak of the US Real Estate market. After June 30, both supply and demand start declining through the end of the year.  The time to sell a home (as measured in Days on Market DOM) starts climbing. Prices decline alongside, until the January 7 trough and the seasonal reset for 2014.

This phenomenon isn’t always clear, since most of the headlines report transaction data from several months ago (tomorrow’s Case Shiller announcement will be data from February, March, and April. And, FWIW, it’ll show the explosive price growth we experienced in the first quarter.)

But the seasonal peak is as clear as the air atop a Colorado peak, if you look at the right data.

Right now we’re at the hottest moment of the hottest market we’ve had in years. Homes are selling faster than they have in years. This is true across the country and across price points. In the coming months, the headlines will be strong for prices. It’ll sound bullish. The housing bears will focus on stats like Days on Market, which will climb for the next six months. Keep an eye on how fast DOM climbs and where our peak looks before January. That’ll give you an idea of how sustainable this recovery has remained into 2014.

Days On Market is one of the powerful statistics in the Altos Lead Indicators suite, if you’re interested in details.

 

 

May’s Interest Rate Spike in Perspective

June 4, 2013

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June 2013 Home Prices Up Another 2%, Rents Continue Climbing

June 3, 2013

US real estate prices rose another 2% in May to begin June 2013 up 10% over last year at this time, and up 24% since the botton of the market March 18, 2011. Home prices will peak for the year at the end of June and begin a normal, seasonal stabilization and decline for the […]

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How Much Risk are Rising Mortgage Rates to the Housing Recovery

May 29, 2013

A recovery created purely by government largess is no recovery at all. That’s the strongest argument that our universally hot housing market is ephemeral. It’s true that the hot housing market is due in large part to federal government policy aimed at stimulating and rewarding housing demand. It’s generally a far better deal to own […]

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Rent or Buy? Trends in Price to Rent Ratios Around the Country

April 18, 2013

Somewhere just after the housing bubble burst in 2008 or so, I started hearing institutional investor types considering how they could use their cash to accumulate distressed real estate assets. Funds emerged Waypoint, Colony, BlackRock, heck even John Paulson – he of the Greatest Trade Ever – flipped from shorting sub-prime to going long real […]

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