Everybody constantly tries to forecast and justify this year’s house price gains — just like they did during stimulus-driven 2010 when the market saw gains — using all sort of fancy talk and math.
To me it’s much more simple and something we have had in our models since Sept 2011.
Bottom line, 30-year mortgage rates dropped 150bps — from 5% to 3.5% — almost overnight last year off of Fed Twist Ops. This means that a typical buyer can borrow 15% to 20% more money than last year — pay 15% to 20% more for the same house with a flat income — with the same monthly payment, which of course is what it’s all about to people financing anything. And 72% of all houses are purchased with mortgages. So, house prices are up only about 7% YoY. This means that normalized for the increased leverage from the 150bps drop in rates YoY, “real” house prices are still flat to slightly lower YoY. It means the artificial lack of distressed supply and the stimulus-driven increase in demand by first-timers and investors this year really isn’t carrying much weight Macro “housing” will get very interesting if rates continue to rise. It will also get interesting over the next couple of months if existing sales continue to decline — print 2012 lows in peak season summer — and new home sales start to disappoint.
From where I sit and with what I can see right now high-frequency housing data over the next 6 weeks will cause housing bulls much consternation. After that I think volatility, uncertainty and fear will rule the housing roost. Some will call it a “triple-dip” in fact. Remember, all year long housing data has been comping YoY against 2011, which was a stimulus hangover year (from the year+ long home buyer tax credit that jammed sales higher sharply into July 2010). To get a more accurate picture of housing analysts should have been comparing 2012 with 2010, as markets then and now were driven by heavy stimulus. Anyway, as we get into Q3 and beyond comps get really tough and the data become a headwind…2013 will be the next hangover year mimicking activity seen in 2011.