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The good part about America is that we do have a young workforce coming on-line soon and we have 2 solid decades plus of working force that will get better wage inflation that what we saw in this cycle... this is more a 2020-2024 story line

Year 7 of the cycle... 2-4 years left before the next recession .. so the next recovery cycle will look better as prime working age workforce is now growing

Strategist says

There is, however, a strong correlation between income and house prices.

Has not recovered to pre cycle recessions highs (variables in these equation)

New home prices

Nominal way over the pre bubble peak... adjusted to inflation we just past it last month

Existing home prices

This is what happens when you have 30% plus cash buyers in an economic cycle, 20% above historical norms and over 50% of all homes being bought by the reach.

I don't like to use the term bubble for home prices in this cycle, just major disconnection from main street America and this is why the demand curve has been the worst we have ever seen from main street but the strongest demand curve from wall street, rich, Foreign buyers, hedge funds... this even with the lowest rate curve on 10's since 1941-1945

In reality and in lending terms the size of the debt (PITI) inflation model... this is the missing algorithm PITI +DTI +LTI = (HC)

Inventory very key on home prices because the asset itself has capacity to grow in asset value ... like all debt instruments the subsidization factor for housing has been very helpful for growth in nominal price values as well.

So there are legs to grow as long as inventory stays below 6 months and there is a lack of distress sales in the market, both are here to stay this year and even next year as well

Call it Crazy says

The charts above dispute that....

No they don't. I don't know how much more simple I can make this for you.

Now, notice what housing prices did during high the inflation times of the mid/late seventies through 1982. Housing went up. A lot. Then it actually leveled off as interest rates were falling after 1982 before picking up again. Tell me how that is a correlation. Interest rates low--sometimes prices rise, sometimes they fall. Interest rates high, housing prices rise. Where exactly is the correlation there, again??

Strategist says

Here for you buddy starts at 2:21

TOL company was my point but tried to get the builders index there for you

http://video.cnbc.com/gallery/?video=3000388493

Logan Mohtashami says

Strategist says

Here for you buddy starts at 2:21

TOL company was my point but tried to get the builders index there for you

http://video.cnbc.com/gallery/?video=3000388493

Hey, that was pretty cool. Thanks.
I liked that guys answers. The 10 year yield shoots up, but the homebuilders go sideways. :) It's as if those ITB and XHB stocks are just waiting to get the expected higher interest rates out of the way before they too start moving up. Was stimulating. :)

Strategist says

Hey, that was pretty cool. Thanks

Lets say I was paid pusher for builders... the best thesis I would use is this

Adjusting to population growth sales are so historically low that the builders aren't pricing in the next waive of the housing buying cycle come 2020-2024 time frame. TOL brothers 2.5 soft trend is due to a lack of dual income buyers in the system

That's the best I can do... shifting the thesis from housing is nirvana to the normal trade cycle which makes the builders a good trading channel story until the front end demand curve shows up

Key with builders in all cycles, got to get in early... late recession cycle trail end demand curve will start to swing positive.

Here in the U.S. is March of 2009 when the data come through positive and then the jobs picked up positive in early 2010

Logan Mohtashami says

Key with builders in all cycles, got to get in early... late recession cycle trail end demand curve will start to swing positive.

Here in the U.S. is March of 2009 when the data come through positive and then the jobs picked up positive in early 2010

Home building cannot get any lower. There is only one direction for it to go, and that is up. That makes home builders and their corresponding ETF's the best and the safest investment ever.

Strategist says

That makes home builders and their corresponding ETF's the best and the safest investment ever.

Strategist says

There is only one direction for it to go, and that is up.

Did you see those permits number today... Holy rental cycle batman... wow

Logan Mohtashami says

I love this graph. A picture is worth a thousand words, but this graph is worth a thousand pictures.
Look how high housing starts went in 1972. Even the recession that followed due to the first oil crisis did not kill housing starts as it did in 2009.
Even during the 17.5% mortgage rates of 1981 housing starts were better. We need more homes. There aren't enough caves for everyone.
Gentlemen, we are about to embark on a massive building boom.

Call it Crazy says

Strategist says

Even during the 17.5% mortgage rates of 1981 housing starts were better. We need more homes.

No, we need more people who can afford and are able to BUY those homes...

People could afford 17.5% mortgage rates, but not 4%?
If they can't afford to buy, they will rent from a landlord who can afford to buy. Either way, that home MUST be built.

Strategist says

People could afford 17.5% mortgage rates, but not 4%?

Forget the nominal rate as the variable factor model, that has led to nothing but disaster sale estimates and the biggest misses on sales estimates we have seen in long time

PITI + DTI +LTI = (HC)

There is no

limf (x) =sky
x-a

Model

debt size grows the capacity to handle that gets challenged

Causation
Correlation
Representation

3 (X)

1.

2

Low rates, #ZIRP tax credit, 3% down mortgages on and on ... starts

Finally number 3

Horrid net demand from new homes which are tilted to the wealthy buyer

Even with an extreme high cash buyer profile and lowest rate curve post WWII

Housing is a process

The net demand curve looks a lot better but in years 2020-2024

Dual income college educated Americans having kids

That's a powerful economic force

It's year 7 now, economic cycles have a 7-10 year time frame .... so even if this becomes the longest expansion ever 11 years, that means you got 3 years left
before the profit margin cycle starts to curve the other way

This is why it's been a rental recovery and not a housing owning one

The purity of numbers is that they can't lie, they're as truthful to the equation as can be

Call it Crazy says

chart of the volume of Existing home sales in the early 1980's?

https://research.stlouisfed.org/fred2/graph/?id=EXSFHSUSM495S,

Goes from 1989

Call it Crazy says

I saw that one, but I haven't been able to find a volume chart from earlier then that.

That's it for EHS, purchase apps go back to 1989 this is the best trend level I can give you

Logan Mohtashami says

Call it Crazy says

I saw that one, but I haven't been able to find a volume chart from earlier then that.

That's it for EHS, purchase apps go back to 1989 this is the best trend level I can give you

http://www.tradingeconomics.com/united-states/existing-home-sales

Strategist says

http://www.tradingeconomics.com/united-states/existing-home-sales

All the way back to 1968.

Yes but on my charts I only have to 1989 that is Fred graphs Most charts really start from early 1990 that is why it's hard to find them on the net... All show the same tend line big deviation starting from 1996-2007 ..., then demographics and reality struck right with the Great Recession... It's why I always use 2020--2024 time frame for better demand curve for housing when adjusting to population .... This was always the big opps from economist because they use and outdated Economical model to forecast sales and starts .... Hopefully they have learned from this

Even some of my outrageous housing nirvana friends said holy $&/: on the permit numbers today

A better chart is to use sales adjusting to population ... Because it shows how each cycle since 1981 has had 2 percent lower rate curve to boost housing and in real terms that didn't happen in this cycle as the mortgage demand curve has been dreadful for 7 years ... But in terms of home prices rising ... The cycle still has legs because inventory is low, distress sales are low and there is no job loss recession in site

Logan Mohtashami says

Yes but on my charts I only have to 1989 that is Fred graphs Most charts really start from early 1990 that is why it's hard to find them on the net... All show the same tend line big deviation starting from 1996-2007 ..., then demographics and reality struck right with the Great Recession... It's why I always use 2020--2024 time frame for better demand curve for housing when adjusting to population .... This was always the big opps from economist because they use and outdated Economical model to forecast sales and starts .... Hopefully they have learned from this

Just keep it simple. If home building is too low year after year, you know it's only a matter of time before they start building more than normal just to catch up. If you are seeing demographics showing increased demand between 2020 to 2024, we can safely assume a big jump in home building in the next few years, followed by a sustained demand all the way till 2024.
There could be a slowdown sometime before 2024, but the overall trend will clearly be up.

Census is known to be off by 17 percent on sales and starts that's why trail end demand is a better metric ... Talking about 3 - 6 month average

That depends on when the recession starts and stops .... I totally expect the next recovery cycle to look better ... But it's not just cycle .... Once the builders bud starter gone crop you know things are better... Trust me they have people like me that run models in this ... They are catering to their demand curve because they need to make money

Logan Mohtashami says

They are catering to their demand curve because they need to make money

Which they should. No point making anything no one wants to buy. When the demand for entry level homes start expanding, builders that cater to that market will outperform the rest.

Call it Crazy says

Another good example for the crowd that says "rates don't matter"... Look at the volume of sales when rates went up to the 17% range in the early 80's. The volume was cut in half, and when rates went back down, the volume returned...

If the discussion was about the correlation between sales volume and mortgage rate, then you might have a point. But, as we're talking about price, those charts are pretty close to irrelevant.

Should I take this as confirmation that you agree that interest rates have no historical correlation with house prices?

Logan Mohtashami says

A better chart is to use sales adjusting to population ... Because it shows how each cycle since 1981 has had 2 percent lower rate curve to boost housing and in real terms that didn't happen in this cycle as the mortgage demand curve has been dreadful for 7 years ... But in terms of home prices rising ... The cycle still has legs because inventory is low, distress sales are low and there is no job loss recession in site

Are you implying that 10 year treasury rates are purposely adjusted downward to help housing?

tatupu70 says

Are you implying that 10 year treasury rates are purposely adjusted downward to help housing?

That thesis is more for this cycle as the Fed's #QE thesis was to boost housing demand... it's why they bought so much MBS and long term bonds to drive long term rates lower to stimulate housing

The problem was that it really didn't work out as they hoped

When QE started after QE 1.. rates went higher after ever QE print and then went down after every #QE exit

The Irony of life, even today the 10 year isn't where it was when #QE was fully let go

#QE velocity thesis in their model they really don't undertstand why people aren't buying homes in bigger numbers and recently they did admit they were kind of shock the hit of housing demand when the Taper first happen. That even 4.5% 30 year could move the demand curve to a negative print

The question is why... why the weak demand curve

It's late in the cycle
12 million plus jobs recovered
unemployment claims at a 15 year low

We should be at 6 million home sales plus by now and over 800K on new home sales with a higher level of main street participation

Answer their algorithm is wrong, was wrong and always have been wrong. You can't run a economic model assuming every American has 20% down with a starting #DTI of 25% in each economic cycle

1996-2007 ( financial bubble years) that could fly... worse case 30% of that demand was fake...

2009-2015 though... you need to know the equilibrium factor model of your own people.....

Simple thesis I had... "We simply won't have enough qualified home buyers to have a real recovery in Housing"
and to be honest that's ok

It's year 2020-2024 that are the real crucial test

To answer your other question, rates historical are low, what we saw in the late 70's was an abnormal path of inflation and rates ... take the 10 year going back to 1790 it's very clear low rates are here to stay unless you get some massive wage inflation cycle

Hard to see that happening

When

#Globalization
#technology
#debt
#demographics

Are in play this cycle

Some of you people follow Bill Mcbride... Calculated Risk.... We had a great 2 hour talk a few weeks ago on housing economic and economics, we don't see that many things different..

Once the young Americans start to get going again a lot demand curve numbers will look better... it's just not yet

Strategist says

Which they should. No point making anything no one wants to buy. When the demand for entry level homes start expanding, builders that cater to that market will outperform the rest.

Hold you builder trade and buy on the dips when the recession happens, you're not that old so come the next recovery cycle you will have a good starting base to work from

Yet Logan Mohtashami, an Irvine, Calif.-based senior loan manager at AMC Lending and a financial blogger at LoganMohtashami.com, saw the numbers as evidence that the housing market was in the midst of “the most magnificent renting cycle we’ve seen in a long time,” adding that builders are focusing on larger homes for financially secure consumers and not creating the starter homes that were traditionally the homeownership entry point for those in the twenties and early thirties – many of whom are now seeking out rental housing.

“We’re in year seven of a renting recovery and the builders know it,” he said. “The cycle will go on longer while builders continue building expensive bigger homes

http://nationalmortgageprofessional.com/news/54522/may-housing-begins-plummet-while-building-permits-rise

Call it Crazy says

Another good example for the crowd that says "rates don't matter"... Look at the volume of sales when rates went up to the 17% range in the early 80's. The volume was cut in half, and when rates went back down, the volume returned...

Actually, when we had essentially this same discussion on April 1, my contention (perhaps not clear) was that volume acts as a pressure relief valve to explain why prices do not drop. In other words, either price or volume will get whacked, and due to human nature and general price "stickiness" my understanding was volume did (and would) go down.

See my comment on volume, Post #82
/?p=1279563

In any event, my attitude as one of the "rates don't matter" crowd was only in terms of price. In terms of volume, yes certainly, it matters and matters quite a bit. However, regarding the "when rates rise, prices are going to tank" thesis which was central to many many past, and some current patnetters, all I can tell you is history says you will be screwed if you are waiting for that 500K house to fall to 450K.

This aside, I appreciate you posting that graph - I was always told that volume tanked back then, but had not been able to find any data to back that up.

Today I told CNBC and The Wall Street Journal this

Here is a big call

I believe the demand curve will get better years 2020-2024. However, if we have another renting cycle in the next recovery stage. I am going to say that laws will be changed that favored home-ownership subsidizing to more rental friendly

RPD

Rental Payment Deduction