Housing Market Crash?

[Alexander Roeschmann]

Possible Housing Market Crash based on Pending Home Sales

Up to this day the US housing market has not been affected by Covid19, but now a lot of potential buyers decide against buying new houses as they a re afraid of a re- or even depression. This leads to a drop of Pending Home Sales of 14.5% (year on year) reaching new lower lows, that are only slightly better than in 2010.

(Graphic 1)

Currently we are at the weakest level since May 2011. (See Graphic 2)

(Graphic 2)

Overall those numbers are alarming and since there are fewer buyers in the market and a lot more sellers the market might plummet into new lower low territory. We are currently headed into a clear Buyers market, pressing prices even more, as AirBnb super hosts, that over-leveraged themselves, are forced to now sell quick.

My prediction is that prices will stagnate and slightly decrease if the economy opens up by May 15th. If this is not the case we are definitely seeing price decreases and if the lock down lasts as long as July we will have another Housing Market Crash, eventually even worse that in '08.

What are your thoughts?

[Ian Stuart]

I think the housing market will remain steady in the intermediate term. The Federal Reserve is backstopping the Fannie/Freddie MBS capital markets - so interest rates on loans are still relatively low, and the capital markets are still liquid in that area - so credit is not drying up anytime soon. That said - heard that Chase recently raised up their minimum SFR financing requirements, requiring a 20% down payment, stronger credit scores, and are also no longer doing HELOCs - which will squeeze single family further. Apparently things were getting a little crazy and Chase was getting accustomed to lending at 5-10% down levels to FICOs below 650... does this story sound familiar?

Would be a different story if the Fed wasn't buying GSE MBS bonds - because rates would be through the roof and acquisitions activity would grind to a halt. 

Here on the multifamily side we're still seeing Fannie quote fully levered, 10-year term / 5 IO, 30 year am, yield maintenance prepay, in the mid - high 3%'s depending on market, asset, and sponsor. 

On the single family side - we're seeing AirBNB hosts getting wiped out. And to be honest - if you're levering yourself up and not putting aside money for reserves / capex / savings - you deserve to get wiped out due to the fundamental lack of risk management in your business plan. I know this one idiot who owns (probably "owned" in the next 12 months) 10 coastal rentals, portfolio leverage of around 76% LTV; 1.10x DCR and now all of a sudden he's not able to cover his annual debt service. Some of them he's even renovating so he can try to realize some "sick upside". Borderline brain dead move.

Well capitalized owners will come in and scoop these properties up for pennies. As it should be. 

That said, the crisis is going to result in many individuals and mom & pops losing their homes in the intermediate term. The wealth gap will widen significantly once this crisis is all said and done due to the massive corporate bailouts, stock market pump, and resulting inflation that will result from the Fed's massive money printing (Giving a whole new definition to the term "BRRR"). Individual mom and pops are losing their income streams and defaulting on their mortgages, autos, credit cards - etc, and they need capital. All the while, wages will likely remain stagnant (save for UBI - which I think is likely) and inflation will be an indirect tax on those that don't own assets - which will further stifle the idea of the American Dream.

The market for single family may not crash in the intermediate term, but the assets and wealth will be transferred from mom and pops to corporations and single family syndicators. Over time single family will be consolidated more and more into the hands of operators as opposed to families, which is a shame. 

That being said - if rates spike, we're in a whole different world. If rates rise, count on acquisitions activity to tank and for discretionary refis to slow down significantly unless they have a hard stop maturity date that they have to deal with. Furtunately the Fed is bailing out us mortgage bankers by propping up demand for GSE MBS paper. (Fannie/Freddie mortgages). 

As a free market capitalist, it's embarassing to be in a industry that is getting propped up by the government. If it was a truly free market I'd be looking for a job because spreads would be sky high, and honestly I think I should be. Unfortunately I don't make the rules.