Home Builder Confidence Surges As Everyone Buys Into The Illusion

The excitement toward the housing bottom both in the media and realtor community has reached a frenzied pitch. Scores of bullish data continue to pour in month after month "proving" that the housing bottom is not only in place, but it is indeed firm.

The new home builders, based on the optimism index released this week, are now as confident as they were in February 2007. At that point they were starting close to 1.2 million homes per year. Today they are starting less than 600,00. The red line in the chart below shows the NAHB housing market index surging as the home starts begin to tick up. Builders hope the recent increase in sales and starts will ultimately lead to a surge in completions, the important part of the equation, which has not yet shown signs improvement (but obviously occurs on a lag).

I have covered the coming problems with shadow inventory, mortgage rates, and qualifications tightening relentlessly. Today, I'd like to briefly focus on demand.

Right now 49% of all mortgages in America have "effective negative equity." This means they will have to bring money to the closing table after paying a realtor and closing costs to get their home sold. They are underwater when factoring in the costs to sell. The following chart shows the breakdown state by state:

Source: Mark Hanson

49% of all mortgage holders not being able to sell their home creates a serious problem for new demand in the market. They are living in a coffin. Waiting and praying.

Hold on you say, there is still plenty more demand out there to purchase homes. What about those that own their home free and clear and the other 51% of the mortgage holders that are not effectively underwater?

That brings up chart number two, which shows that 40% of all home owners currently have impaired credit that will not allow them to purchase a new home. Remember that the FHA will lend 97% loans at 3.5% interest, but you must have solid credit and income. The following chart shows the impaired credit group by state.

Source: Mark Hanson

This means that the housing boom is counting on the first time home buyers and investors to carry the demand. During the first part of this year they have done the job. With most of the shadow inventory still held off the market and the "effectively" under water home owners unable to sell (keeping their homes off the market) the available inventory to buy has been artificially reduced significantly.

This has helped the builders more than anyone bringing us back to the chart we began with.

Those buying now are purchasing into an illusion of scarcity. Perhaps America's banks can keep the shadow inventory off the market forever, and perhaps the government will always be able to purchase mortgages at 3.5% interest rates with 3% down payments. I certainly know they will try. The forces of the free market, just like gravity, will always be there waiting to correct the imbalances. If those forces ever outweigh the heavy hand of the government and the Fed then look out below for those buying in to the American dream.

In the meantime, those that have been given an opportunity to sell with these temporary price increases (their home price has moved up above water allowing them to exit the coffin), I would highly recommend they take up the opportunity.

For a closer look at the problems coming on the supply side of the real estate market see US Real Estate: Where Is The Supply?

h/t Calculated Risk, Mark Hanson


  1. Don't forghe student debt serfs will lack the down payment (ante in the education fund and income to service student loans and a house...

    Given labor force conditions, even if they could it would make no sense. No one builds equity for 10 years, net of transaction cost. People need the flexibility to relocate to where work is available...

    It is an issue with option value. The optionality of renting dominates until owning is far cheaper...

  2. Exactly. This discussion does not even take sentiment into consideration. A student leaving college saddled with debt who has watched home prices fall for 7 years will certainly hesitate before putting their hard earned savings down on something that would hurt their ability to move.

  3. Nice one, there is actually some good points on this blog some of my readers may find this useful, I must send a link, many thanks.


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