Toro
Diamond Member
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- #721
You have a better chance of being right being bullish now than bearish. According to the Dow vs Gold chart we are closer to the bottom than the top. But I think we still have more to go on the Dow PE/Ratio & Dow vs Gold Ratio. I think 2013 will be the year of the Bull. Elections will bring optimism, the health-care law will start paying out instead of just taxing & we will be past the mortgage resets, defaults & foreclosure hump.
The mortgage thing is over. The housing market is near a bottom, if it hasn't bottomed already. People waiting for this huge next wave down in housing are going to be sorely disappointed. The math works like this.
Household formation in this country averages about 1.3-1.4 million a year. Depreciation of the housing stock each year is 100-300k. So each year, we need 1.5-1.6 million houses to be built. Housing starts, however, have been about 600k. In the last few months, we are building new, single family homes at the lowest level in recorded history, which is over 40 years. Thus, we are eating through normalized inventory at about 1 million homes a year. I say "normalized" because actual household formation has been 1-1.1 million homes a year for the past few years as people delay getting married or moving out of their parent's house.
Currently, outstanding inventory is about 1.9 million units. This represents about six months of supply, i.e. it takes on average six months to sell a house. This is the long-term average. A few years ago, it was 12 months supply. Now, we are back to average. But this is off depressed sales. What will happen is that demand will snap back faster than people think because we have depressed demand. Thus, on a normalized basis, we will completely wipe out supply in less than two years, but in fact, it will be faster as household formation will start to accelerate above trend.
The bears' biggest argument is the "shadow inventory," which is the inventory that will come onto the market as banks increase foreclosures. This is true. But let's look at that. There are currently 4.5 million homes with mortgages that are 60 days delinquent. Historically, 90% of those will default. Thus, there will be about 4 million defaults and repos. However, there is always a shadow inventory. There are roughly 150 million households. The normal rate of 60 day delinquency is about 0.25%, this represents about 400k households. So the "excess" shadow inventory is about 3.6 million. However, what will happen is that as the economy starts to improve, that delinquency number will fall because the disruption has been so huge, and as people start feeling more confident and get new jobs, will start paying their mortgage again. There are many companies buying mortgages from banks and working out new payment schedules to keep people in their homes. So there may be perhaps 3 million foreclosures that will eventually hit the market. Remember, we have a normalized supply deficiency of about 1 million homes. Even more intriguing is that about a quarter of the foreclosures are in one state, Florida. So excluding Florida, you may have a shadow inventory of maybe 2-2.25 million homes. And as demand accelerates, this shadow inventory will get eaten away pretty quickly.
And even that may be an exaggeration. I have contacts into the two biggest real estate brokers in the Tampa Bay region, and they are saying that they are at their lowest inventories ever, i.e. they don't have enough homes to sell. And I have also heard that buyers have started popping up in numbers in the Sarasota region over the past few months.
Thus, the shadow inventory is likely to get cleared away in about two years. Thus, this problem is likely to have ended by 2013 or 2014. I wouldn't expect a big rebound however. Normally, it takes some time for people to adjust their expectations, so maybe home prices don't really start climbing until 2015, a full nine years after home prices peaked, about on track with other global housing booms and busts. But as a catalyst to create another big leg down in housing, it's simply not there IMHO.
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