Financial Crisis

No, This Is Not a Housing Recovery

Anyone who says we are in the midst of a housing recovery is wrong.


We have not reached the bottom of the housing market. I hate to say it. I really do hate to always be the pessimist. And I don't say this because I've been steeped in a couple decades' worth of bitterness as a Red Sox fan. The numbers are just not adding up to recovery.

It is all the rage these days to talk about how we are finally seeing recovery in the housing market, and that pretty soon we'll be back to home price growth. Analysts point to the decline in housing inventory, lower rates of unemployment, higher rates of affordability, increases in housing starts, and even growing stock values for publicly traded homebuilders.

But this optimism will disappear faster than the enthusiasm for Kony2012 once the next wave of downward home price pressure hits. Describing the current housing market situation as being in the eye of a hurricane is not exactly accurate, but it is fair to say there is another storm gathering that will hit housing hard in the next few years—and it is impossible to stop.

The storm is a mix of delayed pressure as a result of the quantitative easing of the shadow inventory, and a troubling historical trend.

The first pressure system comes in the form of rising mortgage rates. The Fed's quantitative easing has succeeded in pushing down long-term interest rates and subsequently mortgage rates over the past few years. (QE1 had more to do with this than QE2, but who's counting.) But whether you think this is a good thing or not, with mortgage rates in the 3 percent to 4 percent range, the only direction they really can go from here is up. A 30-year fixed-rate mortgage at 2 percent is just not worth the risk of lending. It might be several more years before the Fed eases off the quantitative gas pedal, but when it does so interest rates, and with them mortgage rates, will rise. And when mortgage rates rise that puts downward pressure on housing prices since more expensive mortgages mean reduced demand and the need to lower home prices to compensate.

The second element of the coming storm is that while today's inventory of homes has indeed declined to a much more manageable level, the shadow inventory of homes remains high. While there are currently around 3 million homes for sale in America, once you factor in the homes that are in serious delinquency (i.e., more than four months past due), homes in the foreclosure process, and homes that banks have seized but not put on the market yet, the housing inventory is closer to 10 million homes. Estimates on this do vary, but even the most recent National Association of Realtors data shows a 35-months supply of homes in Florida, and a 41-months and 65-months supply of homes in New York and New Jersey, respectively. The challenge is that once all these other millions of homes hit the market, they will also add downward pressure to housing prices.

The third thing to consider is that history looks to be anti-recovery right now. It is true, as a number of analysts have pointed out recently, that real housing prices (meaning inflation adjusted) have fallen to their long-term trendline. If you discount the most recent housing bubble as fueled by a host of poor policy choices made in the 1990s (such as homeownership goals, Fannie Mae and Freddie Mac's attempts at dominating the market and advancing taxpayer guaranteed mortgage-backed securities, and the Community Reinvestment Act of 1995), then the historical trend since World War II would suggest that housing prices should be where they are today. But even if indicators say this should be the bottom, the historical trend has also featured multi-year long "over corrections" after housing bubbles.

In the below graph, you'll notice that after a housing bubble peaked in 1978 it slowly declined and hit the historical trendline in 1981. But it continued falling and didn't come back up to the trendline until 1986. Similarly, the housing bubble that peaked in 1989 declined a bit faster and hit the average trendline in 1991, but it wasn't until 1998 as the massive 21st century housing bubble began to build that prices got back to their trendline.

Case-Shiller RPI 1946-2011

We should not expect this coming bubble and bust to be any different. Especially with the downward price pressures from quantitative easing and the shadow inventory waiting to smash in on today's relative calm.

To borrow a phrase from our president, let me be clear: Lower housing prices are not necessarily a bad thing—we need prices to be at the level the market demands. But they will mean higher levels of negative equity and more pressure put on the huge stockpile of homeowner debt. And that is not a recipe for recovery in the near-term.

The dark side of low interest rates is that they discourage savings. And without much incentive to save, household debt levels have not fallen very far from the 2008 peak, and in fact began growing again in mid-2010. This high level of debt contributes to the weakness in economic growth, as it constrains consumption and decreases demand for housing. And with the years of household deleveraging up ahead it doesn't matter that affordability is increasing as prices fall: The buyers that do exist will continue to demand lower prices.

There are optimists who argue that declining unemployment means a stronger labor market and this will provide a host of new buyers entering the housing market (this trend is very exciting for mom and dad who just want their college-graduate child to stop mooching off them for free rent). But those who praise a rate of 8.3 percent unemployment are willfully ignoring that we have shockingly low rates of participation in the labor market, and that if the Bureau of Labor Statistics also counted those workers who've just stopped looking for a job in the past month, the headline unemployment figure would be closer to 9.5 percent.

There is nothing wrong with hoping that we truly have reached the bottom of the housing decline and the beginning of recovery. Personally, I choose to indulge in the fantasy that the Red Sox have a chance to win the American League pennant despite the fact that we have only three pitchers, all past their prime, in our rotation. But when you face facts and consider the numbers, all those rosy news stories about an improving housing market look about as credible as the claim that home prices would always—always!—go up.

Anthony Randazzo is director of economic research at the Reason Foundation.

NEXT: Will Sha Na Na Play at the "Woodstock for Non-Believers"? Will Richard Dawkins Step in for Bowzer?

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  1. What the hell is with this “Answer this question to continue reading this page” BS? If this stays, it’s going to drive me away from Hit & Run tout suite.

        1. and the ^^Other^^

          1. You totally “othered” yourself, masochist.

    1. Your comment had quick results. No popup for me.

    2. I hear people complaining about that but I am not getting it

      1. Non-capitalist, non-hustling peace.

  2. One other thing squatting on the housing market: student debt.

    Kids These Days often have to postpone buying a house for years and years because they already have a mortgage, thanks.

    1. Debt bondage is classically defined as a situation when a person provides a loan to another who uses his or her labor or services to repay the debt; when the value of the work, as reasonably assessed, is not applied towards the liquidation of the debt, the situation becomes one of debt bondage. (See United Nations 1956 Supplementary Convention on the Abolition of Slavery.) This was very common in Ancient Greece. In ancient Athens, Solon forbade taking out loans using oneself as a security and ended any current such debts, ending debt bondage.

      1. By the 1900s, debtors’ prisons were outlawed, and bankruptcy law was established such that a bankrupt debtor could have all their private debts wiped clean and get a fresh start.

        Until the government got involved with student loans which for some reason are exempt from bankruptcy. Student debt peonage is for life. Doesn’t matter if you’re disabled, penniless, homeless, and starving.

        At least you can file chapter 7 and get out of the burden of a house you can’t afford.

        1. This was done because so many professionals (mostly lawyers) were abusing it.

          Come out of college/grad school with $80k or $100k in debt, file bankruptcy immediately, and go to work make a decent salary. Credit starts to be restored within 2-3 years, and everything is golden.

          1. …who retains the right to abuse the same thing in business.

            1. I’m not sure what the answer is. Certainly, some people can use the protection bankruptcy offers, but it seems like the only people using it are dumbasses who are bad with money.

              1. That’s the bullshit that the Koch-suckers want you to think.

                Top 5 Reasons Why People Go Bankrupt
                By Mark P. Cussen | Investopedia
                Mon, Mar 22, 2010

                1. Medical Expenses

                A study done at Harvard University indicates that this is the biggest cause of bankruptcy, representing 62% of all personal bankruptcies…


                1. And its been proven multiple times to be bullshit.

                  A large percent of bankruptcies CONTAIN medical debt, but in very few cases is it the debt pushing them over the top.

                  1. I worked in collections for 20 years and almost every credit bureau report I saw had some unpaid medical bills, usually around $50. Why in the hell don’t people ever want to pay their doctor?

                    1. They tend to pay health care practitioners who are not tied to the big pharma / big governmnent / big insurance complex, usually by means of barter or cash.

                    2. Why in the hell don’t people ever want to pay their doctor?

                      Because generally it gets taken out of your tax return.

          2. Except the actual number of people using bankruptcy to escape student loan payment was trivial. The real reason you can’t clear a student loan default via bankruptcy is regulatory capture by the banking industry.

            1. …is what capitalism does best with money.

              1. Oh thank you, my useful idiot!

      1. We are all debt slaves since we, our future to be looted in me streams, are the collateral for all government debt instruments. When they sell China or a foreign bank T bills, the T stands for title to you, not or Treasury.

    2. Denninger was talking about that this morning, too. Tough to justify obligating yourself for $150K or more when you can’t even save up a decent down payment, because it’s all going to pay off the five figures of debt you took out to “chase your dream” of a college degree, plus whatever credit card debt you stupidly built up paying for those spring break trips to Florida.

  3. I think there’s a 4th factor being ignored:

    Baby-boomers are starting to retire. the largest population by age bracket is reaching the age where they no longer need houses, second homes, etc. And there are fewer people in their 20’s with the money & creditworthiness to pay the prices those properties are valued at.

    1. And there are fewer people in their 20’s with the money & creditworthiness to pay the prices those properties are valued at.

      Ahem, invisible finger. Apparently you haven’t learned the singular (and only needed) economic lesson from the Lone Biker of the Apocalypse: Price, it’s not what you say it is, it’s what the market will bear.

      1. Beautiful quote. Well done.

    2. There are fewer people in their 20s stupid enough to pay current prices for houses.

      I’m quite delighted renting for $350/month, thanks. Which just happens to be the same amount (after adjusting for inflation) as my grandfather’s mortgage. He would have considered paying anything more utterly absurd.

      1. …to your Land Lord, who came to own the very earth by Divine Right of Property. It hasn’t changed a bit in 7000 years.

        These estates were usually managed through local entrepreneurs, who took a cut of the profits. Rural folk were bound to these estates, providing both labor and rents to their landowners.

        Under the Sumerians land had been vested in the god and rent was paid…
        Empire and Communications
        Harold A. Innis…..1550026623

        1. Hmm you look familiar. We had all hoped we were rid of you.

          1. Why do they call this joint “reason?”

            1. If this were not a temple of reason, do you think you would have survived, this long, my Cenozoic comrade?

      2. I’m an American (as opposed to Australian) and I’m in much the same boat. I pay $430 a month in Fort Collins, CO. That includes all utilities and I share a two car garage. No kids and I won’t pay the obscene prices asked for homes around here. Works for me just fine.

        1. No kids

          A man deprived of the use of his testes by the dominatrix economic system of the day.

          1. The letters EBT say otherwise.

            1. Can’t

        2. I pay $430 a month in Fort Collins, CO. That includes all utilities and I share a two car garage.Abersouth

          Wow. That’s a lot to pay for just a share of a two car garage but I guess it beats living in one of the storage containers at the man camp.

  4. Ron Paul and all his relatives whose palms he’s been greasing were never in a housing crisis. Congressional pigs take care of their own.…

    1. I thought you were killed after taking synthetic marijuana?

    2. It’s amusing that this is the worst dirt anyone can find on Paul.

      Is there any other Congressperson whose family isn’t benefiting from them being in office?

      1. Bawny Fwank. He makes them turn tricks and bring home the bacon. Or the sausage. Or some breakfast meat. He just fixes the tricks parking tickets.

      2. It’s ok to Paultards when Paul does it.

        1. Yeah, like Nozick and Rothbard’s penchant for living in waay below market price rent-controlled housing.

          There’s no one as self-righteous as a libertarian who is taking advantage of the State for personal gain.

    3. What happened to ‘this is my last post’?

    4. That article is a complete lie. The payments involved have nothing to do with his Congressional seat, but his CAMPAIGN, as I have mentioned BOTH OTHER TIMES you brought this up in comments. Scroll down to my original comments on the matter HERE.

      p.s. Sorry, I don’t know how to link to a specific comment in the thread.

      p.p.s My original comments refer to a different article, but the same study. The first article failed to provide context, while THIS article linked above flat-out MISREPORTS (i.e. LIES) about the nature of payments.

      1. And I must once again remark on your intellectual dishonesty for 1) Not actually looking at the original source of information, which would show why you’re wrong, and 2) not bothering to defend your arguments, but just, like a disease, contaminating additional comment threads with unsupported nonsense.

    5. I doubt that his family members were in a housing crisis, because he predicted the crisis in detail several years earlier.

  5. According to the Glenn Beck QE School of Hyper-Inflation Studies we are actually in another housing bubble fueled by that damned printing press and 3-4% mortgage interest rates.

    1. In DC inside the Beltway there are almost no forelosures, gentrification continues, they are building and selling $700,000 condos in Arlington, Virginia, and in most zip codes prices never fell.

  6. The dark side of high interest rates is that they discourage spending.

  7. So sad to see the hamburglar pinned like that. Doesn’t Reason think of the children before posting pictures like that?

    1. I thought that was a reference to the Red Sox?

      1. I thought this was the reason photo editors shameless pandering to the gay community?

  8. I love the report late last year about unemployment going down, and the story even admitted it was because endless thousands stopped looking for work or fell off the unemployment insurance rolls. They don’t even try to hide the farce anymore.

    They were talking on the radio this morning about how the economy is “coming back”. Huh? Where? They quoted some hiring numbers, but they sounded like regular turnover stuff.

    1. It is more talk from the ‘get barack re-elected crowd’. Almost everything they say is some over-the-top distortion of reality.

      My favorite – Nancy Pelosi saying that she will stand with her fellow catholics in supporting the president’s decision to force catholics to pay for BC. Really, nothing is too far fetched for them.

      I am still predicting that the vile POS isnt going to win re-election. I hate the bastards so much I am actually keeping my fingers crossed that gas goes past $5 by november.

      1. Why Pelosi hasn’t been excommunicated is beyond me.

          1. Awesome. I’ll never get why the church endorses coercion, when Jesus never did.

            1. And Jesus went into the temple of God, and cast out all of them who sold and bought in the temple, and overthrew the tables of the moneychangers….

              ~verse 16, chapter 12, The Jefferson Bible

              All four gospels have the story of of Jesus using physical force on free-market capitalists.

              1. All four gospels have the story of Jesus using physical force on free-market capitalists squatting con artists and freeloaders illegally setting up shop in the temple.

                1. Capitalism = Taker Culture

                  “[The Native Americans] didn’t have any rights to the land … Any white person who brought the element of civilization had THE RIGHT TO TAKE over this continent.” ~Ayn Rand, US Military Academy at West Point, March 6, 1974

              2. The moneychangers in the Bible were not free market capitalists.
                It was LAW at the time to pay your temple “tax” in local currency. If you brought something other than the required half-sheckel to temple, the changers would sell you the proper coin for a fee. Without govt interference, there would be neither the requirement to pay the annual tax nor the demand for specific currency. The moneychangers were more like modern day tax attorneys; providing services that would not be in demand absent unjust tax law. Jesus used physical force on rent seekers profiting from coercive goverment policies.

                1. Capitalism = rent seekers profiting from coercive goverment policies.

                  Policies such as “privation property.”

                  Policies such as “Land enTitlement to prevent the free movement of people to hunt and gather a free lunch, thus starving them into submission to work in the capitalists’ fields, offices, factories, and armies.

                  You profit from government coercion every day, and merely whitewash it.

                  1. To a hammer, everything looks like a nail.

                    Not everything is an economic issue. Jesus’s anger in the temple is about the disrespect of using God’s house to worship an idol (money.) It doesn’t mean Jesus was anti-capitalist. Otherwise, Jesus would have targeted all markets for destruction and written Das Kapital if he so chose.

                    1. Its pretty clear that Jesus rage was at the prospect of using gods name or the ability to follow his commandments by requiring taxation.
                      This was structured economy stuff and anti-capitalist in every way. Forcing people to convert to a specific currency and pay a fine and control of the location of worship is not capitalist in anyway (those are control by the governors not by the individual).

                    2. Jesus said unto him, If thou wilt be perfect

                      1. go and sell that thou hast

                      2. and give to the poor

                      and thou shalt have treasure in heaven.

                      ~ verse 21, chapter 11, The Jefferson Bible

                      Funny the bullshit prosperity gospel whitewashing that goes on.

                    3. Funny how you’re not complaining bullshit prosperity gospel whitewashing that’s going on at the White House!

                    4. You are correct Indian culture fetish guy. One of the important gospel lessons is: YOU use your property to help the poor, and YOU will be rewarded. Never does Jesus teach that you will be rewarded in heaven if your favorite government policies take property by force and redistribute it in a “gospely” way. The lefty social justice interpretation of Christianity, like most lefty thought is devoid of logic.

                      When challenged, Jesus said the most important commandment was to love God with all your heart and love others as yourself. Not love your government as your God, or force bonds of debt between others.
                      YOU as an individual are charged with taking care of those in need. YOU do it -YOURSELF. That is what Christian charity is supposed to look like.

                    5. Was Jesus literate?

                2. Actually they do sound like capitalists. They saw a need, people that needed different currency, and the filled it while making a profit. The temple was probably the wrong spot.

      2. “I am actually keeping my fingers crossed that gas goes past $5 by november.”

        Yours is more talk from the ‘get that nigger out of the white house’ crowd.

        1. Another idiot lefty trying to play the race card. A more accurate statement would be “get that marxist out of the white house.”

          1. …but you’re not a marxist, right?

            Funny shit there, “concerned” citizen.

            1. No, I’m hoping for a free market solution to the high price of gas. That’s why I didn’t include the reference to wanting $5/gal gas.

              1. then why the hell do you think it needs a “solution?”

                You sound like one of these lefty marxists who demand low gas prices.

                1. Wrong again. I’d like to see as much drilling and oil refining as the market can bear. But we both know why that isn’t happening. It’s a supply and demand thing, you wouldn’t understand.

                  1. You posited high market prices as needing a “solution.”

                    I asked why would a market price, perceived as either too high or too low by your Sarah Palanish brain, need any further “solution.”

                    Don’t dodge and weave, Fibertarian.

                    1. Seeing as the production of said product is limited and all but banned to new entry i would hardly call that a free market. Nor can anyone in good faith. Thus you lose.
                      But your right stating its too high is inaccurate, unless your referring to the FACT that it would be cheaper with a greater supply (the the government bans for their own political, selfish, and economic reasons).

                    2. you’re full of shit, veritas

                      The United States is a veritable pin-cushion of oil exploration. Oh right, but you imagine its banned.

                      What a conspiracy nut.

                    3. Insults are a great way to win a debate!
                      Please save your Owebamanomics for the Yahoo and Weather Channel Crowd.

  9. All the respectable economists agree; we’re on the road to recovery.

    1. would lick Barry’s balls like yourself.

    2. All the respectable scientists agree, man made global warming is real.

  10. A picture worth a thousand words.

    Nice housing bubble!

  11. Anthony, a suggestion:

    Please refrain from venturing into the land of sports analogy and metaphor.

    John Lester and Clay Buchholtz are “past their prime[s]”?

  12. All Power to the Imagination!

  13. OK wow, now there is a guy that knows what time it is. WOw.

  14. Seriously?

    White Idiot, do you have -nothing- to do on the weekends?

    I mean really, come on man. Go out and get laid. It’s not hard; hell, you can even find hookers for pretty cheap.

  15. Why should we want a “housing recovery,” which means increased prices for housing? It’s in the interests of tenants and homebuyers for housing to be cheap. Besides, when “housing” recovers — meaning, becomes more expensive — what really go up are mostly land rents and land prices. Why is it remotely a good thing for people to pay more to landlords for land which they certainly did not create?

  16. I really don’t get the hostility I read here to owning a home. So what if it hasn’t hit “rock bottom.” Is it really not worth it for a first time homebuyer (one who has enough for a 15-20% down and is debt-free. Namely, me) to purchase something cheap w/ extra rooms to rent out? Even if it loses value in the short term, 15 or 30 years is a long time, and surely it’s a better investment than paying rent?

  17. If housing prices rise faster than wages, then more and more people are priced out of the market until the whole thing collapses and prices drop calamitously. This will keep happening over and over again so long as people treat houses as investments rather than places to live.

    1. Uh, everything you spend money on is an “investment.” You’re choosing to trade your money for something that you think is more valuable than that money.

      It’s irrelevant how many people are “priced out of the market.”

  18. You may not know this but as someone who works in the mortgage market I am seeing the underwriting standards go back down on Freddie (we don’t work with Fannie so I don’t know what their doing) loans.

  19. And precisely what mumbo-jumbo which was available to those in the year 1965 would have predicted that average house prices across the nation – nationally averaged without fudges – in 2010 would be ten times what they were in 1965?? To recite a handful of government-created nonsense doesn’t mean that the end of the housing crisis is at hand. When will the $11 trillion losses be liquidated and who will take the loses?? Right now, the economy is like a snake that swallowed a pig too large to immediately digest and the government is like a giant whose hands have clamped down on the snake’s throat and lower intestine – can’t puke and can’t eliminate it. Nor with the economy recover until that undigested pig is dealt with, one way or another.

  20. Another huge trend that many choose to ignore is the demographic trend – we have many boomers leaving their house buying years. These are people who are far less likely to be looking to move. Unfortunately, the group that should be moving into their prime buying years have quite a few things going against them: 1) much smaller numbers than the people leaving their prime buying years, 2) a fresh memory of the housing collapse and 3) much larger debt loads as a result of school loans and weaker job prospects.

    Analysts can continue to ignore the above, but these are not trends that point to a housing recovery and actually point to a continued downtrend in the market.

  21. There is also the population bomb; but the opposite of the Malthusian / Erlichian kind. There are just not enough hands to do the work the boomers and their parents and grandparents leave behind including presenting as customers to the overbuilt housing sectors in various states while paying the medical bills and social security stipends and the other transfer payment – interest on the accumulated debt taken on to pay for these and other state largesse – while also paying non-dischargeable education debt and debt service.

  22. My neighbor died two years ago. 6 years prior he had been given a mortgage for $180K although he had not had a job for several years prior. Since his death the house has deteriorated and is now only worth the price of the lot it stands on.

    To date Chase has paid $6,0000 dollars in taxes on the property and still refuses to foreclose on it.

  23. Good post.You did a good work,and offer more effective imformation for us!Thank you. cheap new era hats New Era Hats

  24. We’re not in the midst of a housing recovery, but we’re at the beginning of one. You can’t be a bear forever.

    I finally bought a house….

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