2013 Housing Outlook: What if the Consensus Is Wrong?
For this outlook piece, let's not just assume that the consensus is wrong, but let's go against the anti-consensus consensus. Double secret contrarian, if you will.
– Margaret Thatcher
It's hard to find a prognosticator not painting a cautiously optimistic outlook for housing in 2013.
This, in and of itself, should be cause for alarm: The consensus is usually wrong. Witness every January when so-called experts release their bold predictions which, inevitably, end up being just as off base as they were the year before.
Limited inventory, a slowly mending job market, waning foreclosures, and low interest rates are all cited as reasons for a rosy outlook for housing. But geopolitical tensions, Washington gridlock, and the specter of rising interest rates should temper our optimistic expectations. This groupthink is pervasive, nothing more than repetitive bullet points echoing the view that housing has bottomed, the worst is behind us, and we are likely to see moderate appreciation in 2013.
And since pretty much everyone has bought into this view, it will probably turn out to be wrong. So what should we be thinking about as 2013 kicks off?
Every January, well-known investor and market theorist Doug Kass puts out a surprise list for the coming year. As usual, it's worth a read. What's notable about his list aren't the topics, per se (which range from predictions about bond yields to who will win the Super Bowl), but the rationale behind the exercise.
As Kass explains:
The real purpose of this endeavor is a practical one - that is, to consider positioning a portion of my portfolio in accordance with outlier events, with the potential for large payoffs on small wagers/investments.
The point isn't to make predictions or make huge bets on low probability events, rather to assume the consensus is wrong and go from there. When you think against the grain, good things happen. And while being contrarian doesn't guarantee you'll get it right, it forces you think in a way most people aren't. Greatness is rarely achieved by following the herd, and great investments are rarely made by being late to the party.
For this outlook piece, we are not just going to assume that the consensus is wrong, but we are going to go against the anti-consensus consensus. Double secret contrarian, if you will.
Those who don't buy into the consensus view for housing in 2013 generally expect the housing market to take another nosedive (the exception of course is Realtors, who still believe home prices never go down). It's not that farfetched: foreclosures and short sales are still ailing many markets, much of housing's recent strength has been government-spurred, uncertainty looms over the fiscal cliff debt ceiling, Europe is still a mess, the Middle East could blow at any second, and emerging market economies like China and India are struggling.
Indeed, there is much to worry about. But to borrow a line from Goldman Sachs CEO Lloyd Blankfein, "One of the biggest risks that people have to contemplate is that things go right."
So without further ado, here are our top 10 reasons why housing is in for a banner year in 2013 and will (once again) prove the consensus wrong.
1. Foreclosures Drying Up
Throughout California, foreclosures were down sharply in the past 12 months. According to foreclosureradar.com, a data and tracking site, notices of sale (often the final legal step prior to actual repossession) in California were down more than 56% in 2012. The trend held across the Bay Area:
San Mateo County: -71.4%
Alameda County: -65.5%
Santa Clara County: -61.7%
Contra Costa County: -59.5%
San Francisco County: -55.2%
The trend is being mirrored across the country, with Florida a notable exception. As further evidence, housing news outlet Housing Wire recently changed the moniker of their annual real estate conference from "REO Expo" to the "Real Estate Expo," to reflect the waning impact foreclosures are having on the market.
Fewer foreclosures in the mix helped sale price data look better than it probably was last year. Coupled with a more optimistic view of the market in general, prices are rising and more homeowners are climbing out from being underwater.
As long you don't have to keep a fence around your pool to keep the gators out, this positive trend should continue in your local market.
2. Rising Rents Encourage Buying?
Particularly in San Francisco, the rental market is painfully constrained and rents are through the roof. For many this means doubling up with friends, picking a cheaper neighborhood, or abandoning the city altogether. For others, high rents make buying a more attractive financial option.
Of course, buyers still have to qualify for a mortgage and come up with down payment money, but with a brisk job market and a tech industry that is stubbornly proving naysayers wrong, for many buying truly does make more economic sense than renting. And as we discuss later in number 8, even those pesky mortgage lenders are doing their part to help out the housing market.
3. Demand Outweighs Supply... by a Lot
Analysts often cite limited inventory as one of the key factors pushing up home prices. But this is only half the story.
Back in early 2009 when the housing market was at its bleakest, inventory was at record lows, just like it is today. The problem of course, was that no one was buying. Now that buying demand is strong, any home that comes on the market with even a reasonable asking price is snatched up - probably with multiple offers.
Expect sellers to step into the market this year to take advantage of strong buying demand, but so long as household formation (more in number 4) and mobility (more in number 5) continue to improve, demand will outpace supply and prices will rise more than most people think.
4. Household Formation Back on Track
It was well-documented that during the so-called Great Recession household formation all but stopped. Kids moved back home, friends more aggressively shared apartments, and couples put off starting families until their economic prospects improved. This put a massive crimp in traditional housing demand, since young people generate most new buying demand.
But about a year ago, this trend quietly reversed and has been gaining steadily over the past 12 months. People can react to changing economic conditions faster than builders can break ground on new homes, and many economists expect household formation-related demand to outstrip new additions to inventory for the foreseeable future (see below number 7 on the prospects for homebuilders).
5. Mobility Is Back
As my firm has written in the past, rising uncertainty curbs risk appetites. And for most people, there isn't a bigger risk than picking the family up and moving across the country. For some, even moving across town is a decision wrought with hand-wringing. So when home prices collapsed in 2008, the idea of moving became that much more daunting. Not to mention, when your house is underwater, moving is all but impossible.
As a result, mobility - the measurement of how frequently Americans move - dropped off a cliff. Historically, increased mobility has been tied to economic expansion, since the better people feel about their economic prospects, the more likely they are to risk moving for a new job or new opportunities.
In 2011 (the most recent census data), the highest number of Americans moved to a different county than before the Great Recession. Mobility has been notably absent from our nascent economic recovery, and since all signs indicate that this trend continued in 2012, the data point to a shift towards more optimistic economic sentiment. This bodes well for just about all aspects of the economy, particularly housing.
6. Homebuilders on the Rise?
The stock market is a forward-looking pricing mechanism. Markets move based on expectations about future results, not what happened in the past. And if you listen to the markets, housing is looking up in 2013.
In the past 12 months, home building stocks have been on a tear:
PulteGroup (NYSE:PHM): +159.6%
KB Home (NYSE:KBH): +78.1%
Toll Brothers (NYSE:TOL): +57.9%
DR Horton (NYSE:DHI): +53.3%
In other words, investors are betting that homebuilders have a bright future. And homebuilders are putting their money where their mouth is. Single family housing starts are up 24% since last year, and while last year happened to be the lowest on record, remember we are looking ahead, not behind. In fact, December 2012's seasonally adjusted new construction rate was the highest in the past 50 months.
7. Recessions Drive Innovation
As we frequently note, betting against innovation is usually a losing bet. And during recessions, a greater portion of us are pushed towards innovation as the only means of survival.
It's no accident that the deluge of innovation and entrepreneurship of the past few years here in the Bay Area has happened against the backdrop of a dismal broader economic landscape. Humans, for all their faults, are resourceful and resilient. When finding a job isn't easy, we still have to eat. And for as depressing as it can be to call the local coffee shop "your office," new ideas spring from the necessity of earning a living.
Further, recessions wipe away bad actors and excesses. Witness the bloodletting of mortgage brokers and amateur real estate investors when the housing market collapsed. These people have not disappeared, but have been forced to reinvent themselves in more sustainable business lines that will help build a stronger foundation for future economic expansion.
Politicians abhor recessions not only because they don't understand economics, but because unemployed people generally don't vote for the incumbent. But despite their best efforts, politicians haven't been able to fully jump-start the economy. For the sake of innovation and our long term economic prospects, we applaud their failure.
8. Lending Is Loosening
Don't look now, but banks are starting to compete for mortgages based on something other than rate. The mortgage market has been so boring, so vanilla and so restrictive for years now, that mortgages have become a financial commodity.
Big banks like Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC), Citigroup (NYSE:C) and JPMorgan (NYSE:JPM) dominate the market, pushing smaller players to the sidelines. Now, as the housing market continues to mend, smaller lenders are starting to innovate. We are starting to see 40-year amortizations, interest-only products and there are even rumblings of the return of stated income loans.
To be clear, subprime isn't back and guidelines are still tight, but as the lending market begins to become an actual market again, qualified buyers currently locked out of the market will further the demand-supply imbalance we mentioned above in number 3.
9. Real Estate Tax Breaks Survived the Fiscal Cliff
As 2012 drew to a close and we watched the fiscal cliff debate drag on, the National Association of Realtors revved its lobbying machine into high gear. Specifically, it sought to preserve the mortgage interest deduction as Congress took aim at a host of generous tax breaks and loopholes.
As late as December 5, 2012, eliminating or severely curtailing the tax deduction for mortgage interest was included in some fiscal cliff solutions being bandied about.
But once again, proving just how powerful the Realtor lobby is, the fiscal cliff "deal" did not change the mortgage interest deduction and was generally seen as favorable for housing. Buyers uncertain about whether they would be able to deduct their interest expenses were able to continue their search breathing a little easier.
10. Pessimism Is Getting Old
It's hard to imagine sometimes, but the financial crisis is about to turn six years old. That is just a long time to be pessimistic. We get it, there is plenty to worry about. But humans by nature are optimistic. We get tired of thinking everything stinks all the time. We look for silver linings, we shake off fear and push forward.
It's not so much that we are forgetting the past, but moving forward. We have great problems to attend to, here at home and abroad. Nationally and locally. But our collective ability to solve problems has, thus far in the history of human evolution, proven far greater than the problems themselves.
At the risk of being called a shill for the Realtors, there is plenty to be optimistic about in 2013 when it comes to housing. And not just optimistic in the "well, the market probably won't collapse again" sense, but there are plenty of broad, demographic trends that support the thesis that housing is in for another banner year in 2013.
There are of course plenty of looming risks out there which could manifest themselves and derail this rosy picture, but as we have said many times, if you are going to bet against housing at this point, you have to understand what you are betting on. And as we wrote this time last year, "the time to be bearish on housing was 2005, not 2012."
And certainly not 2013.
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