Housing Remains A Dead End

The numbers pushing out of housing this morning confirmed my worst fears. The sector is a dead end, and I don’t feel much like getting tied up in it. Mortgage rates are still remarkably low despite the big push higher. Somehow, a 1% run in treasury yields destroyed the entire recovery?

In real dollar terms from the point of view of a consumer, 1% is just not that much money. <$100 a month per $100,000 of mortgage. If that's all it took to crush the market, then what does that reveal about the market? In fact, I'd think if people were in a good position to support housing, the yield rise should be driving home sales as consumers try to lock in rates before they go up another 1%.

But that hasn't happened. Instead, housing sales have been butchered on the alter. The real problem here is that the housing recovery has been highly localized and driven by a very small number of actual sales. If you live near a hotspot of jobs, then prices are soaring. But travel out of the urban centers and land is being given away, several hundred acres at a time.

The recovery in prices is coming from a small percentage of existing inventory being turned over. Meanwhile, the housing economics remain broken. First time buyers that form the base of market pricing are inundated with offers and don't really have the wages to take up any of them.

Shadown inventory will continue to come to market to crush these pricing recoveries. JP Morgan estimates are as high as 4.3 million inventory that is looking to come to market, price permitting.

The housing recovery will hinge on a wage recovery for young Americans. Household formation needs to get back on track – but for the moment, as my multifamily REITs are signaling, renting is a favored option against homeownership among this generation. Household formation among the youngest citizens continue to opt for leases over mortgages.

Seeing these numbers, I continue to favor real estate exposure that focuses on renting residential space. Pure homebuilders and materials could offer opportunities, since neglect will continue to render much of first time/lower market inventories in need of repair or replacement. However, real estate businesses that focus on mortgage generation or sales should continue to be shunned in favor of better investments.