David Rosenberg Sees More Downside For US RE

“How can it possibly be that the US housing market is showing a durable recovery when it is still taking a median of eight months for the builders to find a buyer upon completion of the unit? Up until April 2008 – in the midst of the Great Recession – a number this high was unheard-of, having happened but once previously and that was the peak of the previous housing market meltdown in June 1991.”
David Rosenberg, 26 Jul 2012

We agree with Rosenberg.
Our own estimation is that US RE markets have at least 20% more downside.
In Vancouver, our downside risk is still of the order of 50%-66%.
– vreaa

22 responses to “David Rosenberg Sees More Downside For US RE

  1. http://www.canada.com/cuts+ratings+seven+banks/7006411/story.html

    Standard & Poor’s Ratings Services has cut its outlook from stable to negative on seven Canadian banks, over concerns about unsustainably high home prices and consumer debt levels, according to published reports Friday.

    The Wall Street Journal said the New York debt-rating firm cut the credit ratings of credit ratings of Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, National Bank of Canada, Laurentian Bank of Canada, Home Capital Group Inc. and Central 1 Credit Union.

  2. I think in certain specific markets a further drop may occur but right now, in the 20 cities followed by Case-Shiller, yields on rentals are very strong; I don’t expect much downside from here. Rosenberg disagrees but I wouldn’t take that bet.

    • Still a huge amount of shadow inventory, bank REO not yet to market, the foreclosures are starting to ramp up again.
      Many of the properties are very poor rental prospects, looted for copper and appliances and too far out in ghost neighborhoods so I do see more downside. Many areas will have bottomed for anything that is looked after in decent areas, but I could see the averages getting dragged down by the overbuilding that happened. Something like 20 million properties sitting empty in the US. Again, many are so useless they should be bulldozed, but they will probably affect the market before that happens.

      • Downside for looted buildings? Of course but that doesn’t mean higher quality properties are dropping. Rents are tight in many markets; as CalculatedRisk pointed out (and I agree with his synopsis) shadow will keep prices from rising much but there is more than enough demand for dwellings right now and returns are juicy compared to risk free. That will put a floor on prices unless banks flood the market with inventory. They haven’t done this in the past 4 years so why would they start now?

    • jesse -> To be clear: we see some further downside for US RE, but anybody in the market for US property could easily be well advised to go ahead and buy, either for longterm personal use, or for investment (property which is already cash-flow positive and makes sense at current yields).
      We’ll be saying the same thing about the Vancouver market when it is 40%-50% off: There may be further downside but very few will perfectly time the bottom.

      • WRT the graph shown in the post, this is developer inventory. There is a so-called “distressed gap” between existing and new properties that has existed since about 2007, Normally new and existing track each other well except for when TSHTF in about 2007. Existing owners and REOs could afford to drop prices to sell whereas builders were in effect short and could not drop their prices, hence their sales volumes were hamstrung.

        That effect is still in play today but does not necessarily mean there is further downside to prices. The existing-property market appears to have bottomed. Builders are not active in anywhere near the capacity of the average of the last decade — let alone the average over past decades — but that will inevitably recover as the 20MM or whatever inventory is worked through.

        Interesting to watch, but housing markets, due to their leverage and relatively low trading volumes relative to total stock, will have more upside than downside, unless there is significant for-sale inventory tendered by owners who need to clear their assets fast. That is simply not the case in the US right now; holding costs are not significant due to a general investment malaise, foreclosure shell shock, and low real rates. It is possible and plausible that this inventory will be held from tender for a few more years. In conjunction the inventory oversupply is not homogeneous: builders will shift their ops to areas where there is less oversupply and start building again. This is part of the small uptick in builder activity that has been seen late 2011 and through 2012. I would expect this to continue, with activity concentrated in areas where supply is indeed tight, and eventually starting to percolate through to the more distressed regions.

        Anyways, I for one am not worried too much about the long clearing times for builder inventory when the existing-property inventory levels are actually quite low. That tells me there is no impetus to do anything with builder inventory other than clear stuff slowly over time (having likely already been written down). In other words there is big pressure for prices to rise but builders will, through releasing their shadow stuff, ensure prices cannot rise. Indeed that is what I see as a plausible outcome for Vancouver and Canada in the coming years: a crash of 5-7 years or so and a long bottom without much, if any, undershoot.

      • jesse -> Thanks for that; your thoughts appreciated.

      • When George&Jim decided to chase the £ out of the ERM way back when… and effectively broke the OldLady of ThreadNeedle street… it was George wot cast the die – in the end, being a superstitious fellow, the decision to go all in was based on his chronic back pain (which was acting up at the time)… Go figure, eh.

        Hope you’re right Dr. J – in any sane universe you would be…

        I guess we’ll find out soon enough.

      • except … eventually real rates are going back up (a lot) and real incomes will not be going with them … have yet to pay for the insanity that has gone on … that process has started now in places like spain/italy … 2008 was just the warm-up, don’t forget we haven’t solved any of the root causes that got us here

  3. “our downside risk is still of the order of 50%-66%.”
    I agree, but curious to see what prices, rents & incomes data you use so that I can keep track of valuations as this thing deflates.

    • Graphs and charts are not always necessary to draw logical conclusions. Just as prices (not values) of Real Estate have rise 100% or more in Canada over the past 10 years, so too must there be a proportionate decline. Since prices rose not based on fundamentals, they will declined based on fundamentals. So a 50% decline would only bring us back to where prices should be; and the 66% would be on account of the overshoot as prices crash, they will not stop at the logical number, they will sink lower before recovering to mean!

      • Lets hope not. A 66% decline represents much more than just a garden variety housing bust. It would be an economic bomb for the provincial and city budgets if it happened and would lead to very serious social problems and dislocations. I do not see it as a likely outcome even if it is theoretically possible. Even declines approaching 50% are at the very extreme end of the scale in my opinion and it is easy to imagine we might see some sort of supports introduced long before that steep fall played out. I assume the estimates for a 50 to 66% correction are assumptions based on the regional average of all homes in the lower mainland. As we have seen though some of the steepest price increases were in select parts of the city while other areas have only shown modest price growth. If we strip out the West Side of Vancouver, parts of Richmond and West Van we get an entirely different picture. Sure, big declines will happen in the most sought after areas but those do not represent the whole city. This is one area where I agree that hot-neighborhood prices can badly skew regional averages and leave an impression that the bubble is worse than it really is.

        PS…no I am not getting optimistic. It is still a market with a dismal future.

  4. Before you put too much store in what Rosenberg says you may want to revisit his stock market predictions for 2010

    He has been bearish since the 2009 nadir and just turned bullish despite the S and P being up 120% from it’s bottom



    He was right on buying corporate bonds however. The truth is there are too many factors to take into account to forecast anything accurately.

    • “The truth is there are too many factors to take into account to forecast anything accurately.”
      It’s not about being perfect; if you can only be vaguely ‘accurate’, you can do well, very definitely better than the herd.
      Yes, you can find calls Rosenberg has made that were incorrect, but that doesn’t make this observation of his concerning US New SFH MOI any less interesting.

  5. I’ll go with Davie [in aggregate, but as always, subject to the caveat that certain ‘niche’ markets will defy broader, MacroTrends]…

    AndNow… for some timely Yanqui GranularReality a la Anecdote… from a NewUnemployed ExpatCanuck BeverlyHills Attorney channeling JamesCarville [NoteToEd: highly over-rated ‘hood some terrif breakfast joints, though]….

    “It’s the economy, they say. And so I am just another one of millions of people in America with an uncertain future.” – Chloe Wolman, LAX HogTownTransPlant

    [G&M] – Expat dispatches: I’m a Beverly Hills lawyer with $100,000 in debt – and I just lost my job

    “I did the “right” things (a lot of school and hard work) and was willing to do whatever was asked of me (like weekends and evenings). I attended a school in Los Angeles that was ranked in the top 20 of 200 U.S. schools. Myself and my fellow University of Southern California Law grads, class of 2011, were in the top 10 per cent of graduating law students in the country. And yet I now join many of my friends who are unemployed or semi-employed and weighed down with thousands of dollars in loans.

    My parents are recovering now from their own stretches of time out of work and so there is nothing else for me. No safety net, no assistance, no assurances. The debt is dischargeable only if I die.”…


  6. “It’s just as dangerous, as it turns out, out here — because of the lack of jobs, lack of everything.” – Matt Ecker, Grieving Father

    [Reuters] – For too many veterans, the ultimate defeat

    “About once every half hour in America, a veteran within the VA healthcare system tries to commit suicide, according to VA figures for fiscal year 2011.”


  7. And finally, one last panel of GranularReality to conclude this morning’s DystopianTriptych…

    [TruthDig/Boyarsky] – The Poverty Epidemic Hits the Suburbs

    …”… little, if anything, is said about the disastrous phenomenon of rising poverty, which, as Hope Yen of The Associated Press reported this week, is “on track to climb to levels unseen in nearly half a century. … Poverty is spreading at record levels across many groups, from underemployed workers and suburban families to the poorest poor.” Census figures that will be released in the fall, she wrote, are expected to show that poverty has exceeded the level it was at in 1965, when President Lyndon B. Johnson’s launched his War on Poverty. These truly are the forgotten Americans. They are invisible to candidates, strategists, pundits and even journalists, except for those dedicated few who stick with the poverty beat.”…


    [NoteToEd: from this analyst’s perspective, Boyarsky’s conclusions/remedies amount to resorting to bandaids to stem arterial bleeding]

  8. oops… DarnAlgos! RoboRedaktor is holding one hostage. ThankYou, ED!

  9. Based on this simplistic graph, things doing great in 2006.

    In reality the best thing this metric can be used for is estimating trajectory (which looks quite good).

    Post some real fundamentals, such as price-rent ratios, affordability and vacancy rates. Then you’ll see why people are turning bullish on housing once again.

    • Speaking of fundamentals… Guess what tune Jamie Dimon’s GarageBand likes to practice most. I suppose it ultimately depends on what you’re smoking?

  10. “but anybody in the market for US property could easily be well advised to go ahead and buy, either for longterm personal use, or for investment (property which is already cash-flow positive and makes sense at current yields).”

    Yeah, if you’re a snowbird that’s one thing. As an investor be careful. Lots of shadow inventory, and an economy that needs to get rid of Obama and through Romney before it even begins to think about getting it back together. Plus, US tax and labor laws mean it’s tricky with rental property there if you don’t know what you’re doing. Remember, those properties looked good 4 years ago, right after the crash. Difference? There were fewer bankrupt cities in California then. (You hear they’re talking about slicing 15 days off the California school year to save money…provided the teacher’s union agrees?)

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