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Housing Recovery: Thin Ice

Posted on January 27, 2015

By Mark Hanson

This “housing recovery” has not been about demand, rather house-price super-inflation, which is suspect as price is a “lagging” indicator to demand.

Existing Home demand has been extremely weak since mid-2013, when rates popped and the unorthodox demand began to dry up. “End-user” Existing home demand has been weak since 2007.

Builder demand, more directly related to “end-user shelter” than Existing Sales, has also been weak since 2007.

Prices have been parabolic in both segments, in spite of the underlying demand weakness and in the absence of meaningful credit easing or wage gains (symptoms of rampant speculation).

Demand / price dislocations can last longer than anybody expects, but eventually will righten, and demand will win out. The last time demand and prices were so diverged was 2007.

The housing market will seek out demand, it’s what it does. And after so many years of such extreme stimulus that is now running off, the path of least resistance is through lower prices in 2015.

Historical housing economics suggest that “substantial house-price appreciation” – or “durable demand recovery with escape velocity” — is unlikely in the absence of meaningful “end-user” demand, credit easing, or wage gains.

But, from late 2011 to early 2014 (not coincidentally the Fed Twist thru QE era) that’s exactly what we got. Thinking back to 2006-2007, the conditions were very similar (massive demand / price divergence) following the surge in demand brought on by exotic credit from 2002 to 2005.

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