A Lonely Housing Bear Predicts a Big Tumble

By Lewis Braham - Oct 7, 2013 11:18 AM ET



Talk to Mark Hanson about the housing market for five minutes and you may find yourself wanting to sell your home and park the cash in a suitcase. 


The Menlo Park, California, real estate analyst, blogger and founder of consultancy Hanson Advisers predicts a decline of 20 percent in housing prices in the next 12 months. Half the gains since the latest housing bottom in 2011 could be erased in the hot areas -- Florida, California, Nevada, Arizona and Georgia -- by rising interest rates and a thinner herd of speculative private-equity buyers, he says.

Less bearish real estate experts such as Stan Humphries, chief economist at Zillow and a Hanson fan, also see signs of froth. Existing home sales jumped 6.5 percent to 5.39 million this July, their highest level in three years. In August those sales fell 1.6 percent despite a surge in 30-year mortgage rates -- a move Humphries says was healthy because the market needed to cool off, and that relatively mild reaction showed there was still buying in the face of rising rates.

"There’s a strong distinction between a normal slowdown and the wheels coming off the housing recovery," says Humphries. "That's where I depart from Mark's take."


Deeply Misleading

Hanson's critical view of the housing market, which he shares with mutual fund and hedge fund clients, extends down to how those very statistics are generated. A reporting lag makes existing-home sales stats deeply misleading, he says. The statistics are calculated 30 to 60 days after sales contracts are signed. July’s positive data, for example, were mainly for homes sold before most of the rate increase.

Digging into the data does, however, reveal one reason why Hanson is so leery of housing now. Some 58 percent of existing-home sales in 2013 have been made by all-cash investors purchasing large swaths of distressed properties to lease to renters. Hanson says private-equity firms caused about 50 percent of the price appreciation in cities like Phoenix and Las Vegas, and generally overpaid by 10 percent to 20 percent, according to his calculations.

With gains of more than 35 percent since the crash for properties in Las Vegas, Phoenix and other of the hardest-hit regions, these vultures will begin to lose interest, he figures. With property prices and interest rates both higher, they may find better opportunities in Treasury and high-yield bonds than in houses. That’s because as house prices rise the yield you can get from renting the house declines. The loss of some of these buyers will remove what Hanson sees as an artificial support for prices.

A lack of buyers for new homes is also part of Hanson's downbeat outlook. He points to new-home sales as a better indicator of the health of the housing market than existing-home sales. They're more current, reported as soon as sales contracts are signed, and 85 percent of sales are to traditional buyers with mortgages.

Such buyers have already begun to feel the sting of higher rates. “New-home sales fell 27.4 percent in July,” says Hanson. “The only other time they’ve ever fallen that much was when the home-buyer tax credit expired in May of 2010.” The adjusted Census Bureau numbers he tracks show new-home sales flat from July to August, but the number of new homes being sold is so low to begin with, he says, at 35,000, that they are "recession-level" sales numbers.


Rate Impact

Whether homes become unaffordable as a result of rising rates is a key question for the housing market. Zillow's Humphries points out that in markets such as Phoenix it costs only 13 percent of the average family’s household income to cover its 30-year monthly mortgage payments despite the rate increase. That compares with the 20 percent of income it used to cost in the years leading up to the housing bubble. So, in his view, houses in Phoenix are still very affordable.

Hanson says apples-to-apples comparisons of affordability for pre- and post-crisis periods are problematic. While home prices were higher and 30-year mortgage rates were typically above 6 percent prior to the 2008 crash, houses were actually more affordable back then because of the types of loans people had, he says -- such as loans with zero-interest teaser rates and adjustable-rate mortgages with lower rates than today's fixed ones.

Hanson's track record as a forecaster is mixed. He's made numerous good calls, including predicting the 2007 housing crash. Where he says he went wrong in recent years was in 2012, when he turned from bull to bear, not realizing the extent of the private-equity and all-cash buying that he says is propping up the market.

Bears often aren't popular with their peers, and Hanson is no exception. "I give him zero credibility," says John Burns of John Burns Real Estate Consulting. "For there to be a 20 percent decline we'd have to have a massive U.S. recession." Absolutely not, says Hanson: "You're going to have a cooling on the investor side and the buy-to-rent crowd, and that will be the catalyst for the downturn." 

In one of Hanson's latest blog posts he remarks that perhaps he is the only housing bear left. But as anyone familiar with financial history knows, it’s when there are no more bears left that the bear market begins.