Dead-Cat Bounce Over for the Housing Market?

April 23, 2014

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I have been saying this for a while: You can’t have a housing recovery unless actual home buyers are involved.

We are very far away from seeing the housing market reach its 2005 highs … and as time passes, it becomes clearer that this generation may never see them again.

How can I say that?

What we have seen in the housing market since then, but mostly since 2012, in my opinion, is nothing more than a dead-cat bounce scenario — an increase in prices after a massive decline. The chart below shows how far off we are from the housing prices of 2005.

Chart courtesy of www.StockCharts.com

One of the key indicators I follow in respect to the state of the housing market is mortgage originations. This data gives me an idea about demand for homes, as rising demand for mortgages means more people are buying homes. And as demand increases, prices should be increasing.

But the opposite is happening…

In the first quarter of 2014, mortgage originations at Citigroup Inc. (NYSE/C) declined 71% from the same period a year ago. The bank issued $5.2 billion in mortgages in the first quarter of 2014, compared to $8.3 billion in the previous quarter and $18.0 billion in the first quarter of 2013. (Source: Citigroup Inc. web site, last accessed April 14, 2014.)

Total mortgage origination volume at JPMorgan Chase & Co. (NYSE/JPM) declined by 68% in the first quarter of 2014 from the same period a year ago. At JPMorgan, in the first quarter of 2014, $17.0 billion worth of mortgages were issued, compared to $52.7 billion in the same period a year ago. (Source: JPMorgan Chase & Co. web site, last accessed April 14, 2014.)

I still see too much optimism around the housing market. Let me make this very clear: I don’t expect an outright collapse in home prices like the one we saw when the housing market bubble burst in 2007, but I do see the momentum slowing down in the housing market, and this may result in lower home prices.

The bottom line with the housing market is that its rebound over the past couple of years has been sustained by institutional investors who have invested billions in buying homes at “cheap” prices, fixing them up, and then renting them for a return on investment. Actual participation by people who buy the homes to live in them — especially first-time home buyers — is very weak, as evidenced by the collapse in mortgage originations at the big banks.

The news that home buyers are shying away from the housing market (via the collapse in mortgage demand) comes just as the Federal Reserve pulls back on its money printing. Not great timing at all for the housing market.