Hedge-fund manager Todd Schoenberger once said "Homeownership is for suckers." It's way beyond that now, he says. ·CNBC
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When Kimberly walked up to the front door of a beautiful, 7,500 square foot colonial, anchored in a terrific cul-de-sac in northern Baltimore County, she said to herself: "All my life I thought this was what I wanted. But as beautiful as this property is, I see nothing but a money pit and a trap."
The 32-year old congressional aide who was arriving at the house for a charity event chose to satisfy her curiosity by exploring the grand rooms and perfect fixtures, only to finally decide, "Yeah, not only would I never buy an individual house, I'd be shocked if my friends would as well."
Tune in to CNBC's "Closing Bell" Friday July 11 at 4pm ET. Todd Schoenberger will be on to talk about the housing market and the new class of fools.
Kimberly is not alone in her thoughts as more and more young professionals choose to live in an urban, agile setting rather than be susceptible to a life of endless house maintenance, limitless property tax hikes, and a concrete burden of never being able to sell unless at a fire-sale price.
Owning a home isn't just for suckers, as I stated in my CNBC column in November of last year; it's creating a class of fools for those who do buy, because so many Americans continue to think home ownership is the passport to the so-called American dream.
Headline news stories about rising interest rates and lack of supply are pushing people to make irrational decisions and, inevitably, finding themselves in the unenviable land of buyer's remorse. And with a clear demographic shift, such as the millennial generation Kimberly and her peers find themselves in, the short-term and long-term prospects for the real estate sector are horrifically scary.
2014 was expected to be real estate's Gatsby year. After promising sales numbers in 2012 and 2013, this was going to be the year we were going to hear how homeownership wasn't just a stable investment, but also the gateway to American prosperity. Sales and contracts jumped, including home values as reported from Case-Shiller. The former, however, is top-heavy as the most expensive properties are mostly selling; thus manipulating the data, as seen in the following chart from the National Association of Realtors:
And with rates creeping higher this year, the feeling was those who were on the fence about buying were ready to make a commitment they most likely wouldn't end until death. Hardly surprising, however, we haven't seen that significant bump in real estate sales metrics, and the details behind the data suggest we're on the cusp of another dramatic real-estate bust.
Case in point is the data detailing housing starts — a key metric for new residential construction. Historically speaking, housing starts' figures reach a yearly high in April and May because springtime in the country is typically its peak home buying period. Yet, this year, despite a record-setting stock market and what some will argue is a significantly improved labor picture, we've seen a downward shift in housing.
According to the U.S. Department of Housing and Urban Development, privately-owned housing starts in May dropped an unnerving 6.5 percent from a downwardly revised April reading. And single-family housing didn't fare much better either, as starts fell by 5.9 percent against a lowered April print. This signals what is likely to be a brutal third and fourth quarter for the sector.
As economist Karl "Chip" Case, the co-creator of the highly regarded S&P/Case-Shiller home price index, recently pointed out: "Every time [housing starts] have gotten below a million in the past, it's come right back. Every time except the Great Recession."
The number is dropping, and according to HUD, it now stands at an annual rate of 1,001,000. Incorporate ancillary items such as a drop in demand, higher interest rates, and an unappealing affordability factor, you have to question whether we are still another full generation away from a viable housing environment.
"The Chinese are coming over here with millions and billions of dollars, and they want to spend it on assets that tend to hold their value. And at least the theory is that housing does. But it is far from what it was in 2004," Case said.
The demand side is critical because, without it, housing will be a giant bust —again. It's difficult to analyze the appetite for foreign buyers, but data on millennials is a bit more tangible; and there are few glimmers of hope this generation can be the octane for a housing boom.
According to the Federal Reserve Bank of New York, only 22 percent of 30-year olds who had student debt also had a home loan in 2013. This is down from 34 percent in 2008. In addition, wages and employment for this group are lower when compared to the overall population.
In 2012, 63 percent of 18- to 31- year-olds had jobs compared with 70 percent in 2007, according to Pew data. The unemployment rate for people from 25 to 34 was 6.7 percent in May, compared to the national rate of 6.3 percent. And regarding wages, according to the Washington-based Progressive Policy Institute, the average annual earnings of Americans 18 to 34 who worked full-time fell by about 5 percent from 2007 to 2012; whereas the general population saw an increase of 2 percent during that time.
If you're banking on this group of 85 million Americans to single-handedly save housing, or at least have it strengthen to be a viable part of the domestic economy, then you're just as big a fool as those suckers who recently purchased a home. You need younger generations to pick up the slack if you wish to have any sense of growth in the sector.
Finally, the one true proxy, which really serves as the ultimate gauge of truth and sentiment, is the stock market. And despite the Dow (.DJI) and S&P 500 (.SPX) hitting higher highs recently, the real-estate sector is embarrassingly underperforming the broader averages. Over the rolling 12-month period, the Dow Jones Real Estate Index — consisting of companies such as Toll Brothers (TOL), KB Homes (KBH), Hovnanian (HOV) and Lennar (LEN) — is only up 9 percent while the S&P 500 (.SPX) has returned close to 20 percent in that time period.
And with critical earnings reports due out in the coming weeks for these companies — in what should be an easy analyst beat — will likely disappoint and put added pressure on a sector in serious need of a jolt of adrenaline. Investors and homebuyers are continuing to look like fools in what should be a stable and supporting investment environment.
Commentary by Todd M. Schoenberger, the founder and managing partner of LandColt Capital LP. He also serves as Portfolio Manager of the LandColt Onshore and Offshore Funds. Follow him on Twitter @TMSchoenberger.
Disclosure: The LandColt Fund sometimes holds long and short positions in real estate, and only uses ETFs and mutual funds that mimic the Dow Jones Real Estate Index. Currently, the fund does not hold any positions in real estate. And, neither Schoenberger, nor the fund, have positions in any of the stocks mentioned in the article.
