Housing bear and AdvisorOne contributor Gary Shilling and housing bull Mark Kiesel of PIMCO debated the state of the U.S. housing market on Bloomberg Television's "Street Smart" on Tuesday.
Shilling (left) said that housing prices will decline 20% this year because "there are 2 million inventories, both visible and shadow inventories, over and above normal working levels," which is "a tremendous overhang." He went on to say that "excess inventories are the mortal enemy of prices."
Kiesel justified his bullish stance on the market, saying that, "all inventories you look at, whether new existing or shadow, they are coming down" and "there is only 144,000 new home sales for sale. That's at a 49-year low."
Kiesel on purchasing a home in California and whether he's having buyer's remorse:
"No. I will say it is a little chaotic because there are a lot of boxes around. I think after renting for six years, my view is that housing prices have fallen about 35% and the inventories are coming down and banks are starting to lend again gradually. U.S. housing looks very cheap relative to international housing. I feel good about putting some money into housing right now."
Shilling on why housing prices will decline 20% this year:
"Because of excess inventories. We estimate that there are 2 million inventories, both visible and shadow inventories over and above normal working levels. That is a lot. Back in normal times, we built about a million and a half houses a year, so two and a half million is a tremendous overhang. Excess inventories are the mortal enemy of prices. What may happen here is that now that the robo-signing flap is settled and the big banks settled for $25 billion with the various state attorneys general and the federal government, they have been holding off on foreclosures because they had enough bad PR. Now they have settled that, I think they will go back to foreclosures. The National Association of Realtors says that when foreclosed houses are sold, they sell at a discount of 19% to existing houses and that drags everything down when you get a big dumping of these houses on the market. I'm looking for another 20% decline and that is what it would take to bring them back to the long-term averages. They go back to 1890 in terms of median single-family house prices."
Kiesel on how he factors in those inventory levels:
"Currently, we have 2.5 million homes in existing inventories which is down in the last seven years from 4 million. There are only 144,000 new home sales for sale. That's at a 49-year low. The existing inventory is at a seven-year low. If you look at the shadow inventory, there were 3.6 million homes that were 90-plus days delinquent two years ago. Today, there are only 2.9. All inventories you look at, whether new, existing or shadow, they are coming down."
Shilling's response:
"They are coming down, but they are still huge…Yeah, they are down, but when you count in the shadow, and particularly this category that the Census Bureau has, which are houses held off the market for other reasons, very descriptive. This includes foreclosed houses that are vacant, but not yet sold. It includes houses that people have listed, but they couldn't stomach the bids they got so pulled them off the market. You count all of that in and you are still over a working inventory of about 2.5 million. You are still 2 million above that when you count everything in."
Kiesel on what number he's tracking:
"What I was quoting was the 90-plus-day delinquencies. If you add that with the foreclosures, you do get to the 3.9% level. The thing about housing is that it's very much a regional market. The homes that your viewers and people actually would want to buy, you need to look at the existing inventory that is quality. Go out and look for a house now. There is less quality inventory on the market today than a year ago. That shadow inventory will get absorbed quicker than you think because the implied rental yield is roughly 5%-12% in a lot of markets, so investors will line up. Gary, I respect your work and I read your books and if housing goes down 20%, I will back up the truck and likely PIMCO will, too."
Shilling's response:
"That's right. At that point the percentage underwater of mortgages would go from now 23% to our estimate is 40%. The equity of people who have mortgages which has come from almost 50% in the early eighties to 17% would go down to about 7%. Virtually nobody with a mortgage would have any equity. What that would do to consumer spending to say nothing to mortgages and mortgage-backed securities derivatives, that is pretty heavy-duty stuff. That is recessionary kinds of things. We think that will happen over the next three-four years, one way or the other."
