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The Housing Market is Nowhere Near Bottom
Housing is what started the current mess me are in. Thanks to record low interest rates from the Federal Reserve, the US consumer went on a debt-induced home buying binge. That binge is now coming home to roost. And it's not going to let up for the foreseeable future.
Let's start with supply. First, there are a ton of existing homes on the market -- right around 4 million (charts are from Calculated Risk).
And this is before we get into the issue of foreclosures.
This translates into a little under a 10 months supply. Also note that this number -- months of supply -- has been increasing.
So -- we have a ton of supply on the market. Unfortunately that has not translated into a big enough cut in prices to stimulate demand. Here is a chart of the Case Shiller home price index.
Notice that prices increased about 90% in 6 years, yet have barely dropped in comparison to the massive run-up they had during the early 2000s. Simply put, we have a long way to go before we start seeing prices hit an inventory clearing level.
And who's going to buy these houses?
Job growth has been dropping, which is leading to
Dropping income, and
Dropping consumption. In addition, it's not like Americans can take on much more debt.
The basic economic facts are very straightforward: inventory is really high and demand is dropping. That means we can expect more price drops for the foreseeable future.
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Can I presume that we all agree with Hale's basic conclusion - there's a huge amount of bad money out there looking to become somebody's losses real soon.
Take a minute to watch mr. mortgage's review of the FED data here.
http://www
It's entertaining, AND worth the watching.
Then, batten down the hatches.
I agree with several posters that Hale's comments are clear and concise (I'd like to see him analyze our Health Care w/ other countries). I don't know if there are anymore disasters the likes of Bear Sterns , but the lower rates are keeping an arm, option arm mess from blowing up.
And just when I need to sell my house because of a sky high property tax increase. So do I let my house go into foreclosure or do I work for the evil health insurance industry?
Great site for health care info; http://www
This has been ruminating in my head for a long time. It may seem facile use of the brain, or a facile brain....
In 2000, the Case/Shiller has the index at about $100,000 for an average home. We look at today and see it has fallen about 7% to $186,000
We then go back to our Census Bureau report of the median household income. It was about the same as it is today. About $48,000 adjusted .
I know that mean and median don't necessarily match out, because the median doesn't exactly sit atop the middle hump of the Bell Curve. But let's consider it close enough for even Bush government work, with my apologies for lack of precision.
Now let's assume that we have a nice median household that wants a home. Second, let's assume they have not given into the mob consumption and have reasonably small shortterm debt. And they have managed to save 10% in cash for a down payment on their home.
Finally, let's assume they have no intention of leveraging out 30 to 1 like Bear Stearns, and will undertake a mortgage a full 2 1/2 times their income. If we back into the number, they can afford a home at about $133,000. In 2000, that leaves them with a real solid opportunity to get a nice home.
Today, that gets them a garage, or a crack house, which recent arrests have left empty.
CM, I couldn't agree more and Bonddad is right on. I have been asking this for a long time, who made the most money off these inflated prices? The government and the banks wanted everyone to be a "homeowner", of course, there was a catch, the huge mortgage/interest, and they all almost lived happily ever after. Forget about that quick recovery, you are looking at years, if ever.
Government through their lack of action allowed this mess to happen.
Government must fix it.
It is too big and everyone can go under.
I say, BAIL-OUT EVERYONE.
If you are going to bail-out anyone then you have to bail-out everyone.
We can sit around and play the blame game and celebrate our neighbors humiliation as yet another home goes into forclosure or we can write the check and fix it.
It's a lot like a bad business deal. There will always be those that want to fight until there is nothing left to fight about and those that just ask: "How much does it cost to write a check and fix it and then go on with our lives and make back the money we lost."
It will be a lot cheaper in the long run to just write the check and fix it.
Read the Ticker's explanation of the current crisis and it's causes. Then sign the petition to fix our financial system. http://fin
Stop the lies before it's too late.
deanfv,
I did read the white paper and did sign the petition.
While I am in favor of much more comprehensive reform to the monetary system, the measures identified in the white paper are individually and collectively necessary to get some sanity-based stability restored to the financial system.
I thank you, and congratulate you for this effort.
I've also signed the petition, deanfv.
I will be passing it on.
Read this. Follow the links and sign the petition to stop the government lies. Get off your butts while you still can DO SOMETHING about this financial mess. Otherwise, Great Depression 2 is coming to YOUR HOUSE.
http://mar
http://fin
The Lies And Obfuscation We Tolerate - Why? *UPDATED* ....
Ben Stein has finally stopped drinking the Kool Aid. I was wondering how long it would take. An article in the NY Times April 27th edition makes it quite clear:
"'The owners, employees and creditors of these institutions are rewarded when they succeed, but it is all of us, the taxpayers, who are left on the hook if they fail. This is called private profits and socialized risk. Heads, I win. Tails you lose. It is a reverse-Robin Hood system.'
........
Don't worry about oil prices say Bubble TV. We'll be just fine. The fact that oil has basically doubled in price in the last year is not a problem for the economy. Yeah, ok - tell that to Joe Sixpack who burns an average of two tanks a week getting to and from work. What was a $50 weekly expense just turned into a $100 one. That's an extra $200 a month out of his pocket. "Stimulus checks" will offset this?
....
http://fin
Low interest rates alone were not enough to cause the crisis we are now in. The government failed to act as overseer in the loan industry, to prevent sub-prime loans from being made without regard to facts and figures. As long as the price of homes was going up, who cares if the borrowers cannot make payments, right? Wrong. A lack of governmental oversight resulted in a housing bubble that could not be sustained. Without oversight, the housing bubble could have happened regardless of interest rate levels.
And who decided to let a "free market" rule the loan industry, without regards to rules and regulations?
Was it the same incompetents who have been making all the decisions for the last 7 years?
I believe the reduction of financial regulation began with the likes of Ronald Reagan and John McCain.
"Thanks to record low interest rates from the Federal Reserve, the US consumer went on a debt-induced home buying binge."
I stopped reading at that line. The US consumer went on a debt-induced home buying binge because they practiced bad financial decision making habits. They made bad choices, that is all.
Most Americans did not. They read the contracts and did the math and saw they may not be able to make the payments so they passed on the loans. The ones who are losing their homes are the ones who failed to be responsible and honest with themselves.
Next time you see one of those "Smith family being evicted by evil bankers" stories, put your "Hate Business" attitude aside and listen to the details. I saw one yesterday. A couple under thirty with FIVE kids was losing their home. Was it the banks fault they had FIVE kids, all of which had the latest Nikki...
Thanks for bringing your myopic perception back for a little slap around playtime, Tater-tot.
There was both fraud and speculation that created the housing bubble, and there are guily parties on both sides. But for you to apologize for the Republican banking industries who were the loaners of the funds, and therefore the self-policing free marketists, time after time, is getting humdrum.
As a retired real estate appraise let me tell you that banks would demand that an appraiser hit the sales price before the appraisal was done. I have heard horror stories about an appraiser being told that if you cannot bring the appraisal in at the sales price we will take you off our panel. Result an ever increasing spiral of sales prices. Banks which have told gullible buyers that they can refinance their teaser rate to a low fixed rate until they try to. There are gullible people who believe mortgage brokers and banks when they lie. Brokers and bankes have been convicted of falsifying loan documents. Banks are at least as much at fault as a buyer who didn't know they would be laid off when their employer moved all jobs overseas, and got a GOP tax break for doing it. The banks who actually changed documentation on loan docs should be forced to forfit the mortgage.
Ah, if only it were that simple. To some extent you are of course right, but the nature of these loans was what made that kind irresponsibility possible. There’s plenty of blame to go around, everyone was thoroughly convinced that home values would increase forever.
This isn’t the first time this country has gone through this. In the late 1920’s home “owners” would take a two or three thousand dollar mortgage to buy a house and pay interest only on the mortgage. They were relying that the property would only increase in value and that they would be able to refinance it at the end of the loan. It didn’t work then either. One of the first things FDR did was set up the HOLC (Home Owner’s Loan Corporation) which spent two billion dollars buying delinquent mortgages from America’s Savings and Loans Banks. It also offered home owners affordable loans with terms of 20 to 30 years.
As far as being a business hater, perhaps you haven’t noticed but I have, business has a tendency to become predatory when unrestrained by regulation. Commerce then reverts to a brawl where the “best?” is the only one left standing. Greed is NOT good, it’s destructive!
An excerpt from a March 2006 posting titled "Economic Tipping Points":
Now for the worrisome part. Foreigners who have been bankrolling our spending spree are getting nervous. The Chinese are talking about diversifying their foreign exchange holdings. The Asian Development Bank is discussing ways to minimize its losses should the Dollar plummet. Serious investors are loading up on gold. Interest rates are rising making it more expensive to finance our debt and our overpriced Real Estate. Rising interest costs are increasing the rate that the deficit is growing. Once investors have lost faith in our ability and motivation to repay our loans they would all head for the exit. That’s when the slippery slope becomes a rout. That’s when that $550,000 home reverts to its original selling price of $87,000. That’s when the $875,000 in your 401k falls to $105,000 and has the purchasing power of $35,000. That’s when the Government has to print the money for Social Security payments. That’s when your employer goes belly up and unemployment reaches 35%. Right now is what would be called the good old days. Those on the Right have an answer to all this, “What Me Worry?”.
The "What, me worry?" answer is provided by the Right to the people on their own side of the great divide who are "out of the loop" as well as the sheeple.
I have to laugh, olephart, when people say the administration is incompetent. They are doing everything according to plan, and the Ministry of Lying Statistics is doing a marvelous job!
Folks, you have been warned....
WE WILL SEE ANOTHER $ 7 TO $9 TRILLION IN BAD LOANS SOON!!!!!!!
UNLESS THE FEDERAL RESERVE STEPS IN QUITLEY AND HIDES IT.
THE F H A ESTIMATED $14.9 TILLION IN BAD INVESTOR HELD LOANS AND WE HAVE ONLY SEEN $2 . 9 TRILLION IN BAD LOANS SO FAR!!!!!!
Mr. Stewart:
What would You do???
I sold my house in the Cave Creek/Phoneix area in 2006, in the height (Thank God) of the market.
Have been supplementing my income w/ the interest income (was better when I could get 5.4%,
now with the Fed, around 3.%)
I am afraid to wake up and find out the banking system went down. I know they are FDIC insured, but that could take years.....
I feel like I need to buy BEFORE I loose $$$$ by a real banking crisis which I think could be at the next turn......
I am now in Sunny Southern Cali to be near my Marines. Oceanside, where there is PLENTY of inventory and deals to be had (compared to 18 mos ago)
Buy a foreclosure at no more than 60% of the assessed valuation.
Or buy foreign assets (stocks, euro denominated bonds in major corps, etc.) and sell them once the price of houses reaches normality.
Sign up for the Dr Housing bubble blog. It specializes in Southern California real estate. If you buy a house now, you're going to lose equity. That's especially true in Southern California. Prices have not yet fallen nearly as far as they will before this is over. Find a safe place to put your money and rent.
Nice summary. You forgot one thing: The number of ARM resets for the next 2 years. People were still borrowing money under crazy terms up until a year ago. Those upcoming resets will lead to more foreclosures, which will lead to more inventory, etc, etc and the downward spiral continues.
See Dave Johnson's Profile
Also a recession is setting in, which will amplify everything we are seeing. It will force many more families into a stress situation, forcing many more home sales. Which will of course make the recession worse - a feedback loop.
Inventory -- the rate of home sales will decrease more, which means the months of supply increases just from the lower sales rate. (A million homes is ten months supply at 100K sales per month but is 20 month supply at 50K sales per month.)
It's not just about the ARM's anymore. Even if you have a conforming loan, stay in your house and make your payments, your property is losing value and in this market you can quickly find yourself upside down.. That's already happening to some homeowners so we're not far from seeing some of them walking away from their mortgages.
WA - I am not disagreeing here.
Upside down is the definition of where a lot of people will be.
But I think a lot of them will not walk away from those mortgages because of the upside-down-nature of their financial standing.
The main key will be a few other factors, the largest of which is the DSC.
As long as people can afford to keep making their payments, they will probably stay where they are.
Yes, they will be in a situation where their equity is disolving or gone, but as long as they can afford the payments, there is chance that over time things may improve.
People have to live somewhere.
Upside-down is the real estate term.
Its the bankers term.
For those who no longer need the home they're living in, you will definitely see the walk-away.
For those who have lots of options, yes.
Hopefully, its well-planned.
And, up next: the Alt-A group.
It was very predictable that a 40-year-low in mortgage rates and "look the other way" regulation was a confluence of circumstances guaranteed to cause unsustainable home-appreciation. Much wealth-creation occurred--on paper--and the huge numbers of people that played the "game" added to ridiculous upward movement. Now the "bubble" will lose "air" and many will lose homes and money. Maybe we will learn that a home should be a "home" first and a means to wealth secondary. These cycles seem not "measured" with any reason by ALL involved!
"look the other way" regulation is meant to help people lose their homes not improve thier lives.
"Look the other way" regulation can allow an unqualified buyer to ATTEMPT to support a costlier mortgage than they can afford. If the market has appreciated, they can--when clearly overstretched--sell and maybe even walk with some profit. But cycles have an end to appreciation. If they got in the game too late and are "underwater" as you say this gamble will not "improve their lives" and cost both the borrower and lender.
ruleoflaw66 - thanks for clarifying Bill Clinton, Joe Lieberman and the DLC's integral role they played in banking deregulation that spawned the current housing crisis (coupled with Greenspan's short sighted policies) as well as many of the Wall Street scandals over the past 8 years - sure the Bush administration ramped up the Clinton administration's pandering to Wall Street's every whim, but the Dems need to look in the mirror and take a hard look at the key role they played in this mess - AND THE SAME GOES FOR THE INSTRUMENTAL ROLE THEY (DEMS, INCLUDING HILLARY) IN ENABLING THE DISASTROUS BUSH POLICIES (AND ONGOING OCCUPATION) IN IRAQ.
GW BUSH DESERVES EVERY BIT OF BLAME (AND THEN SOME) FOR HIS RECKLESS FOREIGN AND DOMESTIC POLICIES, BUT CONGRESSIONAL DEMS HAVE BEEN THERE FOR EVERY BUSH POLICY DISASTER - EITHER SUPPORTING HIM OR SPINELESS ENABLING.
"talk" may be cheap in the real world, but in washington
See Dave Johnson's Profile
Yes, the consequences of conservative economic policies are always the fault of the Democrats. Of course.
And don't forget the war in Iraq. That is now the Dems fault as well, goes the right-wing talking point. As Rev. Wright said, there are too many people who operate on the principle of, " Don't ask me to think, just tell me what to think!"
OK, first off, the Clintons did a great job of acting more like Republicans than Democrats, which kept them in synch with the rightward drift of the country at the time. The core problem is still the idiotic idea that the free market will somehow correct all ills - and even if it does it tends to be reactionary, so it cleans up after the damage has already been done. Great, except the economy in general is now taking a hit and damaging the futures of all of us rather than simply making those who participated in the making of the mess pay. And, if one looks at the CEOs of the various financial outfits, they appear to be walking away with a good deal more than the average wage earner will see in a lifetime, so the wages of economic sin appear to be quite good really. As regards the last paragraph the core problem is that the people who put money into the political system do indeed own that which they have purchased, just part of the charm of an ownership society where the vast majority of the country is owned by a very, very small minority - including the elected officials.
"Housing is what started the current mess me are in. Thanks to record low interest rates from the Federal Reserve, the US consumer went on a debt-induced home buying binge. That binge is now coming home to roost."
Housing IS what started it but let us not forget about all of the HOMEBUILDERS who built thousands and thousands of those mcmansion type homes and bulldozed over countless acres of farmland to build more & more housing developments. So they built way too many homes which has driven the value of existing homes down. I think the homebuilders have greater responsibility in this equation than the home buyers do.
Homebuilders do bare a certain amount of the responsibility for the current mess.
Unfortunately, in the housing bill that just passed in the Senate, there was a provision that allows for builders to carry back their losses to profitable years, another form of socializing business losses.
Homebuilders are still adding to the supply of housing through housing starts, which will further increase the oversupply and their losses.
http://www
They are still building large subdivision here!
Fuel prices forcing people to move closer to their work with no bus lines or mass transit it is getting bad.
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