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We're Nowhere Near A Bottom in Housing
What should prospective real estate investors be watching to catch the inevitable upturn?Sales and home construction have to stop falling, but that's only a first step, analysts say. The glut of unsold housing has to come down sharply before prices can bottom. And like the stock market, price is often your best indicator about real estate's direction.
Real estate slumps are usually local affairs, reflecting natural disasters or regional economic troubles. But the subprime lending crisis has resulted in the first nationwide home-price decline since the Depression by some measures.
States where sales, construction and prices rose most during the lax lending era will take longest to recover, analysts say. Many are located in the West, such as Arizona, Nevada and California.
The last time Western states suffered a real estate slump was in the late '80s and early '90s after the savings and loan crisis and Federal Reserve rate hikes choked off credit.
In the West, existing-home sales peaked in late 1988 and bottomed in December 1990, with a sluggish, uneven recovery. New housing starts peaked in January 1990 and bottomed in March 1991.
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Builders have slashed housing starts by 55% from their January 2006 top. Total unsold new properties have fallen. But that's been overwhelmed by weaker sales and foreclosed homes flooding the market.
Unsold existing homes soared to 11.2 months' worth at the April sales pace, NAR said. The inventory ratio for single-family homes was the highest since 1985.
"You need to get that down to a five-month range for prices to stabilize," Wheaton said.
Economics is not rocket science; it's actually a very simple, common-sense affair after you cut through all the damn noise and spin. Too much of something means the price of that something will go down. That means we've got a huge problem for home prices (graph is from Calculated Risk):
In addition, the months of available supply number is spiking as well (graph is from Calculated Risk):
And as a result of all that inventory, prices are dropping (from the Big Picture):
Also consider this news from today:
Prices of single-family homes plunged a record 14.1 percent in the first quarter from a year earlier, marking a pace five times faster than the last housing recession, according to the Standard & Poor's/Case Shiller national home price index reported on Tuesday.The S&P/Case Shiller composite index of 20 metropolitan areas fell 2.2 percent in March from February and plummeted a record 14.4 percent from March 2007.
Economists expected prices for the 20-city index to fall 2.0 percent on month and 14.0 percent from a year earlier, according to the median forecast in a Reuters survey.
"There are very few silver linings that one can see in the data," David Blitzer, chairman of S&P's index committee, said in a statement.
And new home sales aren't doing much better:
Sales of newly constructed single-family homes rose 3.3 percent in April to a 526,000 annual rate but they were down 42 percent from a year ago, which was the largest year-over-year drop in nearly 27 years, government data on Tuesday showed.
And who is going to buy these homes?
Consumer confidence is low, as is
Consumer sentiment
And consumers have already taken on as much debt as they can handle.
So -- anyone calling a bottom in housing is completely ignoring the fundamentals.
-- Inventory is still surging and will be for the foreseeable future with foreclosures spiking
-- Consumers already have a ton of mortgage debt on their books, leading to
-- price declines.
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So housing is becoming more affordable. That's a good thing. Don't whine because you bought when it was super-expensive.
Hey, overdog, alpha dog, you must have been such a smart dog to buy so long ago. Or do you own at all? Affordability includes the ability to secure funding too. I paid cash for my first home. Still have it. Aren't I just that wise and wonderful person. Hey, dog. If you knew what you were talking about, the best time to buy real estate is anytime. It's having the money that makes it happen. Get a life.
I totally agree. Having the money is the key. Good for you to pay cash for your first home. That's the way to go. The best time is anytime when buying real estate. You get to live in it too. It's wonderful. Having the money is always numero uno.
I would like to see/hear more conversation about the role of the Home Builders in this catastrophe. They seem to be pretty quiet except for asking for a big bailout from Congress and Taxpayers.
I notice where I live are the huge amounts of overbuilding - its like open space and some trees were a bad thing??? So they needed to keep building subdivisions and planned communities. I am unable to even think about putting my home up for sale because there are so many newly built homes in my area that are still not sold. Of course I blame the greedy municipalties too. What was wrong with these people making these stupid decisions to build, build, build, and lets overbuild!!!!
what's wrong? chasing the buck, buck, buck! We are increasingly competitive and less cooperative. We are lost, seriously lost. The home builders (in capital letters) will scrape the Earth until they reach the core to make big money and then they cry and get taxpayer money to support them during the lean times. Ship of fools. Vote Obama............ at least that would be a move in a direction where we might not have to be forced into living in suburban hell because of uncontrolled development.
And before its over Hale, it's likely to spread to the critical consumer credit market. Meredith Whitney, chief of equity research at Oppenheimer, sees the housing/credit crisis extending beyond 2009. "Ms. Whitney estimates that by 2010, $2 trillion of available credit card lines, or 45 percent of total outstanding credit lines, will be stripped from consumer liquidity."
With GDP based on 2/3rds consumerism, the impact on the US economy could potentially be disastrous. Thus far, Ms. Whitney's track record as a financial/banking analyst has been stellar. If you get a chance, watch yesterday's Bloomberg interview of Meredith here:
http://caps.fool.com/Blogs/ViewPost.aspx?bpid=56831&t=01007689170116685293
Honest, factual, and hard hitting discussion of securitization, credit card exposure, & new regulations. Hale, have you ever considered collaborating with Ms. Whitney? I think you'd make a great team.
Pay cash for everything. Death to the debt lords.
The deeper we go in debt, the fewer options we have. The foreign interests are in control, witness the corrupt former Senator Gramm who is working for UBS, foreign owned banking monopoly while advising a Presidential candidate. Bill Clinton has worked for foreign interests to line his own pockets. In every direction elected leaders are retiring to lobbying extension positions of foreign led organizations. Interest on our debt is coming home to purchase and control.
With ever increasing volume and speed, our Country is being bought up by foreign government controlled sovereign funds. We are losing our sovereignty over our own affairs as America rapidly declines and our democracy crumbles before our eyes. Our fate will be indentured servitude without immediate national rules governing outside ownership.
There is no political leader who discusses other than foreign meddling, bailout, handout and "a chicken in every pot and a car in every garage." Refusing to discuss trade deficit and foreign ownership, debt, indebtedness and looming massive unemployment and bankruptcy is a symptom of political and social immaturity. We are beginning to see the consequences of "something for nothing" economic policy including this unprecedented housing market collapse.
Well said.
Very well said.
It's called 'privatization'. We sold goods in times past, now we no longer produce anything to sell so we sell companys, industries, highways, bridges, golf courses, ports of entry, etc etc etc. Before our eyes we have become a 'services' country, bad for workers, good for hookers.
Let's face it. The US Consumer is frozen in his tracks.
We can argue supply or demand side for the housing industry situation.
But if we look at it from the demand side, we have a Consumer who is 1) in debt 2) his house and investments are illiquid as if they were Auction Rate Securities. Even if he has equity which he wants to convert to cash, he will take a tremendous beating in value.
We have been literally forced out of local savings accounts, CDs, etc. into markets resplendent with risk and robbers. (BTW, has anybody noticed the Fed has swapped out almost half of their reserves for chitty debt?)
The Paycheck class is already being hammered everyday, and if they have been adding to a portfolio, it has just been a debt exchange. But now the Invisible Hand has moved up the food chain into the upper reaches of the Middle Class. it is after that cheap capital and debt-based revenues that greased the corporate margins. And it is going to get it, until we think up our next bubble.
The Market is down now, and its the last hiding place for that cheap money. Top Mutual Fund managers are watching declines in their assets under management, but they are not showing up someplace else. Watch the LIBOR,too. It's getting expensive for hoarders of commodities.
The Consumer is picking at the last of his pennies.
And all this while Peak Oil hits and corporate, consumer and government debt skyrocket.
Should the oil supply fall rapidly ( over 2% a year ) the world economy will implode and our economy along with it.
Get ready for the reckoning ...
Peak oil is at least 30 years out, based on CURRENT estimates. The bigger concern is that the environment is looking to hit a no-turning back point in the next 10 to 20 years!
Take a look at this chart...
http://www.istockanalyst.com/article/viewarticle+articleid_1930576~zoneid_Home.html
This loan problem doesn't go away until 2011 ...
the fha estimated there was a 3 trillion dollar housinf loan failure comming back in Febuary. We are into 1.3 trillion now!
Long way to go grab your balls and hold on!
A technical (but important) point about supply and demand. Demand is the desire to purchase and the "cash" to purchase. So the interplay between supply and demand has changed drastically in the past two years. If you could qualify for the purchase loan at 100% of purchase price and there was no verification of your income, then there was a lot of "demand" defined in the economic sense that no longer exists. The quality of loans being approved has improved decreasing the number of willing people to sign the dotted line. This has a tremendous impact on a supply that will lanquish. It will stagnate and become headaches. Then it will be salvaged and a new generation of "demand" will exist and the lessons learned will once again be forgotten. (I remember well when interest rates were 14.0% for home loans). Draw yourself a supply / demand diagramatic. Then move the demand slope significantly to the left and see what happens to price. You may even be able to plot the calculus.
OK WHERE DO I DRAW THE LINE WHERE THE HOME WERE OVERVALUED BY THE LOAN COMPANY'S PROPERTY APPRAISER.
Then where would I draw the line for the REAL VALUE of the property, Usually about $ 100,000 to $130,000 less than the Loan was make for.
The demand function for the "real value" will be empiracally derived. I mean, with conservative loans funding the purchases moving forward, offers and prices that emulate 20% down with monthly payments approximating 35% of borrowers' gross monthly income will dictate the values. These can then be crossed to the values (comparables) that were funded in the heydey of the subprime clusterbomb lending. There were a whole bunch of people who knew better.
(It would be an interesting graduate thesis for some budding mba juxtaposing 2006 prices to 2009 prices for a select pop of subprimes)
What should prospective RE investors be watching? They have to be watching for prices to quit falling. If you are a seller, the problem with lowering your price in today’s (declining RE) market is that when potential buyers see property prices going down, there is no reason for them to rush out and buy a house. There is no sense of urgency. When sellers do lower their price (as in today's market), this has the opposite effect on sales. Instead of increasing the likelihood of a faster sale, potential buyers continue to wait until house prices come down further. The further prices come down, the more potential buyers want to wait. The longer they wait, the more prices come down. The more prices come down, the more they wait. It’s like a downward spiral.
If you are a buyer (or RE investor), watch for prices to quit falling.
"Economics is not rocket science; it's actually a very simple, common-sense affair after you cut through all the damn noise and spin. Too much of something means the price of that something will go down."
Just an observation. The number of available houses is not that much different now as a few years ago. They haven't built that many more. The reason more are available now is the slower sales rate. If you look at the sales rate of a few years ago you will probably see a similar number of houses on and off the market as today over a given length of time. The difference now is the time required to sell a unit. Also, at this time I would venture a guess that many people are withholding houses from the market that they would have sold and moved up.
Prices in this case are subject to the psychology of the market and the availability of the means to purchase a house. A few years ago the psychology was one of greed. House prices were rising and everyone wanted a piece of the action. This was made possible by unregulated lending and the fiscal stimulus negative interest rates. Now the psychology is fear. House prices are falling and buyers are waiting for better deals. Therefore, even if there were only one house for sale, if nobody were buying and no one was lending it would be one too many and its price would reflect that.
YEAH ECONOMICS IS SIMPLE!
NOTHING HAS A VALUE TILL SOMEONE PSY MONEY FOR IT.
WHAT ARE YOU WORTH ?
Actually, they did build a lot more. New developments in the middle of nowhere, all with granite and stainless everything. And now with gas at $4 a gallon, you can't afford that hour commute and the new mortgage with 20% down. This is gonna last a long time.
I'm not happy about this, for the record.
I agree with you. The only place to build houses is in non-urban areas, and if you build or buy a house that's not in the city, you'll have to get to the city somehow to get to the job that pays for that house. Of course, you could use mass transit - but oops! You're not in a big city, so there is no mass transit to use.
How much do those Amish buggies cost, anyway?
Ole, a question: Doesn't supply and demand depend on the ability of the buyer to pay in order to support the prices, thus the demand part of the equation? If the banks are still sitting on all that free Fed money, how does that impact the S&D scenario?
The U.S. constitutional system (when not violated) is a federal credit system, rather than a monetarist (fiat) style system. In the United States, we have a central bank institution independent of supervisory control by our elected government. Under the constitution, the national currency is under the direction and control of the Federal Executive, but only with the consent of Congress, especially the House of Representatives.
The U.S. Federal Constitution treats money as a creation of and subject to the state. Our strength lies in agriculture, industry and infrastructure. The shrinking power of hedge funds and usurious banks is inevitable as the value of debt-based assets is shrinking. Protectionism does not look so bad and the Federal Reserve System has been revealed for what it is - a conspiracy to accomplish an unconstitutional goal - placing control of the money supply into the hands of private bankers. Free trade and globilization have undermined the national interests. Cotton Mather, Benjamin Franklin, Alexander Hamilton, Mathew Carey, Henry Carey stood against what is happening today.
Excellent, yet little known fact, "outnow". The persistent myth of the U.S. constitution being based (economically speaking) on the ideas in Adam Smith's "The Wealth of Nations", as well as those of the physiocrats such as Turgot and Quesnay, is just one more example of the distortion of historical fact for the sake of the oligarchy. Those individuals you mentioned, especially Hamilton and the Careys, believed in protective tarrifs, government coining of money and control of credit and banking, and in a dirigist policy of public works, rising wages, and the economic pursuit of the common good, or "general welfare."
Globalization and "free trade" are simply vehicles for creating an autonomous class of the super wealthy at the expense of the middle and lower classes worldwide-so that we may become their wage slaves, "coolies" and canon fodder.
ECONOMIC SLAVERY is a good term to.
You can see fro my reply above(or below) how I agree about everything but Hamilton.
While I think he had a lot of great ideas, around money I see him more of a Bank of Englander type than of the policies you describe.
Maybe its just me.
His proposals on the First Bank US were for it being a private corporation, with government participation, as well as that of foreign entities.
Foreigners eventually able to control our currencies and credit, as they do today, seems like the antithesis of a sound, Constitutional money system.
I fail to see how his First US Bank proposals are consistent with government coining and valuing money and in controlling credit and banking.
I detest Adam Smith.
I admire the Careys' political-economic thinking.
And I recommend that we proceed to implement the Chicago Plan for money creation, while repealing the FED Act and putting the private bankers on 100 reserve banking.
Something Marx said:
"Revolution is 90 percent opportunity, and 10 percent planning."
Something Milton Friedman said on the need for promoting radical ideas.
"It is important, so that if a crisis requiring or facilitating radical change does arise, alternatives will be available that have been carefully developed and fully explored."
The Chicago Plan.
The Monetary Reform Act.
http://www.neweconomics.org/gen/uploads/CreatingNewMoney.pdf
The times they are a-changing.
Wow!
I agree with everything you said, except one thing.
And I thank you for saying it all.
Hamilton?
I'll go back and read some money history books again, and get back with you.
I'd substitute Jefferson and most importantly Lincoln (because he actually DID create government-issue money) for Alexander, and call it a day.
But, even more importantly, the question becomes, what are we going to do about this crime against America and its people?
I am rather fond of this from the Principles for Monetary reform at the MoneyMasters web site.
"Sound monetary reform requires the issuance of all money (legal tender) by the State, exclusively; in amounts calculated to stabilize the general price level; without debt obligation to private persons; with all lending to be performed by private legal persons, exclusively; while safeguarding the widespread ownership of private property."
A revolution.
Proof in this response to Lincoln's issuance from a times of London editorial.
"If this mischievious financial policy (issue of Lincoln Greenback notes) shall become endurated down to a fixture, then that Government will furnish its own money without cost. It will pay off its debts and be without debt. It will have all the money necessary to carry on its commerce. It will become prosperous without precedent in the history of the world. The brains and the wealth of all countries will go to North America. That government must be destroyed or it will destroy every monarchy on the globe"
Still waiting.
I place Alexander Hamilton in this category because of his belief in the "American System." The U.S. Federal Constitution treats money as a creation and subject to the state. I agree that Hamilton had his deficiencies and one must consider the times. Aron Burr was a British agent under Jeremy Bentham. It was later that Woodrow Wilson and Theodore Roosevelt undermined this system until the election of Franklin Roosevelt. The British - the Anglo-Dutch financiers always wanted a monetarist style in globalist terms on implicitly finance-imperialist, neo-Venetian terms.
Lincoln restored the tariff after many years of fighting. The war of 1812 was about British interference and so was the Civil war - both fought over tariffs and cheap labor - to wit: slavery encouraged by the British. FDR used a "hybrid" system. This is where Keynes' ideas come in.
The American System provides a remedy for the financial crisis while the monetarist system does not. Who is going to pay off the war debt? A fixed rate of exchange and government credit and state money.
In SF the prices haven't changed - if anything they have gone up. In our paper today a real estate agent said she has many couples paying all cash for homes in good neighborhoods.
In Encinitas and elsewhere in the more desirable areas in San Diego county the prices have gone up. The subprime loans do not originate in these areas which require jumbo loans. My sister owns several properties in Newport Beach. She is not worried. We paid cash for our home in a prime area in the Del Mar area. We have no mortgage. Our children, however, cannot afford rent in this area. Buying homes for young people will be very difficult. The job market is bad for our son-in-law who has a Master's degree in electrical engineering from USC. He works for his father's firm but not as an electrical engineer. The American Dream is just that. How can young people afford to buy homes?
The rest of the real estate in the U.S. has been way overvalued. Few buyers can qualify under stricter lending requirements. The market will drop as the interest rates move up as they must. I have other property that is not in the right areas that has probably declined thirty percent. In fact, there has been no offers in three months. We just keep reducing the asking price.
Outnow, a little off topic but have your son in law check out Dubai. That is where a young electrical engineer should be right now. Plenty of work, cheap gas, no taxes, good healthcare and make sure he gets paid in Dirhans instead of dollars.
Just goes to show that bushs tax cuts are working, for those who make over a $million a year. How many $50,000 a year earners are buying $500,000 houses with cash?
I don't mind home prices falling by another 30-40%. I am in the market for a bigger home. :-)
BIGGER HOME = HIGHER PROPERTY TAXES + HIGH INSURANCE COST + HIGHER ELECTRIC BILLS FOR HEATING AND COOLING + HIGHER MAINTANCE TO HOLD THAT VALUE
Higher pollution footprint too.
Central Bank interest rate conduct over the balance of the Bushwa administration will dictate where the value and vacancy of real estate goes. Inflation is the solution for fools. This is the path we're on. The target rate for fed funds needs to be in the 5.0% range, it currently sits at 2.0%. Bitter medicine stings. And...what do we think George Jr understands about all of this?
Prices will continue lower until first time buyers can afford a home with a conventional loan. By conventional I mean 20% down and no ore than 35% of income toward the mortgage. Existing home owners have more real estate than they want and will not contribute to turning the market around. Where that price is unknown, but I suspect it is much lower from here (maybe 30%), before we'l see significant new buyers.
Very good point.
May I add one thing.
That 35 percent of income.
A lot of folks just don't seem to realize that over the next few years, the overall economy is going in the tank. it's not just the housing sector of the economy.
That means a substantial drop in employment and real wages.
As a result, when the housing glut begins to approach its natural "response" point, from both a price and inventory perspective, the number of people who can afford that 20 percent down on a 35 percent of income mortgage is going to be far smaller than it has ever been in most of our lifetimes.
My take on the situation is this.
The jig is up on the amount of debt that Americans have built up and accepted as the norm of their existence.
Unless we find real ways of reducing the debt load, there is no solution against a decades-long real decline in the standad of living of all Americans.
There is a solution, but not the political will to bring it forward.
It clearly challenges the stranglehold of the international financial capitalists in creating the money supplies of the industrialized western economies.
I say either fight that power, or get hunkered WAY down.
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