|
||
Five Reasons Why I Think the Housing Bust Ends in 2008
It is hard not to get dispirited by data from the housing world.
The national median housing price is down an unprecedented 16% from the second quarter of 2006 through the 1st Quarter of 2008. Not since the Great Depression have we seen declines of this magnitude.
One in seven houses for sale today is owned by a financial institution or mortgage investor -- impatient sellers who will take the best price and run, further driving down prices.
Many U.S. homeowners are in trouble. The Mortgage Bankers Association of America reports that as of the end of March almost nine per cent of U.S. mortgages were either past due or already in foreclosure. And recent numbers from RealtyTrac Inc. indicate that foreclosure-related filings (such as a default notice) were up 48% from this time last year.
Finally, with pressure on the Federal Reserve to start raising interest rates so to ward off inflation and strengthen the dollar, there is concern about adjustable rate mortgages which reset in the next year or two. "Rate shock," when teaser rates expire and borrowers see rate spikes, is very dangerous for the housing world. We certainly don't need more homeowners in trouble with their loans.
For these and other reasons, many knowledgeable commentators argue that housing prices are in a downward spiral which could push down values for several years to come (see, for example, James Cooper in the June 9 issue of Business Week: "Housing: The Recovery Wrecker").
Still, notwithstanding all the negative information, I believe that housing prices will stabilize by the end of the year. Here's why:
1. Financial institutions and investors know that holding foreclosed property (called REO for "real estate owned") is a very poor utilization of their capital. The lenders who "inherit" this property will move it through the system as fast as they can. Vultures and investors will buy these properties, most likely to rent for some period, but in any event taking them off the market quickly.
2. Although some in government resist a taxpayer bailout of homeowners who got themselves into trouble, political pressures - especially in an election year - are just too strong to prevent substantive government assistance. Last week I had dinner with a U.S. Congressman. Whereas he did not like the idea of helping out people who took on too much risk, he really hated the idea of seeing the economy suffer as a result of housing price declines. In my view, this congressman was expressing the perspective of many of his colleagues in the Congress: if we are going to save Bear Stearns for gosh sakes, in the name of protecting the economy, aren't we going to act similarly when the American homeowner is at risk?
3. Consumer confidence, albeit presently at a 16-year low, will rise with a new administration. All seems so rosy at the beginning of a new presidency, and whoever is elected will have made lots of promises -- promises that people want to believe. This sense of change for the better will jump start the housing market which is really all about consumer psychology. The fact is that housing prices go up when people think they will go up, and vice versa. For most people a house is an emotional purchase and buying decisions are influenced greatly by a confidence about the future. If the prospect of a new administration jolts consumer confidence upward, then housing prices will follow.
4. Sooner or later housing prices will decline to a reasonable "rent ratio," (think P/E multiple) a price at which a house makes sense as a pure investment vehicle. In other words, where the net rental value of the house pays the buyer a reasonable return on capital invested (this analysis applies even if the purchaser intends to live in the house). Already house prices are reaching these levels in certain markets - for an excellent analysis of the rent versus buy decision, read New York Times' reporter David Leonhardt's story of how he finally bought a house after many years of telling his readers to rent (NY Times, May 28).
5. Finally, there are already signs of some strengthening. The April "pending home sales" published by the National Association of Realtors, showed a 6.3% increase over March, and reached the highest volume in six months. A "pending sale" is a contract which, although still subject to contingencies (e.g. the obtaining of a mortgage), is a good sign. Most contracts do end up with a closing and that means housing sales may finally be picking up. While sales do not necessarily mean price increases, the fact that people are venturing back into the market is an indicator that some percentage of the population believes prices have hit bottom.
I forgot to mention that I am educated as an attorney. Attorneys learn to argue both sides of a fact pattern. If someone held a gun to my head, I could write a strong argument for prices declining another year or two. But, since no gun is in sight, this post is how I feel... at least today.
Follow Jim Randel on Twitter: www.twitter.com/jimrandel
Loading comments…
Want to reply to a comment? Hint: Click "Reply" at the bottom of the comment; after being approved your comment will appear directly underneath the comment you replied to
I was comparing the DOW over the "slick Willie" years compared to the "devious George" years and it is quite astonishing. The 8 years of Clinton saw the 15% yield. Bush is not quite 2%. What does that tell you about supply-side yardsticks?
The DOW at Jan 93 was 3309. The Dow at Jan 2001 was 10,646. Annual yield 15.7%
The DOW at Jan 2001 was 10,646. The Dow today 11,842. Annual yield (7yr) 1.5%
So...what is the economic explanation of that for republicans???
3. IMO, a big factor in the housing bubble was Greenspan holding interest rates down too low for too long, in an effort to provide political cover to Bush for the 2001 recession. However, in 2008 we now have a dollar in freefall and roaring inflation. Interest rates HAVE to go back up ... and that will depress housing -- the higher the rate, the more the effect.
4. Mortgage lending regulation will go back into effect. Now that the adults will be back in charge, the free-wheeling excesses of the Deregulation Crowd will be checked ... moving the bandwidth of Eligible Buyers back to smaller, but more sustainable, numbers.
5. "Consumer sentiment" won't mean much when the average person is struggling under historic personal debt, gas prices, inflation, and lack of home equity.
6. Much of your theory seems to depend on generous government bail-outs/subsidies. I'm just not as confident that this will happen -- at least, not in a form that brings back the housing market. At best, it may keep some folks from losing their existing homes.
I'm not an Economist, admittedly, but I see this going well into 2009.
I agree with your point 3. Alan Greenspan had the interest rates on steroids. Irrational exuberance quintuppled! With Fed Funds at 1.0%, Asian Central Banks monetizing the debt of the U.S. (which accomodates our negative real rates), and a deregulation crop of kids running Investment Banks into the era of "securitizations" pricing risk that would have previously been avoided... the result is on the table. We've been here before, we'll be here again. The game of finance needs rules. And the rules need to be enforced. Anyone who does not understand that has not too much maturity or intelligence.
...or is a full-blooded Republican, Henry.
Wow ... I have to disagree, Mr Randel.
1. I suppose the housing market may perk up in some geographic areas, by EOY 2008, but in many areas (especially those worst hit), the glut of unsold inventory is REALLY big! I can't see that getting sold down overnight.
2. If banks and homeowners do let their properties go at firesale prices not only do they take a huge economic hit, but where will the buyers come from? Not all those people who were foreclosed on, that's for sure! And many who want to sell in order to buy will be unable or unwilling to buy, when they see the new values for their property, so they'll take their houses off the market rather than continue.
It's hard NOT to disagree with him, Cathexis.
Well if you buy a home that you actually expect to LIVE in for a while all this is irrelevant, over time it is a good investment. My folks house they bought new in 1963 is now worth 25 times it's purchase price even with a market downturn. Plus if you were able to get a fixed rate loan at a good rate your mortgage will always be a predictable SAME amount, never have to worry about 'rent increases' or 'mortgage payment adjustments' again and that is a PLUS.
This is interesting. Imagine if the past were prologue...and a home you purchased today for $250,000 increased in value by 25 times over the next 45 years!! That average house would be worth $6,250,000. Wow! Imagine the economy it would take to get there.
With the current rate of inflation, thanks to GOP economic policies, we may be seeing that within the next decade. :-/
Another bottom caller!
As if there aren't enough in all the MSM already... ;-)
1) Foreclosures - banks can't keep up.
Plus, in about 40% of all cases - the banks don't own the note! They've been sliced and diced and sold on, so no one can (legally) instigate foreclosure proceedings without clear ownership.
2) Ah, yes, the Great Bailout Clusterf&#ck - no one has yet explained to me how this will work.
Not to mention it rewards bad decisions at the expense of those who didn't make them.
And, of course, not mentioning that two of the architects - Kent and Dodd - are now on the hook for allegedly getting 'sweetheart' deals from no other than Angelo 'Orangeman' Mozillo....
3) Consumer confidence is one thing - ability to buy is another.
4) A bit confused here..... are you talking about buying a house to live in , or an investment property?
5) Ah, c'mon, the National Association of Realtors? With their infamous NAR (Naturally Always Revised) staitstics? That's like asking the wolf about the 'health' of the chickens in the hen-house....
And, good grief - PENDING?!?!?!
About 40% of those pendings will not close escrow, because the buyers can't get the loan, or can't unload their first property.
And, yes, there was a Spring Bounce - most properties are bought and sold in the spring and early summer. But where is the year-on-year comparison? What about comparisons with sales in March 2007, March 2006?
") Foreclosures - banks can't keep up.
Plus, in about 40% of all cases - the banks don't own the note! They've been sliced and diced and sold on, so no one can (legally) instigate foreclosure proceedings without clear ownership."
Note that you carefully and studiously ignore reality. More than 55% of foreclosures are localized in FL, MI, AZ, CA and NV. Which means that 45% of foreclosures are dispersed around 45 other states. You might lik ereality. You should try it sometime.
"5) Ah, c'mon, the National Association of Realtors? With their infamous NAR (Naturally Always Revised) staitstics? That's like asking the wolf about the 'health' of the chickens in the hen-house...."
Admittedly true. but nowhere near as much slef-interest as the Case-Shill-er Spindex. At least NAR is spinning because they sell the actual products (houses) the Case-Shill-er Spindex has no value whatsoever except as an index of volatility. Hence, the Spindex always manages to report some "volatile" change by picking and choosing markets and statistics.
"Note that you carefully and studiously ignore reality. More than 55% of foreclosures are localized in FL, MI, AZ, CA and NV. Which means that 45% of foreclosures are dispersed around 45 other states."
Sorry, Ein, not getting your point..... what does it matter where the foreclosures are? I'm unclear as to your meaning, and how it relates to 'reality'?
Please elaborate - and if you can do it without questioning MY grip on 'reality', so much the better ;-)
The problem as I see it is the derivative ticking time-bomb in which housing is a part of it. Actually, no one knows the impact of the derivatives that were generated during the housing bubble ascendence. But they are significant. And more derivative bubbles (commodity speculation bubbles especially) are being added by a grossly under regulated financial market. Remark, too, that almost all the firewalls put in after the Great Depression has been taken down. Right now it is estimated that the total world derivative market is 500 trillion dollars! That is horrifying to say the least given that the world GDP is around 40 trillion dollars. It has all gotta to collapse sometime. And just as the Soviet Union fell, it is only a matter of time before the US collapses. Republican and Democratic 'deregulation lawlessness' (also under Clinton) are largely responsible. My advice--re-regulate as fast as as possible or face hell.
Dear Jimmy:
Your reasoning is flawed.....the biggest flaw are the NEW, much sitffer underwriting
requirements of almost all lenders.....only the FILTHY(if I might use that term)RICH
are able to get a fast mortgage today.....the rest of the subsidized(FHA,VA,etc.) folks
have to come up with some cash....and, oh yeah, I almost forgot, YOU ACTUALLY NEED
A JOB THAT GIVES YOU MONEY.
A lot of people are losing their meal tickets lately Jimmy and it ain't gonna get any better
soon.
Your "PSYCHOLOGY" centered recovery theory is bogus as a stand alone process....
you need a healthy economy and an expanding job market in addition to the factors
you cited......
I give you an "A" for effort Jimmy, now run along and retake Econ.101,102.
Sorry to disappoint you Dr. Doom
'but the market has already started to turn in parts of the country.
And boomers with large pots o'cash are buying
homes hand over fist. Not to mention a whole bunch of Euros
who suddenly have twice the buying power they had a year ago.
Who do you think is still buying apartments in New York??
The sky does not fall forever Sparky. So get ready to make some money!!!
Vultures abound at all times....hence the age old term "Contrarian".....Yes,there are
pockets of continued "growth" in a few areas of this great and diverse country.....I see
the same picture, both specific and general, that YOU do my friend.
Problem number one here in America, and in the world, is the tremendous jump in
the retail cost of energy.....it's sapping the life out of ANY budding of a recovery.....and
until it works itself FULLY through our economy, it's not going to be the "sweetness
and light" that you refer to.....
Isolated pockets of continued economic growth due to localized conditions DO NOT
make the basis for a true NATIONAL assessment of our economy.....OR the basis for
POLICY to try and turn things around from the direction we are going in.
And, finally, yeah, I make money in a down market myself....I don't have to mention how,
'cause you ALREADY know how also.
Regards......
Blutus, please send your Euro friends to my block here in the rust belt, there are 14 houses available, cheap. Plenty of misquitos in the summer and snow in the winter, they'll love it, it's a preview of hell. Where exactly is the market turning around? Please state.
Hey, Sparkles, wake up and read the STATISTICAL report on the Business page.
To iheardthisbefore; meanwhile back in reality.... seriously, take off the tin foil. Lenders are still making mortgages and always will. The standards are not as lax as they were, but mortgages are still available and downpayments are still tiny. Even the FHA only reuires 3-5%. Amnd of course you need a job. That was always required except for the past 2 years of the bubble.
Has the marlket turned? I don't know. But I do know that whn it does, as it will, the doom and gloomers here will be denying it for at least a year and then will switch to predicting the next crash instead.
You mean like the predictions for the crash that's happening now?
See the post on the Business page, E-Sparky. Facts are kinda, well, factual.
We will never again recover. Just look where they are heading in the European Countries, who are
usually ahead of us. It looks very bleak. They are discussing Hartz IV in Germany for people who can't find a job and one never ever gets out of there, or you get a min. wage job or as Merkel has proposed
$ 4.00 per hour and the rest is being paid by the tax payer, they call it "combi-loan." I ask this, what does a company have to do in the market if they cannot afford employees but who depend on the state? Perhaps the state then should limit or put a cap on their prices too to make it fair.
I don't think so. Back in the 1960s, with one adult working per family, four times the one person's gross income would buy a nice new home. By 2005, it takes 10-12 times the gross income of two adults in a family to buy a comparable home. Greenspan artificially held down interest rates and the federal government ignored the recklessness of lenders to allow people to borrow 100% of the purchase price, get a loan they could pay to buy a house they could not afford. When the interest rates adjusted, people defaulted.
All those properties need to go through foreclosure and all the air needs to come out of the balloon. If it's 20% down today, we've still got plenty of room for real estate to drop before it hits bottom. Add to that unemployment, excess inventory, banks going under, people who owe a lot more than the value of the property and cannot pay off the loan even if they sell, we're likely headed for a scenario when the whole thing drops dramatically: one house on the block comes off their over-priced listing, then it's a race to the bottom. Which would be good because housing prices are grossly out of whack with what people can afford. Let the foreclosures proceed, let the housing market hit bottom.
While I agree with you that homes have a lot further to fall to reach inflation adjusted 1950-2000 prices (the 50 year time period when home prices remained flat with inflation per square foot). I disagree with part of your post.
Yes, the 70% rise in price/square foot since 2000 is temporary and will inevitably sink back to normal levels, but another change will have to happen. Most of the current US home inventory is houses that would have been mansions even 30 years ago. Guess what, with the direction our economy is going, we will return to normal house sizes, that means all the huge homes will either be subdivided and shared, or they will go empty and be torn down to build reasonable sized homes.
2000 square feet, 3000 square feet, bigger? Those homes are dinosaurs, and will go that direction.
Correct.
I predict that a lot of these homes will soon become homes for aging boomers.
And this has already started to happen. Some creative grant writing is going on at a rapid clip.
And the housing market has already started to turn around in parts of the country.
Big difference between 2000 and 3000SF homes, A.
"I don't think so. Back in the 1960s, with one adult working per family, four times the one person's gross income would buy a nice new home. By 2005, it takes 10-12 times the gross income of two adults in a family to buy a comparable home."
Only in NY. Meanwhilke in the rest of reality, 10-12 times two median average adult incomes would be in the 900,000 to 1-2 million range. In 99% of teh country, you can buy 2 or 3 nice new homes for that.
Kind of what I was thinking EinChicago.
Even in my slightly overvalued area of the country (DC exburbs in MD) you can find a decent 3-4br house in a livable neighborhood for easily less than 400K. We bought one ourselves late last year for ~270K (3br, 1.5bath, partially finished attic, ~1800sq ft). A bit over 3x my wife and myself's combined annual NET income, not gross.
We don't view this place as a piggy bank though - just a nice somewhere to live. If it gains some value over the next 5-10 years, so much the better.
THAT IS SILLY !!!!!!!
THE BANKS JUST GOT THE INTEREST RATES LOWERED TO DRAW IN THE NEXT BUNCH OF SUCKERS.
Unless those suckers have a bucket of money,
they won't get near a loan!
The wheel is turning Buckwheat. Don't get stuck behind old news.
People who can't afford it are not longer going to be able to get a loan, any kind of loan.
And the prosecutions of the con-men offering the loans has just begun.
The sun will come out tomorrow Annie!
"The sun will come out tomorrow Annie!"
And the sky will stop falling Chicken Little.
It won't end in 2008.
Swiss Bank has some interesting statistics. The next wave of resets (those belwo prime but above subprime) occur latter half of 2009 early part of 2010. It wil take 6 months or more before those loans are foreclosed on.
You're right about REOs, but banks have already figured a workaround. The organization you mail your check to is a trustee, not the owner (remember CDOs). The true owner of the property might be anyone. What they are doing now is refusing to foreclose. The house remains in limbo. Upkeep is paid for by the taxpayer, the actual work done by the city. There's no one to give a bill to because the city can't prove who the owner is. There also appears to be no deadline a lender has to meet to complete the foreclosure. The lenders do this so they don't have to dip into their reserves and they don't have to pay for the upkeep of a vacant house.
Consumer confidence might go up, but I wouldn't count on it. You contradict yourself, because in the next paragraph you talk about house prices falling to a reasonable rent/ratio.
Pending sales rising doesn't mean prices are climbing. I'd say it points to the opposite. People are buying because they think they are getting a great deal (the market has bottomed out). What they don't realize is next year will be another tsunami of foreclosures.
You missed the part where the American Dollar has to be driven into the dirt so the NAFTA /CAFTA and what ever they call the free trade agreeement with South America will work . SAFTA I GUESS.
So, who are the buyers and where are they getting their money from?
.
This was worth reading just for the term "fact pattern".
.
However, I thought we did not save Bear Sterns. We merely arranged for someone to buy it for nothing.
.
House Prices may be inclined to go up if people feel good but if the lenders are strict enough to limit demand they will not go up.
.
It is good for society for house prices to drop. Low prices mean less stress to keep up a mortgage , higher quality of life and greater economic competitiveness.
.
James, you're looking at this thing "from the top." You're looking, and writing, from the point of view of someone who regards the decisions of millions of individuals "in the aggregate." In other words, the quintessential "macro-economic point of view."
Come with me ... to the other point of view ...
You and your spouse are bringing in around $120K a year, but that's actually only a couple-thousand tankfuls of gas. You're tired of renting, so you look around. Nice houses, that you well remember having spent about $100K for a few years ago, are on the market for nearly half-a-million.
What do you do? The LAST thing you're going to do is "to buy a house." You know you'd be "so far underwater" that you'd have no choice but to declare bankruptcy. (Your daddy didn't raise no fool...)
So, you decide to wait. Instead of throwing money away at a "nice house," you buy gold. Magically, the money begins to multiply, because as "dollars" continue to decline (i.e. "what is really happening"), gold remains stable.
A couple of years hence (you can wait...) "the blood is running in the street," and your investment in Gold will have expanded just as rapidly as the Dollar fell. You buy your house from the banker who (as a holder-in-due-course from the beleaguered former-homeowner who finally said "f**k this... seeya!") is desperate.
Works for me. I can wait.
And it worked so well for those gold investors in 88, during the last panic.
*snicker*
Depends when they got in....snork.
"You and your spouse are bringing in around $120K a year, but that's actually only a couple-thousand tankfuls of gas. You're tired of renting, so you look around. Nice houses, that you well remember having spent about $100K for a few years ago, are on the market for nearly half-a-million."
I wish I could live where you live and nevcer have to deal with reality. At no time in history were houses selling for $100K per year at the same time that 2 median incomes were $120K. That's just insane and assinine.
You must be logged in to comment. Log in or connect with
