Housing Solution: Crashing Home Prices or Cheaper Mortgages? 21 comments
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Most will agree that the key to ending this downturn is for the housing market to stabilize. Economists say affordability in the marketplace will bring back buyers. Home prices are down 50% and more in some U.S. markets. This is increasing affordability and bringing in buyers, as demonstrated in California's rise in home sales.
The government is doing its part by forcing lower mortgage rates. The question is whether the market should run its course and regain equilibrium naturally (and at great pain to the American citizen) or will artificially lower mortgage rates make the bottom happen and stick.
James B. Lockhart, federal regulator for Fannie Mae (FNM) and Freddie Mac (FRE) since they were taken over by the government in September, said at a housing conference Monday that
Restoring home affordability was key to a turnaround in the housing market. Despite falling home prices, there are still many potential home buyers "on the fence."
Lockhart was referring to lowering mortgage rates through Fannie and Freddie to help affordability.
Robert Toll, CEO of Toll Brothers (TOL) said affordability is the silver lining on the horizon. Even for a luxury homebuilder like Toll, affordability will bring buyers back. From Toll's FQ408 conference call:
Dan Oppenheim of Credit Suisse just published a report noting that “affordability is significantly improved and better then at any time in the past several decades. The mortgage payment on the median priced home now equates to 16.7% of median household income; an improvement of a 430 basis points since this past summer. That’s down from 25.1% when affordability was at its worst in July, 2006 and well below the long-term average of 23% from 1982 to 2007.”
First signs that foreclosures are subsiding. From MarketWatch:
"Recovery is underway. Affordable is back in the housing market," says Alexis McGee, president of ForeclosureS.com. "In 2009, housing will not only recover, but we'll see buyers leap into this market in droves, depleting our housing oversupply, and actually put higher price pressures on the market."
The latest U.S. Foreclosure Index by ForeclosureS.com shows a slight drop from 84,534 to 84,291 in the number of properties repossessed by lenders following foreclosure last month over October. These are REOs or lender-owned real estate. But that's off nearly 21% from September's 106,415 REO filings. (Year-to-date 12.6 of every 1,000 households nationwide have been lost to foreclosure.)
NAR: The latest U.S. Foreclosure Index numbers show November REO filings in California down to 15,978 in November, down 6.55% from October and off nearly 50% from September. Home prices there have come down, too, as much as 39.4% from Q307 in some areas.
Maybe with home prices where they are, the government effort to artificially reduce mortgage rates will be what pushes the market over to the positive side. Time will tell. From Reuters:
The U.S. housing market is very near a bottom for home sales and prices will hit their low in September, Moody's Economy.com economist Mark Zandi said on Monday… "Foreclosure sales, distress sales, are about 40% of the market. Of course, a bad jobs market means we'll have a couple months more of weak sales."
When prices sink, sales rise. From Newsday:
Multiple Listing Service of Long Island, NY: The median closing price fell to $376,500 for Long Island and Queens last month, down from $421,000 a year ago and $385,000 in October.
The November drop represents a 10.6% decrease from a year ago and a 2.3% decrease from October.
"The good news is things are selling but prices have dropped," said Michael Azzato, associate broker at Century 21 Family Realty in Northport.
USA Today on the Fort Worth, TX area:
The metro area is considered affordable. The median home price is now down a bit, so despite the national financial storm, home buyers are moving ahead.
It may not seem that way to Realtors or others struggling to make a go of it in Central Oregon's decidedly cooler home-building industry, but… Global Insight, an economic and financial analysis and forecasting firm, found that… the median home price in the Bend, Oregon metro area was $276,900 in Q3. And it said that price was 43% overvalued, despite dropping from $286,300 from Q2 and $315,100 in Q307 - when the report found Bend home prices were 62.3% overvalued.
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This article has 21 comments:
Mortgage rates, currently in the mid-5% range, are really quite nice....prices are certainly lower than 2006....
Why is it that no one ever talks about raising income levels...????
Income drives purchasing power and value.
One of the little discussed apects of the credit expansion over the past 15 years is that employees were able to "improve" their lives through borrowing...and employers may have gotten a hall pass on wage growth....
It will be interesting to see how employee / employer salary discussions work out in the future....
I do not intent to preach here, but all in DC are fixated on fixing the problem as oppose to resolving the problem. Fixes are fxes and almost all the time need fixing. However, once a problem is resolved it is done with.
On the low-end:
• Prices have dropped below the cost to buy the lot and build the home.
• Net annual return on an all-cash purchase exceeds 5%.
• You have to win seller acceptance over competing offers within a matter of days.
On the “upper middle class” end:
For homes currently valued between $750k and $2m… the correction has not even begun in earnest. A huge percentage of these homeowners have ARMs. None have reset yet. They will. Its not the interest rate adjustment that will push them over the edge… since their fully indexed rate will still be low, at least for now. It is the fact that some of these loan programs force principal and interest payment re-amortization over the remaining 25 years. Some marginal folks will need to sell. And when they do, since there is exactly zero market for making loans in this segment, people will face increasing pressure to get out, which at best, will put downward pressure on prices, and at worst, spiral into another “sup-prime” type debacle. And that’s with LIBOR staying low.
We just saw the blueprint of how this plays out in sub-prime. It is not a socio-demographic thing, but rather a math thing. These homes will decline in value, 35-40% off peak prices, and the lower-end homes currently trading below intrinsic value will hold their own, or come up a bit to bridge the gap, as foreclosure displacement puts upward pressure on the rental market.
So my take to the question posed in the article above? Crashing prices, which umm... makes mortgages cheaper.
Simply raising wages would cause significant inflation. Everything we consume would go through the roof. If companies believe people have extra income, they will get it from them.
Houses are over-valued. Americans are too deep in debt. Yet, the Governments answer is to get us deeper in debt. They can artificially prop up home prices but they are only delaying the inevitable. What goes up must come down and if Americans are smart they won't jump at home buying until values drop to where you can buy a home for 1.5-2 times your income.
October Housing Market Down, But Select Counties Show Promise According to IAS360 House Price Index
Integrated Asset Services' Index Shows Numerous Counties in Hard Hit States Such as Arizona and Florida Moving Upward
To see the data go to www.iasreo.com/ias360u...
Affordability is an "immediate" status calculation with little regard for what may happen with the level PAST purchase date.
This assumption is based on funding (mortgage) rates being fixed after closing - acceptable.
This assumption then implies that the stable funding protects the valuation of the property in question - absolutely unacceptable.
Looking at it another way, AFFORDABILITY is what got us into the problem.
While current and future mortgage application requirements have/will increase, there is little protection for prices until prices adjust with inventory.
That balance is still grossly tipped in favor of falling prices.
That is why. Still not a good time to buy a house and won't be until 2010 at the earliest.
Forclosure stats are currently skewed
Raising wages mean more layoffs and inflation and is not the answer.
We need another 40-45% drop in these overinflated prices.
So far this economic theatre and it's cast of main actors: Fannie Mae, Freddie Mac, Primary Lenders like Countrywide, FED and Treasury have done everything in their power to PUNISH prudent buyers & savers. Their actions have deliberately pumped up home prices and made home affordability nearly impossible over the last decade. This has been a decade of declining affordability and rampant lending of toxic home loans.
Face it, there are only a handful of new home buyers remaining out there and they are aware of the game plan this cabal has set up.
I'm the fence post waiting for the Depressionary crash in home prices.
I've waited 2 decades to afford my own home, I can wait another 2-3 years before I invest my hard saved cash.
The only way to make housing affordable is for prices to drop. Artificially creating affordability through low rates, longer terms, balloons at the end of the loan like with many mortgage modifications now days is what got us here in the first place.
Well researched compilation, thanks!
This is what I commented on months ago, at length. Whether higher affordability as envisioned by the government results in lower prices or lower mortgage rates doesn't make any difference. The fact is, many potential buyers are now able to 'afford' a residence in their locales, because prices have fallen to the point that median income families can purchase homes, and mortgage rates have remained low.
In Northern NV, the median sale price of a home is trending toward $200,000. As I mentioned in the past, that's the level at which a median income household can afford a mortgage at prevailing interest rates.
If interest rates rise, the median price must fall to maintain the same relationship between income and mortgage debt. On the other hand, if median prices fall even further, but rates stay low, more buyers will be able to qualify for mortgage financing.
The biggest challenge I see is that credit has become tighter, and lending standards are stricter than they've been in years. So even if a household qualifies for mortgage financing with verifiable income, the requirements for reserves, good credit, and a stable employment history are being used to reject borrowers that in the past would have easily acquired mortgage loans.
Essentially, affordability is a key component of arresting the slide in home prices. But lenders who are unwilling to broaden the pool of potential buyers because of the factors I mentioned will delay when the housing bottom finally is reached, and by association, when values can begin to recover, even at sub-inflation rates.
ATB,
Bill
Sky-high housing costs at insane DTI levels --like we *still* have in CA-- encourages people to take on massive levels of debt they will never pay off, and to become captive to the banking and real estate industry. This "stimulates" the economy, when people must work 2-3 jobs apiece and spend every dime they have to service that hungry 'gator.
What do you people think would happen if people stopped getting mortgages at 10-11X HH incomes? Utter chaos, desolation... Max Max, that's what! Why... without monster mortgages people might begin... (*gasp*) SAVING again --the Horror! The absolute worst outcome for our economy is for housing along the bubble coasts to come down to a level truly affordable for working or middle-class family incomes. We must do *anything* to prevent this!
Please write your Congresscritter and demand that they man those ramparts!
MORE BAILOUT SCHEMES to protect high prices & executive bonuses!
MORE ARTIFICIALLY CHEAP MONEY from the Fed!
MORE COMPLICATED, DODGY LOANS to help prop up those prices!
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