Housing Gets Even Worse

November is never a great month for home sales, but don't let that fool you: Today's reports are truly gruesome, falling significantly short of very bearish expectations. New home sales, at an annualized rate of 407,000, are at their lowest level since 1991; existing home sales, which were running at a rate of over 7 million a year in 2005, are now down to less than 4.5 million.

The median home price in the US is now just $181,000 -- down from $215,000 as recently as June -- and total housing inventory for sale rose in months-supply terms (thanks to the drop in sales) and is now hitting all-time record levels of about one year's supply.

All this is happening, remember, in an economy where roughly two-thirds of American households are owner-occupied. Owning one's own home, something which for most of this decade was a definite asset, is now a serious liability. Millions of workers can't move to somewhere with a better job market, and to make matters worse their net worth is now negative -- which means that no one will lend them any money, even if they are current on their mortgage payments.

And prices have further to fall: As the commenters yesterday were quick to note, if you plug real-world numbers into a buy-vs-rent calculator, especially if you make the reasonable assumption that rents aren't going to rise, it's still generally cheaper to rent than to buy, plus of course you get much more freedom of movement, and the option value of being able to buy a home much more easily in the future after prices have fallen further.

I still think that trying to put an artificial floor under house prices by forcing down mortgage rates is a bad idea, even as it seems to be gaining traction with Team Obama. But you can see the attraction: It's something, which at this point seems to be unambiguously better than nothing. And certainly the economy as a whole isn't going to start growing again so long as house prices and home sales continue to fall at this kind of pace. But my gut feeling is that we're in for a very long bear market in housing, and that any attempt to turn things around in the short term, if it's successful, will prove to be short-lived.

Comments

[bricki:]

It is not so much as putting a floor under house prices as it is bringing some liquidity to the housing market.

2008 Dec 23 02:13 PM

[FrugalSam:]

If the government stops interfering and lets home prices fall quickly, folks like me will step in buy them quickly. I can make a 50% down payment tomorrow morning.

By trying to put a floor on prices, the government is effectively persuading home owners to not cut prices and hold on for a bailout instead.

2008 Dec 23 02:43 PM

[prudentinve...:]

There are probably many others like "Happy Renter" who deserve to purchase their first home at a reasonable price. Since people in this situation likely have substantial downpayments, and since they tend to be patient and prudent, they are likely to be good credit risks. It would be unfortunate if we adopt policies against such responsible individuals and in favor of those who try to live beyond their means at the expense of others.

2008 Dec 23 03:06 PM

[kingaj12:]

The most important thing right now is to put a floor under the unemployment rate and on the financial consequences to consumers of being unemployed. Folks are not spending because they are concerned about their post-layoff lifestyle; and Banks are not lending because they are concerned, too.

Keynes' "General Theory of Employment, Money and Interest" is a pretty good read right now, given all the Keynesian phenomena happening around us.

2008 Dec 23 04:34 PM

[Questioning:]

It's a tough call what should and shouldn't be done to revive housing. With SRS closing today at $57.50 on a 52-week range of $52.10-$295.72, it seems clear the market is expecting a real-estate bailout. It seems unlikely any intervention could be a silver bullet. It hasn't been in other sectors so far and more and more industries are lining up -- hat in hand. With all of these demands, it's hard to imagine the possibility of a viable "floor" for housing.

2008 Dec 23 04:40 PM

[jepittman:]

Construction of new homes is now below household formation. Net new housing starts are approximately 400 thousand units per year with household formation approximately 1.2million. Thus new and existing home inventories can be expected to fall about 600M in 2009. A bottom in housing is in sight. As the inventory of homes is worked off a major drag on GDP will be removed. This is already on the radar of large investors.

2008 Dec 23 09:46 PM

[Scott Sambucci:]

Couldn't agree more with your statement: "I still think that trying to put an artificial floor under house prices by forcing down mortgage rates is a bad idea." The net effect of a mortgage rate decrease to the proposed 4.5% would have less of an impact the lower overall price levels. If you run the math, the effects of 20% drop in home prices will lower monthly payments to the buyers more than a 20% drop in mortgage rates (say from 5.5% to 4.5%) with an artificial price floor. I ran some numbers for comparison if you're interested in seeing the net effects - scottsambucci.blogspot...

2008 Dec 24 09:34 AM

[Guero:]

Sorry Felix, but median home prices NEEDED to fall. When the majority of buyers can't afford a home if not for a no-down, interest-only, teaser-payment abortion of a financial instrument, that means the market is out of balance. What is occuring now with housing prices is beneficial, even if it feels like hell to those who bought at the top.

2008 Dec 24 10:10 AM

[PASTOR TOM:]

Considering my real estate investments of 31 properties, when I decide to let the bank have the property due to being upside down now, the banks (mortgagees) on 29 of the 31 properties are just ignoring the situation. This is 93% of my properties not being pushed into foreclosure. How many other small investors have this same type of inventory of foreclosable properties that the bank's are ignoring, so they don't have to put them on their "Bad Loan" list, and increase their reserves. Countrywide is the most common ones. If my portfolio represents 93%, what about the rest of the investors? We have NOT seen anything like a "Bottom" and won't for some time. I am estimating September, 2013 for the time when real estate will again be "As We Knew It".

As for the "New Household Formations" don't most new households rent?

We have a ways to go in this upside down real estate market.

Comments?

2008 Dec 24 10:31 AM

[scootie2008:]

Some calculators also value [on the rent side] the saved down payment and saved excess monthly payments as invested with a 7% return over the life of the note.....that needs to be rethought as well.

It should be becoming clear that the government cannot put a floor under any of this. Sure we're doing all the stuff the FED did not do in 1929 but that does not mean it would have worked in 1929 or now.

2008 Dec 24 11:21 AM

[Austrian Sc...:]

It wouldn't have worked in 1929 either, this is where the Fed and Bernanke has it all wrong. They believe their own hype. The time to stop corrections is before the bubble forms in the first place. By now its too late.

They should just let the freaking thing correct and learn there lesson that a series of booms and busts fostered with bad public policy does more harm that good in aggregate. They're beating the hell out of the middle class for the benefit of the people who make their living in financial system.

2008 Dec 24 11:29 AM

[Kunst:]

Isn't it interesting that SRS (Ultra-short Real Estate ETF) is at a 52-week low when real estate has collapsed over those 52 weeks? Beware of the ultra and especially the ultra-short funds. They massively underperform what they are supposed to do.


On Dec 23 04:40 PM Questioning wrote:

> It's a tough call what should and shouldn't be done to revive housing.
> With SRS closing today at $57.50 on a 52-week range of $52.10-$295.72,
> it seems clear the market is expecting a real-estate bailout. It
> seems unlikely any intervention could be a silver bullet. It hasn't
> been in other sectors so far and more and more industries are lining
> up -- hat in hand. With all of these demands, it's hard to imagine
> the possibility of a viable "floor" for housing.

2008 Dec 24 04:24 PM

[vaughn:]

Pushing long term interest rate down to 4.5% level might help mortgage borrowers who can actually borrow from banks, but in the same time it also squeezes banks hard. Look, banks already paid zero for its deposits. With long term interest down, the spread enjoyed by banks is also down.

Worse, the money market fund can no longer exist given zero rate return. I think there is a term describing this phenomenon, liquidity trap.Now, the fed will have to purchase all the cp outstanding. The money money fund invested solely in government bond must also fold due to zero rate return. why invested in the money market fund when the return is zero (negative if charged with management fee)?

The qe must fail no matter what. For those who have money do not want to spend now, waiting for a better price in the future. For those who don't have money can not spend unless they can somehow borrow it from banks (they will be lucky if banks don't call their previous loans under the so called universal default clause)

In short, all the money printed by FED via QE will remain in the banking system. The deflation trap will see to it unless and until consumers can afford to consume again. Painful adjustment aheads. No way out of it. not QE. not 1 trillion(?) fiscal stimulus plan proposed by the Obama.

2008 Dec 24 11:16 PM