U.S. Housing: A False Dawn Recovery in 2009?

Any prospect of a U.S. economic recovery in late 2009/early 2010 is clearly contingent on a stabilization of the housing market; indeed, alongside the scale of the meltdown in China, it is the key factor for global investors. Although median prices nationally have already retraced to early 2004 levels, perspective Japanese residential real estate fell an astonishing 75% in nominal terms over 15 years from the peak in 1990, and retraced back to 1984 levels.

A remotely similar outcome in the U.S. would be devastating, given the level of consumer leverage. The latest S&P/Case-Shiller Home Price Indices for October 2008 show continued declines in the value of existing single family homes with 14 of 20 metropolitan areas now reporting declines in excess of 10% yoy. Having peaked nationally at $230k, median house prices are now down to just over $185k, compared to $140k at the beginning of the decade before the bubble began to inflate. Both composite indices and 14 of the 20 metro areas are reporting new record rates of decline. As of October 2008, the 10-City Composite is down 25.0% from its mid-2006 peak, and the 20-City Composite is down 23.4%. Even previously resilient urban markets like Boston and New York are now falling fast, reflecting stress in their key financial sectors.

It's not quite all bad news, however. Fixed-rate mortgage rates are falling steadily and now down to 5.2%, which has sparked a refinancing boom; pent-up demand from strong household formation should help mop up remaining excess inventory, given the collapse in new construction. The slump in gas prices will make the hard-hit 'exburbs' with their long commuting distances, particularly in the Southwest, viable again for buyers.

These factors make it likely that although U.S. housing is facing a multi-year correction that will take the median price back another 20-25% over the next several years, it is quite possible we get a short-lived 'bungee jump' move in U.S. housing later in 2009, assuming further aggressive support measures from the incoming Obama administration.

Aside from still historically high valuation levels, weak real income growth and rising unemployment, demographic factors become increasingly bearish for supply beyond 2010 as baby boomers begin to downsize their living space in large numbers.

This underpins my view that we face an erratic and weak 'washboard' recovery in the U.S. and a secular bear market in equities that began in 2000 stretching to about the 2012 horizon, despite now reasonable normalized valuations. Near term however, as discussed in recent posts, there is scope for a strong bear market rally over the next several weeks in equities, energy, and other risk assets.

Comments

[Dr.Jackpot:]

Here's how I value housing.

Buy a piece of land. Get permits and approved plans. Get a saw and hammer (plus 1,000 other items). Take time off and build it yourself. I mean ENTIRELY by yourself if it takes 4 years. Then stand back and admire your work. THEN, you will know what it's worth. Until then, you don't know 'nothing'. I did it and I know what it's worth-------priceless !

Jan 04 09:32 AM

[msoori:]

Dr. Jackpot, That is a good way to value your house... but did you take into account the income lost from taking 4 years off from your work? I am not in a position to take 4 years away from work, so I have to settle with more realistic methods. But I agree, building something by yourself is very rewarding as I have done little projects on my own.

Jan 04 09:52 AM

[rm:]

[Fixed-rate mortgage rates are falling steadily and now down to 5.2%, which has sparked a refinancing boom]

That doesn't really affect housing prices though, does it?

[pent-up demand from strong household formation should help mop up remaining excess inventory, given the collapse in new construction.]

Sure, but we're going to need a lot of fools to mop up if your prediction of further declines is correct.

[The slump in gas prices will make the hard-hit 'exburbs' with their long commuting distances, particularly in the Southwest, viable again for buyers.]

For how long? Even if they do stay down for the long term (they're already approaching $2 again), consumers are waiting for the next excuse du jour that will drive prices up again.

[it is quite possible we get a short-lived 'bungee jump' move in U.S. housing later in 2009, assuming further aggressive support measures from the incoming Obama administration.]

Using larger spoons to conduct the bailout does not change the fact that we're facing a tsunami.

[Aside from still historically high valuation levels, weak real income growth and rising unemployment, demographic factors become increasingly bearish for supply beyond 2010 as baby boomers begin to downsize their living space in large numbers. ]

There lies the core problem. No amount of "streamlined" modifications, sweeping legislation, or new "initiatives" can do anything to change any of those factors.

Jan 04 10:21 AM

[Thomas Smic...:]

Build a home people can afford and buld it to a high standard of craftmanship, and, like a good restaurant on restaurant row, peole will come. My field of dreams is a 3/2 bedrrom 1300 sq. ft home that we are selling like hotcakes in NC, while luxury homes and specs sit and rot. We are buying their vacant lots for about 20 cents on the 2005 appraisal.

We are even financing some guyers ourselves with credit in the mid 600s with more than enough stable income (teachers, etc.) to make payments.

The big box guys are behind the curve, as usual. We have our own bull market, discovered through direct observation.

Jan 04 10:27 AM

[Prof. Samue...:]

RE: 2nd Wave of Foreclosures, Small Business, The Housing Market, Foreclosures, and Job Loss:

On December 14, 2008, CBS’s 60 Minutes had a segment on the 2nd Wave of Foreclosures. They indicated that experts were expecting another wave of mortgage defaults on ALT-A and Option ARMs mortgages which will dwarf the Subprime Mortgage Crisis. CBS MISSED A VERY IMPORTANT FACT!

Many fail to realize that there are millions of self-employed smaller businesses, who employ from 1-10 employees, that are holding the mortgages that are going to reset in 2009 through 2012. These borrowers are Prime and Near-Prime borrowers who hold ALT-A, Option ARMs, Interest-Only mortgages. There are $1 Trillion ALT-As, and $500-600 Billion Option ARMs.

So, here we have a major problem… Not only will these small business owners lose their homes, but there will be the resulting JOB LOSSES on their business failure. Note, although President-Elect Obama is stressing the need to create 3 million new jobs, we must understand that “JOB RETENTION IS AS IMPORTANT AS JOB CREATION”.

I authored a survey which was conducted by the National Association for the Self-Employed (NASE) to its national membership. The NASE Survey disclosed disturbing facts. The NASE survey is at www.nase.org . See the NASE News for the Survey on Toxic Mortgages. Please read my Commentary.

According to this survey, it is estimated that 3,709,800 small business owners hold Alt-A and other toxic mortgages, and 1,279,800 are already delinquent as they have missed one to three or more monthly mortgage payments at mid-November, before the expected Resets that are scheduled to begin in 4th Quarter 2008 through 2012.

The solution lies in the hands of Congress as they meet in January to structure an economic stimulus package. Congress should take note of this survey and be “proactive” in addressing the situation, rather than “reactive” as the case has been in the Subprime Mortgage Crisis.

We can’t afford another shock to our economic system at this time. This 2nd Wave of Foreclosures which will be caused by the ALT-A and Option ARMs will not only result in Foreclosures, but also Job Loss.

Jan 04 12:09 PM

[Kunst:]

Inflation is the debtor's friend. And who is a bigger debtor than America, Inc?

Print money to devalue the dollar by half, doubling prices and incomes. House prices go above 2006-peak levels, owners have equity again, and mortgage payments are cut in half as a percent of income. As an extra benefit, employment surges as American industry becomes competitive again. Happy days are here again.

We wouldn't stiff the rest of the world like that, would we?

Jan 04 04:46 PM

[User 314261:]

But the incomes do NOT double. Incomes have not kept up with inflation for many years, retired "incomes" are cut nearly in half as their savings and retirement funds in dollar denominated investments are cut in half and SS is only incremented by a fraction of the actual inflation rate. What devaluing the dollar does mainly reduct government debt so they can print more money. Nevertheless, the devaluation is taking place because there are too many dollars. Happy new world!


On Jan 04 04:46 PM Kunst wrote:

> Inflation is the debtor's friend. And who is a bigger debtor than
> America, Inc?
>
> Print money to devalue the dollar by half, doubling prices and incomes.
> House prices go above 2006-peak levels, owners have equity again,
> and mortgage payments are cut in half as a percent of income. As
> an extra benefit, employment surges as American industry becomes
> competitive again. Happy days are here again.
>
> We wouldn't stiff the rest of the world like that, would we?

Jan 04 05:33 PM

[Kunst:]

User 31261: You are absolutely correct that there are losers in this scenario. Anyone living on fixed income, lenders, people who were responsible with their spending during the credit party. In fact, most US workers' income will not keep up with price increases. Social Security isn't going to be able to meet its obligations, which is another pressure to inflate and only partially compensate in the COLA.

The problem is that as a country, we've been living beyond our means for a long time, selling off assets (that's what borrowing really is) to make up for insufficient income. That can't last forever, and the eventual result will not be comfortable.

Jan 05 01:45 AM

[Mark in SF:]

"compared to $140k at the beginning of the decade before the bubble began to inflate."


I disagree. This thing got started in 1996. Mid 00's was just when things got really, really frothy. There was plenty of speculation, assuming property always went up, interest only ARMS, etc before that.

Jan 05 03:20 AM

[Mark in SF:]

@kunst
"We wouldn't stiff the rest of the world like that, would we? "

you are forgetting that most debt is owed to other (rich) Americans. The US goverment debt is just a small part of overall debt.

Those rich folk are not so keen on high inflation, I guarantee, as it means their wealth (and the common man's debt) goes away.

Jan 05 03:25 AM

[Mark in SF:]

@Bornstein

What are you suggesting? I bail out Alt-A borrowers?

Why will losing their homes mean losing their jobs? You're not making any sense.

In your report did you mention how many people LIED on their Alt-A loan applications?

Jan 05 03:36 AM

[Smalltownba...:]

Case/Shiller was set up to monitor pricing in a normal market. Today the fact that it ignores foreclosure sales and new home price declines is grossly understating the real drop in prices that has occurred.

We need a new model so that we can see what is really happening.

Jan 05 09:44 AM

[Big V:]

Dear Dr. Jackpot:

You may think your house is priceless, but it's not. If you want to find out what the real price is, just put in on the market and see what you can sell it for. I don't know how much you spent on the land, materials, tools, and labor (represented by 4 years off), but that was a finite amount. It doesn't make sense for a potential buyer to offer an infinite amount of money in exchange for your finite investment of time and labor.

Jan 05 03:06 PM

[john1:]

Just more unpatriotic negativity from liberals who hate America, and freedom.

Jan 05 06:46 PM

[CR Home Mor...:]

In addition to other factors, home prices may continue to drop until mortgage payments are close to the cost of renting similar property. Then qualified buyers will have more incentive to own rather than rent.

Jan 05 10:46 PM

[Jonness:]

"Just more unpatriotic negativity from liberals who hate America, and freedom."

Patriotism and anger will not help you flip your overpriced asset in a deflationary market. My advice is to lose the emotion, study the markets, and do the best you can to protect yourself and family from what is happening around you. Expend your energy using knowledge and wit. Otherwise, you will needlessly suffer, as these times will prove to be a bone cruncher.

Jan 06 12:22 AM

[Debt Free F...:]

Guys if you would only use The Money Merge Account it works virtually like your standard checking or savings account, except it has the ability to cancel large portions of your mortgage interest. You simply put your money where it counts and have your money working for you instead of the bank. With the Money Merge Account system you could have your home paid off in as little as 1/2 to 1/3 the time, with NO increase in your current monthly mortgage payment and with NO refinancing of your existing mortgage. You can even payoff other high interest debts, including credit cards and auto loans.

Mar 19 12:27 AM