Where Is That Mythical Housing Bottom? 28 comments
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Unless we see a recovery in the housing market, we won’t really see a recovery in the economy. But is the housing market approaching a bottom? Or does it still have a ways to go?
The answer is critical to understanding the current economic depression.
This is a chart of the S&P/Case-Shiller Home Price Index.
As you can see, it’s plummeted over the last 18 months or so. It shows that U.S. house prices have been spanked harder than a disrespectful 5 year old. And, unfortunately, it shows no sign of bottoming anytime soon.
This makes sense considering the flood of foreclosures hitting the market. In my parents’ neighborhood in Fort Lauderdale, Florida, homes that were selling for $250,000 during the peak are now going for $70,000 in foreclosure. Repeat this scenario across the country, and you’ll see that home prices still have further to go.
Making matters worse is the 8.1% U.S. unemployment rate and the fact that nobody can find credit to buy a home with. (Less credit means fewer mortgages.)
As the year drags on and foreclosures keep hammering house prices, this trend will continue to drain cash from homebuilders. That means homebuilders such Lennar Corporation (LEN) should continue to see lower share prices as the year wears on.
Stock position: None.
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This article has 28 comments:
But ... unless this is the end of days, these new foreclosure additions should not create the same level of price deteriation as seen else where because their homes simply didn't appreciate as much or as fast.
As a result damage to mortgage holders should be less and the incentive for underwater homeowners to walk away from their homes is also less.
The market will bottom -- some day. Just don't expect it to go back up any time soon
" ... and the fact that nobody can find credit to buy a home with."
Now THERE is the real myth! Unfortunately it keeps being perpetuated by the media, too.
I just met with the president of our community bank. They have plenty of cash to loan, and welcome to opportunity to loan it.
Forget, "psychological" help. How about dealing with keeping our jobs and real income instead of trying to sustain our phantom asset values. You bought a house, it was overpriced, now other people can buy it 20% lower. Get over it. We buy tons of overpriced shit all the time.
For many individuals, because they paid such a steep price for their house, they can not afford even merely one small financial setback because it will cause them to fall behind on their pay schedule.
In this environment, it's hard for people invest for the next 30 years and buy up all the excess inventory (which as of now is at a record high, ~13 months supply), causing the potential problem of housing staying at low prices due to large supply and, at best, average demand while more and more of those who suffer a financial setback are forced to sell their home due to foreclosure.
Meanwhile lets focus on creating jobs in SUSTAINABLE industries (medicine, energy, tech) - that also enhances quality of life along the way.
As an example, near the height of the housing bubble, home prices in Orange County, California were so high that less than 10% of households had a median income that would qualify them to achieve the dream of home ownership. Because of risk ignorance, easy credit was made available to people who did not truly qualify.
Second is consumer confidence. Third, as already mentioned, is unemployment. All three of these areas must first see improvement and then stability before we see the housing bottom.
As ArkansasAngie mentioned above, there are widespread fluctuations throughout the country where some areas are greatly impacted. Many areas, which can in part claim credit for instituting anti-predatory lending laws, have been protected from artificially inflated home prices and excessive consumer spending by using home equity like it had an ATM card attached to it.
Because the housing boom was artificially sustained outside of normal cyclical channels, the hangover from the party will last longer - and it will also be more difficult to hold back on the reigns as we slide further down the correction side of the hill.
"[A]ccording to a recent USGS study (Assessment of Coal Geology, Resources and Reserves in the Gillette Coalfield, Powder River Basin, Wyoming, USGS open-file report 2008-1202),
pubs.usgs.gov/of/2008/...
the coal reserve estimate for the Gillette coal field is 10.1 billion short tons, which is a mere 5% of the original 200 billion ton resource total. In other words, the USGS has just revised the Gillette resource base down by 95%.
energybulletin.net..."
Credit is available to folks with decent credit scores and some equity/down payment $$.
Demand for home ownership continues but the ability to purchase has curtailed that demand. Low interest rates and average prices in accordance with average household income will negate that curtailed demand.
In short home ownership peaked at 69% and will drop back down to 62-64% which is apparently the natural limit. Until all this happens [supply drop, average prices connected to average household income, home ownership around 64%] new homes will not be built. Now all this is played out differently depending upon geographic location. Florida, California, Arizona, Nevada, Michigan will have much longer balancing times [certain areas of Michigan may never achieve balance].
Mortgage Reset Chart - Relevant For Time Frame Assessment
www.calculatedriskblog...
My take is that we have until Feb 2011 until the main bulk of the resets have taken place. Considering the lagging of Foreclosure - end of 2011 housing may trend toward "Normal".
If you consider the Multiplier effect of the "Web Of Financial Engineering" one can surmise - We Are In For A Rough Few Years.
The Government Does Not Have Enough Money To Throw At This Issue - Eventually confidence will wane when the monies the government has spent become too egregious to pay the interest on. People will not pretend this does not matter forever.
The Worst Is Yet To Come.
On Mar 10 12:21 PM ramblingtwreck wrote:
>
>
> " ... and the fact that nobody can find credit to buy a home with."
>
>
> Now THERE is the real myth! Unfortunately it keeps being perpetuated
> by the media, too.
>
> I just met with the president of our community bank. They have plenty
> of cash to loan, and welcome to opportunity to loan it.
>
>
>
>
So that is why home values are important. But they're still very inflated nationwide...don't believe the cherrypickers who say, "prices are up in my (statistically irrelevant) area".
Now do you see why it's going to get worse?
On Mar 10 05:31 PM GoMyLittleSheep wrote:
> To hell with housing. We DON'T NEED a housing bottom for the economy
> to recover. My livelihood depends on my job, not my house. Why the
> hell would I care being 20% underwater on my house when I have no
> plans to move? Oh, they say it'll help psychologically, yadda yadda,
> etc.
>
> Forget, "psychological" help. How about dealing with keeping our
> jobs and real income instead of trying to sustain our phantom asset
> values. You bought a house, it was overpriced, now other people can
> buy it 20% lower. Get over it. We buy tons of overpriced shit all
> the time.
As housing prices drops the banks lose more and more money from foreclosures. As these losses pile up, the banks have become insolvent, i.e. they can no longer meet their debt obligations and need to be propped up by the government. In this insolvent state, they are no longer willing to lend money. Its like trying to borrow money from a friend who has massive amounts of credit card debt. Your friend won't lend you money until s/he has paid off a good portion of their debt.
Even after all the cash infusion and other government assistance the banks have received, they are still unwilling to lend. This is because they know that their losses are only continuing to pile up because housing prices are still sliding downward, if not accelerating downward. Bank losses won't stop piling up until housing prices stabilize.
So when do housing prices stabilize? Now that credit markets have frozen, banks that are willing to make new loans are requiring 30% or more in down payments. In addition, there has been a flood of unemployment. This combination makes for a very small pool of potential buyers who are likely unwilling to pay for prices that have no where to go but down. Price to rent ratios and price to income ratios in bubble areas have yet to come back down to normal levels. Until that happens, banks will continue to amass losses and remain unwilling to lend causing our economy to continue its downward spiral.
Well, here in Austin, I'm seeing the same kind of bubble dynamics in our housing market that I watched unfolding in Florida in the years leading up to the bust -- which, by the way, is still not reflected in the asking prices of homes in the Central Florida area. So Texas is maybe not that different, but simply a laggard to the game. There are modest blue collar block style homes being sold for treble what they were valued at six years prior. Something's wrong when 1100 sq foot house in a modest neighborhood is selling for over a quarter million dollars -- not to mention some sky high property taxes for the area.
Which brings me to an issue that I don't see addressed much -- taxes; won't cities have to generate the revenues they aren't collecting on vacant properties through some other means? Either with a sales tax hike, higher state taxes (where applicable) or higher property taxes for the responsible owners remaining in their homes? And what about taxes levied on homes based upon bloated value assessments?
On Mar 10 11:48 AM ArkansasAngie wrote:
> USA Today claimed on Monday that just 35 counties have a majority
> of the foreclosures in the US. The contagion is spreading however
> as states like Texas and Georgia see their local economies beat down
> by unemployment.
>
> But ... unless this is the end of days, these new foreclosure additions
> should not create the same level of price deteriation as seen else
> where because their homes simply didn't appreciate as much or as
> fast.
>
> As a result damage to mortgage holders should be less and the incentive
> for underwater homeowners to walk away from their homes is also less.
>
>
> The market will bottom -- some day. Just don't expect it to go back
> up any time soon
>
Building homes people do not want or need is economic waste.
A friend of mine went shopping for a loan in December. After providing standard documentation at Wells and BofA, he went to a Countrywide branch. He was instantly approved with no documentation required.
Yes folks, they're still doing it...
To answer the question I posed. The "buyers" control the "bottom". If and whenthey start acting on their desires, we will at least feel the bottom.
And yes, there is a myth of no money out there. It is there but, you have to make the decision to buy and go ask for it.
To put it another way, wouldn't it be foolish for buyers to try to "catch the falling knife" and buy a home, when home prices are so obviously not at the bottom? If you buy a home today, you pay for all that extra maintenance, taxes, interest, insurance, and depreciation, which would be much better "spent" by putting it in a savings account. If you hold off for a couple of years, you can get the same home for 25% of what it is now, with much lower payments, taxes, maintenance, and insurance costs. More importantly, it will appreciate instead of depreciate. Put the money you saved by renting towards a bigger down payment when you buy a home after housing bottoms. That will lower your monthly payments even further.
The smart thing to do here is to protect the interest of your wife/husband and kid(s), by waiting until it's clear that housing has bottomed. Anyone who advises you to buy now has an ulterior motive.
On Mar 13 09:17 AM Landbuyer wrote:
> Interesting but, who controls the "bottom". This really is a great
> time to buy a home. Affordability is at an all time high, interest
> rates are low, and there is pleanty of product to chose from. The
> biggest issue is fear and the perceptions it brings with it. Jobs
> are a question sure but, if you have a job and decent credit score
> you cn get a home. Particularly the 1st time buyer.
>
> To answer the question I posed. The "buyers" control the "bottom".
> If and whenthey start acting on their desires, we will at least feel
> the bottom.
>
> And yes, there is a myth of no money out there. It is there but,
> you have to make the decision to buy and go ask for it.
In my city newsletter today, the cover story and editorial both lead with local real estate, and how now was really the time to buy. And inside, there's a sampling of what a quarter mil gets you -- a decidedly un unremarkable 1050 sq ft tract home from the fifties. No joke.
Talk about insult to injury...
> The smart thing to do here is to protect the interest of your wife/husband
> and kid(s), by waiting until it's clear that housing has bottomed.
> Anyone who advises you to buy now has an ulterior motive.
>
>
In my city newsletter today, the cover story and editorial both lead with local real estate, and how now was really the time to buy. And inside, there's a sampling of what a quarter mil gets you -- a decidedly un unremarkable 1050 sq ft tract home from the fifties. No joke.
Talk about insult to injury...
> The smart thing to do here is to protect the interest of your wife/husband
> and kid(s), by waiting until it's clear that housing has bottomed.
> Anyone who advises you to buy now has an ulterior motive.
>
>
On Mar 13 09:17 AM Landbuyer wrote:
> Interesting but, who controls the "bottom". This really is a great
> time to buy a home. Affordability is at an all time high, interest
> rates are low, and there is pleanty of product to chose from. The
> biggest issue is fear and the perceptions it brings with it. Jobs
> are a question sure but, if you have a job and decent credit score
> you cn get a home. Particularly the 1st time buyer.
>
> To answer the question I posed. The "buyers" control the "bottom".
> If and whenthey start acting on their desires, we will at least feel
> the bottom.
>
> And yes, there is a myth of no money out there. It is there but,
> you have to make the decision to buy and go ask for it.
Just keep in mind the complexity of the housing market. The fact that you have to go though a process of borrowing money to buy such a big ticket item and the process of selling a home requires time to find a buyer and a process to go though completing a contract when the market is illiquid for houses. Think about it - you put a sign out in front of your house and hope someone finds it no the mls. The buyer has to look at it and make all kinds of decisions of weather they should buy and if it is a good time to. When everyone is doing this at once it further complicates the matter because the asset is now in less demand. If you compare it to selling other assets you can see all the complexity of having an agent, a special contract, and what not. Selling other things are much less complicated and don't require complicated procedures. As far as jobs goes this puts all kinds of people involved in housing out of work such as builders, makers of products, those in construction trades and so on. So the big question is when will housing deflate to a reasonable value and what will fill the gap in unemployment. One would have to look back into history when the problem got out of hand (ie when house prices became overinflated) and what measures our government is doing to make put the economy on track. So then you have to consider is the government putting more cash into our pockets in one way or another to help stimulate the economy and not just feed debt. There's not only a process to selling a home but a process for the economy to rebound. If a person has less wages or no wages and has to pay a huge percentage out of pocket for the cost of living and taxes to the government the chances are slim for a recovery.
Lessons from the Great Depression
-Don't buy something with leverage/credit that you could never possible afford to pay off in the future. this is what so many businesses did in the roaring 20's and the fatal yrs before the depression.
-Don't buy market slogans at market peaks of how strong the economy will continue to be or there's no end to the thriving economy. if it seems too good to be true it usually is. much like Jim Cramer quotes, quotes from analyst and politicians back in the depression, today and other economic crisis. they are paid liars nothing more. sometimes they tell the truth, sometimes half truths, and sometimes they outright lie when they have to.
-More debt creates more poverty. the more you owe the farther you have to dig out of a hole. each time you sign into something your signing your own fate away. with taxes you don't have a choice. this is why monetary policies are so important to balance an economy.
-always consider the risk not just the reward. what were the chances of the home buyers doubling their investment that baught 2yrs before the bubble collapsed? and what were the chance of them loosing it all? obviously the prices were high and rates were escalated. it may have been hard to predict that some would loose it all but the tell tail signs were surfacing.
and one of my favorite quotes:
The Light that burns twice as bright burns half as long...
and you have burned so very, very brightly