Housing Is Bottoming

These two charts make the case that the housing market has seen the worst of its decline, which started over three years ago. The first chart is Bloomberg's index of the stocks of major home builders, and today it is about at the same level it was at in mid-October. Despite all the terrible housing news, these stocks have not declined further in value on balance over the past six months—a good sign that all the bad news has been priced in.

The second chart shows the yield on 10-year Treasuries compared to the yield on FNMA current coupon conventional mortgages (homeowners pay a rate about 50-100 bps higher than that). What we see is the MBS spreads are back to "normal" levels while mortgage rates are at generational lows. Indeed, since the MBS market was first created in the 1970s, rates have never been so low. Add to that the fact that home prices are significantly below their highs in both nominal and especially in real terms, and you have a tremendous surge in housing affordability. No wonder sales activity is picking up dramatically in all the markets that have been the most distressed.

If you have been thinking of buying a home, don't delay much longer.

Comments

[Mad Hedge F...:]

Sorry, I don't buy it. The Manhattan residential market is now in free fall, after holding up better than every major market in the country for years. Rents have fallen up to 25% since the Lehman bankruptcy in September, dragging down condominium and co-op prices almost as fast. Hardest hit have been units priced in the $1-$2 million range that appealed to up and coming Wall Street traders. This class of newly unemployed former owners is now fleeing the Big Apple en masse. The stratospheric end of the market, the mega mansions and penthouses with those fabulous Central Park views and live-in nanny suites in the $30 million on up range, are still holding up. With industry job losses this year expected to exceed 100,000, expect this downtrend to continue.

Apr 06 05:30 PM

[AGreenspan:]

It's just shocking to me that a fellow economist would base his conclusions on just these 2 sets of data. There's probably at least a dozen other economic data sets more highly correlated to housing prices that would be more suitable to draw conclusions.

Apr 06 07:19 PM

[Jonathan Rose:]

Are you mad, truly insane or you just have no understanding of what is going on out in the real world. The market cannot bottom out until house prices become affordable in proportion with peoples salary's, hence deleveraging down to at least three and a half times salary. As everyone looses their jobs and employers see falling sales due to the depression this becomes accentuated and results in property pricing free fall. The stock market is down 50% or more and was not as over leveraged as housing. Expect to see another 30-50% off your neighbors house price until his monthly mortgage payment is equivalent to what he can rent it for

Apr 06 08:53 PM

[sickofthehype:]

Unfortunately YOU need to wake up and realize that in many cities we're already seeing 1999 prices, and 20% down gets you extreme cash flow. That's called the pendelum swinging too far.

Despite your doom and gloom and overall bad attitude, 91.5% of America is still working, and the unemployment is a lagging indicator anyhow. 93% of homeowners are still paying on time too. Prices are well in line with incomes and your free fall prediction is humorous.

Best of luck waiting for 1980 pricing to hit and enjoy that rental.




On Apr 06 08:53 PM Jonathan Rose wrote:

> Are you mad, truly insane or you just have no understanding of what
> is going on out in the real world. The market cannot bottom out until
> house prices become affordable in proportion with peoples salary's,
> hence deleveraging down to at least three and a half times salary.
> As everyone looses their jobs and employers see falling sales due
> to the depression this becomes accentuated and results in property
> pricing free fall. The stock market is down 50% or more and was not
> as over leveraged as housing. Expect to see another 30-50% off your
> neighbors house price until his monthly mortgage payment is equivalent
> to what he can rent it for

Apr 07 12:57 AM

[Russ Wetherill:]

Caveat Emptor! Buyer beware!

If you are thinking of buying a home, delay longer... much longer. During the 1990s housing price slide in Los Angeles, the 12 month moving average of home price change was negative for six years. This means that averaging the net change in home prices for any 12 month period indicated that the prices were falling from 1990 to 1996. Assuming that this recession is as bad as that of the early 90s, we can expect the home prices to increase in the spring of 2013. By all accounts, this recession is much worse than that recession, so 2013 may be optimistic.

Also, as Jonathan Rose pointed out, median home prices need to be inline with median incomes in the relevant market. According to Zillow.com, the median income in Manhattan Beach, Ca is $100,750, while the median home price is $1,433,500. This equates to a price to income ratio of 14.23:1. Clearly, this is no where near a 3.5:1 historical ratio.

Looking at the hardest hit areas of Los Angeles, like Compton, the price to income ratio is also no where near the 3.5:1 ratio. Median Price = $258,000; and, Median income = $31,819 >> 8.11:1.

Looking at the price to rent ratio for a middle of the road home in Torrance California:

Remax has this property at 22317 Madison St, Torrance Ca as a rental for $2750/mo. Zillow values it at $605,000. >> P/r = 1.22. Price needs to fall ~20% to be in line with the 15 time yearly rental income multiple. Since the asking price has been about 20% higher than the Zillow for properties in the nicer areas of SoCal, there is a big difference between what the sellers are asking and what the market dictates the value ought to be. It will take time for the hold-out sellers to realize that bubble prices were not real prices and accept lower values.

We may also need to go through a deleveraging cycle similar to 1931 to 1951 where the nationwide debt to GDP decreased over a 20 yr period until reversing in 1951. Also the interest rates are artificially low because the FED is keeping the rates at a low level. These low rates effectively prop up house prices. When capital is tight, then credit rates should be high so that money is lent to the person that can make the best economic use of the money. Look at the jumbo rate to see what the 30yr conforming rate ought to be right now. If the 30yr rate was 7% instead of 5%, then all financing buyer purchase power will decrease by about 20%. This will cause the housing prices to further correct by 20%.

I could go on with other discussion on relevant factors such as: unemployment, contracting GDP, new mark to market accounting rules, Alt-A and Option ARM resets due in 2010 and 2011, but I suspect that the author is trying to increase buyer interest in the market to his advantage and to the buyer's detriment. Maybe the author is a realtor, a seller, a homebuilder, a mortgage originator, or has some other vested interest in seeing the real estate market recover. He certainly hasn't taken much into account in his analysis.

At best the charts show that the homebuilders have found a temporary bottom. The spread I have been looking at is the yield on the 10yr note and the 30yr fixed mortgage rate. The difference between the two is the premium paid by investors for the extra risk present in the Mortgage backed security. This spread is a good indicator of the availability of capital to borrowers. Historically this spread is about 1.5 basis points. Today, this spread is 2.39. This is below the peak of over 3.0 a few months ago, but still well above historical norms. Why does this matter? Two words: market valuation. Markets aren't being properly valued in many areas because there aren't enough sales taking place due to the lack of availability of credit. The prices may go higher or the may go lower when the credit starts to flow again.

And by the way, jumbo loans require as much as 30% down to get those 7% 30 yr fixed rates. What is that going to do to the sales pace in Manhattan Beach where every sale is a Jumbo Loan?

Apr 07 01:01 AM

[walters:]

Pundit-we need to see some disclosure from you. Basing your conclusions on 2 questionable indicators is problematic. But it is hard to tell if this is just bad judgement or like the clown-Mark Perry- you feel the need to litter the scene with your "good" news.

Apr 07 09:15 AM

[HardwoodFlo...:]

yo- Hedge fund guy- get a new post! It's maddening.

Russ good points. Especially your last one. Jumbo's are hard to get and , compared with FHA, expensive. So, sales are of distressed properties with FHA loans. The prices will keep falling under this scenerio- as the median price falls.

Apr 07 10:31 AM

[BostonObserver:]

How does this view reconcile with the famous/infamous CSFB mortgage reset chart that has made the rounds for the past two years? From the looks of that graph, it would appear that we are in the eye of a storm that will get much worse again in 2010-2011 as a massive wave of Option ARM and Alt-A resets take place.

www.calculatedriskblog...

Apr 07 11:41 AM

[Chris Uhlir:]

UE is not in the neighborhood of 10%. Per Shadow Stats (and the Gov't's own admissions if you dig deep enough) the real UE is probably closer to 20%. And I agree that UE is a lagging indicator but that only is true after it has reached the low point of the trough (sp?). UE rate is still accelerating. The economy is not going to turn around 3m plus jobs anytime soon enough for this to be called a bottom in housing.

"Despite your doom and gloom and overall bad attitude, 91.5% of America is still working, and the unemployment is a lagging indicator anyhow."

Apr 07 02:19 PM

[short WFC:]

phew, good work responders, 10x better analysis than original post

Apr 07 10:51 PM

[Allan Frain:]

By the time the current downward pressures on housing play out, expect the retirement and death of the Baby Boom to exert its downward force. Buy a house for utility, sure. The return of housing as an investment is decades off.

Apr 08 07:24 AM