U.S. Housing Nearing Bottom, But Foreclosures Worrying

The 11% month-to-month rise in US new home sales in June reported yesterday grabbed the headlines, but some of the other indicators are more interesting.

A roundup of analyst opinion by the WSJ’s Real Time Economics blog finds a degree of consensus that the market is at or near a bottom. The fact that prices were down is in some sense good news as it brings affordability into better balance.

As important as the bump in sales is the reduction in inventories. As the WSJ reports, the

ratio of houses for sale to houses sold in June was 8.8. But inventories are shrinking. The ratio was 10.2 in May. At the end of June, there were an estimated 281,000 homes for sale. That’s below 293,000 for sale at the end of May.

Mark Zandi at Moody’s economy.com calculates that excess housing inventory declined from 1.9 million units at the beginning of 2008 to around 1.5 million during the current quarter and will taper off to a near normal level by the end of 2011. Excess inventory is the surplus of homes for sale or rent above a 4% vacancy rate.

Zandi further argues that housing is fairly valued or undervalued in many parts of the country including much of California and the Southwest:

He believes that starts have already bottomed and that prices will bottom in early 2010.

However, Zandi remains concerned about the impact of foreclosures, which are expected to keep rising as loan modification efforts so far have failed to have much impact.

Another ominous sign: Reuters reports that

rising unemployment continues to make more Americans late on their mortgage payments, a sign that the rate of US personal bankruptcies will keep going up, according to monthly data from the Equifax credit bureau.

Barry Ritholtz, at The Big Picture, meanwhile, argues that the monthly data is not statistically significant.

… WE DO NOT KNOW what the change was from last month, as the margin of error is greater than the reported data point.

He puts the June “increase” in perspective by noting that sales were down 21% from a year earlier.

In a similar vein, Floyd Norris of The New York Times notes that

In actual sales, the preliminary estimate is that 36,000 homes were sold, up 3,000 from May but down 9,000 from last June.

To put it another way, this was the second-worst June since they began counting new-home sales in 1963. It was not quite as bad as June 1982, when the country was mired in a deep recession and interest rates were sky high. Then 34,000 new homes were sold.

There are twice as many households in America as there were then, so relative to population this was the worst June ever, by far.

Comments

[Socialism c...:]

The prices in my area have still not dropped significantly -- we are an "orange area" on the map in this article. There are far too many variables being ignored by those calling the housing bottom, IMO. Tell me why I should jump in now in a mad frenzy to get the $8k tax credit, and pay almost that *each year* in property taxes??? That is an out-of-control facet to this that has been largely ignored!! My parents now pay for property taxes each month what their original mortgage payment was! Essentially, they are never done paying. Why do I want in on that?

Confiscatory taxation has to be abolished. Local governments have GOT to find different ways to fund themselves and SEVERELY limit their out of control spending, if they want folks to settle in their town and buy a home there. If this factor is not sufficiently addressed, we will witness rampant suburban decay like we used to see in the inner city.

I don't see housing turning around for a LONG time...not until the looming issue of big government and high taxation is solved in this country. The middle class simply can't afford middle-class life anymore -- and that includes home ownership.

Jul 28 12:00 PM

[Bigman16:]

Are Moody's values based on the Median Home Price in the first exhibit? And what are they comparing that to - average household income?

Jul 28 01:49 PM

[Fighting Yoda:]

Seasonally adjusted the prices actually fell for both 10 and 20 city index : -0.16% and -0.21%. Major/troubled markets continue steep declines Phoenix (-1.7%), Miami (-1.12%), Vegas(-3.08%). Phoenix is now down -54.28% from peak and Vegas – 53.34%. So plenty of bad news – more foreclosures and supply coming.

I do not think there is bottom or even stability in sight – job losses and credit crunch are yet to play out.

Jul 28 02:27 PM

[molson360:]

Moodys is still in business and people are still listening to them?

Jul 28 02:51 PM

[enigmaman:]

Pure inventory manipulation, banks are holding back on processing foreclosures so hundreds of thousands of homes that should have been foreclosed have not. Banks do not want to write these down to actual market value because while on the books home prices can be set at what the bank believes they should be. Flooding the market with all these foreclosures will hurt prices and hurt them so they will bring them to market as needed, holding them as long as they can, like years, that is good news for the people living in them, hopefully they pay some of the carry further offsetting the banks losses

Jul 28 03:43 PM

[Cold Reality:]

I agree with Ritholtz and Norris, as well as anyone else who understands that: 1. Much home inventory is not on the market and not yet reflected as unsold; 2. Pent-up foreclosures from Q2 lender forebearance are not reflected in these results; 3. Imminent higher-quality mortgage defaults are not reflected; 4. The effect of growing unemployment, small business failures and associated economic results are not reflected, and 5. This is, after all, a seasonal bump, coupled with opportunistic purchases at distressed prices (note decline in prices even as sales increase by a miniscule amount).

It would be difficult for the reasonable person to ignore these factors, as it would be foolhardy for anyone to use this data to declare any sort of bottom to the housing price declines.

Jul 28 04:12 PM

[cbc:]

Hey people,
I have noticed there are very few bullish commentors left on SA. I ask everyone to lighten up on the bulls. We do need a little more of their enthusiasm/fantasy. I am starting to get depressed, theres hardly any one left to pick on.
;')

Jul 28 06:21 PM

[robert.b.fe...:]

Gentlemen start your spinning wheels. Historicaly real estate crashes have taken seven years to reset a norm. We still have a long way to go before any reset can be declared as THE bottom. As many have pointed out powerful political and economic forces are trying to mask the depth and severity of the current crash. Commercial real estate is now being hit as well and this will only serve to exaserbate the whole problem. The same political and financial interests will be at work spinnig that crash as well. Add to that many of the sales of residential properties were short sales of distressed accounts. Be very, very careful with real estate at this juncture.

Jul 28 06:30 PM

[deported:]

The market may still have some downward pressure but the screaming deals of 6-12 months ago are all gone. We may never see prices like that again.

Jul 28 07:51 PM

[Moon Kil Woong:]

Thanks to everyone pointing out seasonality and the fact that the housing bounce is not even half as rosy as people are saying. It is annoying to hear blatant lies about how the housing market is great and prices will now rise.

I guess there are a lot of the same people looking to get even more people stuck in real estate. That is the unfortunate effect of saving Countrywide and other bad banks. The simple fact is, usually the best time to buy a house if you want to speculate on property price appreciation is when there is high interest and you use cash. Interest rates are exactly opposite to that scenario if real estate brokers happen to actually care about their clients (they usually don't). I'd much rather get the upside to home prices when interest rates fall than buy on a bottom and fret over what happens to demand if long term lending rates rise even 1-2% or Fannie Mae and Freddie Mac bite the dust for selling at rates that can't even cover defaults (except the Fed is now offering to buy some of these loans to put yet another cost on the taxpayer's tab).

Personally, you will know the housing market is fine when the government stops trying to create hairbrained schemes to artificially support it.

Jul 28 09:52 PM

[Arthur Hau:]

I believe the map drawn by Moody's is totally junk!

At zero percent interest, can anything be undervalued? Just what does it mean by "undervalued"?

The long-run rational Fed fund rate is around 5-6%. At 0%, everything is over-valued!

When people are fooled by the low interest payments for buying a house, how can it be undervalued?

As a rule of thumb, the fair price of a real estate property is roughly equal to the expected average net rental receipt divided by the average long-run interest rate.

When most people do not know the difference between the current artificially low interest rate and the long-run average interest rate, everything is over-valued, not undervalued!

It is easy for something to be overpriced because of the interest rate illusion. However, it is difficult for a real estate property to be underpriced, especially because no one can short-sell it! Without short-selling, speculators can only push up real estate prices; they can pull down real estate prices.

Now, Moody's map is saying that in many areas in the U.S., people'd rather pay significantly higher rents than their expected long-run monthly mortgage payments for owning a house? Ask yourself: is that possible?

Bear in mind that when most people are buying homes for their own living. Any potential capital gains and capital losses really do NOT matter in the long-run to these people! Therefore, they only care about their rents vs. their mortgage payments.

Jul 29 04:11 AM

[Dian L. Chu:]

Though residential housing seems to have stopped free falling, the commercial real estate is the next head wind. Morgan Stanley & Wells Fargo, two of the largest lenders and investors in commercial property across the US, confirmed this when they reported large losses and surging bad loans.

The failing health of the $6,700 billion commercial property market, which accounts for 10+% of the US GDP, could be a significant hurdle on the road to recovery.

Jul 29 09:24 AM

[Rolandownth...:]

Problem is the banks are just to greedy and won't modify the loans so people can live with the real wages they earn. There are masses of homes that haven't sold and and more that haven't foreclosed yet. I suggest everyone read, "Jeff Nielson" The Truth about U>S> housing numbers. I can't believe how rotten the whole system really is! And the commercial real estate hasn't even begun to show how bad it's going to get. Not to mention, unemployment is still going on big-time. I think the real bottom is years away. Wonder how many Americans will have wages that can afford a house anymore with the new cap and trade and health care bill. Taxes are predicted to increase from 50 to 80 percent. Who can afford a house here, let alone be able to live. How can the economy recover when were headed down the road, with the same policies of the Roosevelt era?

Jul 29 11:49 AM

[Research Recap:]

Mark Zandi tells me that housing valuation is determined based on the house price-to-income ratio and the house price-to-effective apartment rent ratio. He uses the Case Shiller indices for house prices. "If the price-to-income and price-to-rent ratios are both well above their long-run pre-bubble average (1980-2003) then it is classified as being significantly overvalued. If one of the ratios is above its long-run average then it is overvalued. If both ratios are near their long-run average it is correctly valued. If both ratios are below their long-run average it is undervalued. These are crude measures of valuation, but informative."

And for what it's worth, economy.com is an independent unit of Moody's and not part of the ratings division.



On Jul 28 01:49 PM Bigman16 wrote:

> Are Moody's values based on the Median Home Price in the first exhibit?
> And what are they comparing that to - average household income?

Jul 29 01:58 PM

[Troyhector:]

I think the US housing market has not hit bottom.

"There are four items in place that are tricking people into calling a bottom, when in fact three of these items are temporary. The result is an artificial restriction of supply and artificial pumping of demand.
1) It’s the seasonally strongest buying season
2) There’s a foreclosure moratorium about to end
3) Federal tax credits offered for 1st time homebuyers
4) Historically low mortgage rates (this may or may not change soon)"

I think housing market has still to fall because America is loosing on Jobs and interest rates have gone higher.

Read More www.housingnewslive.co...

Jul 29 03:55 PM

[Rolandownth...:]

From the New york Times!
Lucrative Fees May Deter Efforts to Alter Loans
www.nytimes.com/2009/0...

Jul 30 03:05 PM