Housing: US vs. Japan

What an odd OpEd in Tuesday's NYT.

Its value is the accompanying chart (below) but the rest of it is, how can I politely phrase this? Merde.

courtesy of NYT

I find all the happy talk in the accompanying article nonsense.

Why? Three simple reasons:

1. Excess housing inventory is currently at or near historic levels.

2. The Housing Affordability Index is still very elevated (the index measures median household income relative to the income needed to purchase a median-priced house). While it is off of its recent highs, it is still above its historic mean by significant amounts.

3. The House Price to Rental Ratio. As the nearby chart shows, we are not remotely close to normalized levels yet.

Ratio of OFHEO house price index to personal consumption expenditures on rent

Chart courtesy of WSJ

Also check out: Beware the housing bottom-callers

Source:
Home Sweet Investment
ALEX TABARROK
NYT, March 18, 2008

Comments

[Left Coast ...:]

It would be nice if someone would do some real analysis of fundamentals -- perhaps compare US job creation, population and household formation against those same stats of Japan for the same period. This would give great insight into the support or lack therof for US RE prices.

One might come to a different conclusion and a differnt french word.

2008 Mar 19 11:17 AM

[johnthebear:]

Something important to consider, when trying to figure out where the housing bottom arrives. During the last year, more than 100,000 jobs have been lost in mortgage companies and banks that formerly helped originate a home loan. With fewer people, it will take longer to process a loan.

Also, with the lower price trends, how will real estate appraisers determine what is "market value." Market Value must be based on comparable sales, and for a time there will not be any comparable sales to consider. Appraisers are suddenly held to a higher standard and state license over sight will be increased, again making the turnaround time to get an appraisal longer. This time delay will be of great importance.

Remember on the way down, you could get a loan approved in hours, because the loan originator could immediately sell it to Bear or some other idiot on Wall Street and not have to worry about it. Now, with the meltdown of the securitization process, banks and savings and loans will have to hold home loans for the 30 year term, just like in the old days. So, where will banks that are working with a smaller capital base get the money to make up for all the loan origination's that they did before the crisis?

Bottom line ... the housing price decline has only just begun and there will be plenty of pain throughout the entire economy. It is time for some very serious prayer. A country based on Faith in God and his Son Jesus Christ will survive,but not without pain. He never promised life without pain, especially when a liberal nation turns it's back on him.

2008 Mar 19 01:53 PM

[Griz:]

Yet again a beautiful picture of mean regression... And as they say, a picture is worth a thousand words.

2008 Mar 19 10:18 PM

[hatarakiman:]

I am more interested in the Mortgage/Income ratio. The sellers make the price based on how the buyers could pay.

There is a site giving that information.

www.housingtracker.net...

2008 Mar 19 11:49 PM

[mmouillar:]

Sir,
I find it very telling that we can clearly see an inflexion point on the end of 2002 in the curve "Ratio of OFHEO house price index to personal consumption expenditures on rent".
This is the very moment when prices should have started to go down "in a normal real-estate price cycle", WOULD NOT THE FED HAVE DECREASED INTEREST RATES TO THE UNCHARTERED TERRITORY OF NEGATIVE (in real terms) VALUE.

This move of the FED triggered the rise of the biggest worldwide bubble of history (as explained by The Economist in its "In come the waves" article of Jun 16th 2005).

This bubble is now popping, and its overwhelming size dwarfs all possible intervention by central banks.

2008 Mar 20 06:21 AM

[Gary A:]

I believe our country has done some bad things, like voiding the oil contracts that existed prior to the Iraq War in essence "stealing" oil from Iraq. And like allowing 9/11 to occur with the obvious explosives that existed in WTC7, the one not hit by planes, and with the squibbs showing that came out of the other towers. These all were advocated previously by PNAC (see Wikipedia). To make a long story short PNAC wanted an "event" to get America to invade the middle east. Rove and Cheney were members. PNAC wanted control of oil and petrodollars and the fed bought into it. The fed then had to figure out how to finance this war. Liar loans were the result. Easy money was for the stealing of oil, as a means to pay for that theft.

2008 Mar 21 02:20 AM

[johnthebear:]

Prepare for a long downturn... No, the crisis is not over!

This problem began with the failure of Savings and Loans in 1986 when Congress permitted brokers to sell loans in packages for both commercial and residential loans. Greed of lenders and loan originators caused them to do their best to originate as many loans at any loan/value ratio regardless of quality of the borrower so they could get big fees. They promised approval in hours of huge loans, regardless of the "appraisal" and forced appraisers to hit their values or lose their job. Congress thought they fixed the problem by requiring appraisers to be licensed. They in fact lowered standards and then did not enforce the standards they created.

Government did not oversee this bundling process and it got completely out of hand. The administration did nothing to prevent this from happening and in fact prevented individual states from assuming this oversight authority. I don't think my president, (President Bush) wanted anything done to slow down the lending process. He preferred to brag about the large number of homeowners in the US, regardless of whether the borrower could afford the house he was obligated to pay for. They promised an appraisal in hours, based on flawed computer models and finaly reached the conclusion that an appraisal is no longer needed. I guess not, when the appraisal always meets or exceeds the contract price.

The chickens have come home to roost and there is no plan to clean up the chickens mess. It will be a long time to clean up the mess... maybe 10 years. It won't be pretty. S and P finally got it right, there will be bank failures, but unfortunately there is no way they, Moody's and Fitch can make up for their failure to tell the truth in a timely way. I doubt they will sleep well at night. They failed US.

2008 Mar 21 08:07 PM

[johnthebear:]

Prepare for a long downturn... No, the crisis is not over!

This problem began with the failure of Savings and Loans in 1986 when Congress permitted brokers to sell loans in packages for both commercial and residential loans. Greed of lenders and loan originators caused them to do their best to originate as many loans at any loan/value ratio regardless of quality of the borrower so they could get big fees. They promised approval in hours of huge loans, regardless of the "appraisal" and forced appraisers to hit their values or lose their job. Congress thought they fixed the problem by requiring appraisers to be licensed. They in fact lowered standards and then did not enforce the standards they created.

Government did not oversee this bundling process and it got completely out of hand. The administration did nothing to prevent this from happening and in fact prevented individual states from assuming this oversight authority. I don't think my president, (President Bush) wanted anything done to slow down the lending process. He preferred to brag about the large number of homeowners in the US, regardless of whether the borrower could afford the house he was obligated to pay for. They promised an appraisal in hours, based on flawed computer models and finaly reached the conclusion that an appraisal is no longer needed. I guess not, when the appraisal always meets or exceeds the contract price.

The chickens have come home to roost and there is no plan to clean up the chickens mess. It will be a long time to clean up the mess... maybe 10 years. It won't be pretty. S and P finally got it right, there will be bank failures, but unfortunately there is no way they, Moody's and Fitch can make up for their failure to tell the truth in a timely way. I doubt they will sleep well at night. They failed US.

2008 Mar 21 08:07 PM