Home Prices Fall 11.4% in January: A Chance to Hit Bottom?

I have to say that is quite a shocking number - after median prices held up as sellers were very stubborn throughout 2007, failing to recognize reality and waiting for the "bounce" back to 2006 prices, it appears we are finally getting some capitulation. Remember, "they" told us this could never happen [Jan 24: They Said It Could Never Happen. Ever. They Lied.]

While many will hand wring over this number, it is a bullish development to me. As I've outlined before [What Should Median Home Prices be Today?], home prices need to fall for the free mark.... err.. for our socialist market to react. We've seen the homebuilders slash prices already - it was the homeowners who were still living in denial world. But as more and more supply hits the market (especially forced supply through foreclosures and walkaways), competition will increase and prices will drop. Which will eventually spur new owners into the market.

So the process is now beginning in earnest (bullish) - now we just need to find some people in America who could actually put 10% down on a home (bearish) and the lenders have to want to lend to them. With our savings rate so pathetically low as a nation, I just don't know how many people who don't already have a home have 10% down sitting in the bank account (on a $200K house thats $20K). The other alternative is a return to pushing 1% down, 3% down, and 5% down loans, but I don't know how many lenders will risk that in an era where home prices are falling. If you put 3% down and the home price drops 8% the homeowner is underwater immediately and a future "walkaway" candidate.

So we remain between a rock and a hard place despite what the pundits tell you. When the "rebound" comes, it's not going to be a straight shot up - it's going to be a long sideways. But as houses become cheaper, more people can actually afford them (a foreign concept eh?) and more people will have enough to put a solid down payment on the home (another concept lost in the excesses of the past half decade). Now if we could only get our socialist government to back off and allow this to happen, just imagine the long term positives.

• A widely watched index of U.S. home prices fell 11.4 percent in January, its steepest drop since data for the indicator was first collected in 1987. The decline reported Tuesday in the Standard & Poor's/Case-Shiller index means prices have been growing more slowly or dropping for 19 consecutive months. The index tracks the prices of single-family homes in 10 major metropolitan areas in the U.S.
• The broader 20-city composite index also fell, dropping 10.7 percent in January from a year ago. That makes it the first time both indexes dropped by double-digit percentages.
• "Home prices continue to fall, decelerate and reach record lows across the nation," said David Blitzer, index committee chairman at S&P. "No markets seem to be completely immune from the housing crisis."
• Blitzer said all 20 cities S&P tracks have seen dropping prices for five consecutive months, when compared to the prior month. What's more, the declines are growing in severity, with 13 of the 20 cities reporting their biggest single monthly decline in January.
• Washington, D.C., and Minneapolis both slipped into negative double-digit territory for the first time in January, recording 10.9 percent and 10 percent drops compared to last year.
• The worst performing markets are Las Vegas and Miami, which both reported 19.3 percent drops.
• Other cities that showed double-digit percentage losses were Phoenix (18.2), San Diego (16.7) Los Angeles (16.5), Detroit (15.1), Tampa (15) and San Francisco (13.2).

Meanwhile, while the upper 1% on Wall Street continues to clap like seals cheering on their Kool Aid "2nd half recovery" in the US consumer; said consumer in bottom 80% is living a whole different life on Main Street. Systematic destruction of the lower middle class (and moving up to middle middle class through inflation) will finally become a realization to those upper 0.5% living in $1.6 million apartments in NYC (average salary of $1.4M for investment bank managing director). But then they can push out the "6 months everything will be fine" to "1st half 2009". While blowing kisses to Uncle Ben because inflation really doesn't sting too much in the $1M+ bracket.

• Consumer confidence sank to a five-year low in March as tight credit markets, rising prices and worsening job prospects deepened worries that the economy has fallen into recession. The Conference Board, a business-backed research group, said Tuesday that its Consumer Confidence Index plunged to 64.5 in March from a revised 76.4 in February. The March reading was far below the 73.0 expected by analysts surveyed by Thomson/IFR.

But don't you worry traders - it's time to buy retail stocks because the consumer will be back in force in the malls with their $600 checks come summer. So buy buy buy. That's what the playbook says, and the playbook knows all.

Comments

[kandreau:]

Just to be clear the index fell 11.4% in a year - not in a month.

2008 Mar 27 09:58 PM

[Britishsteel:]

when home prices correct to 3 x;s the buyers salary then you will have found a bottom. Until then short at will commercial reits next, time to get short

2008 Mar 27 10:52 PM

[jimbomo:]

I wonder if we will ever see a real bottom or merely sideways movement with a slow drift downward (like Japan experienced). One reason is because of garbage like this mortgage broker's ad for FHA loans:

--FHA Mortgages - For New Home Purchases and Refinances

--FHA Raises Loan Amounts! Now even more loans qualify.

--FHA mortgages, which are insured by the Federal Housing Administration, are a helpful tool for people who might not qualify for conventional mortgage programs. They offer:

* Low down payment requirements, mortgage insurance and closing costs
* Cash-out refinances up to 95%
* Easy credit qualifying for people who have poor credit or lack a traditional credit history
* Past bankruptcies can still apply
* Help for people with low-to-moderate incomes

--Programs:

Buying your First Home
FHA might be just what you need. Your down payment can be as low as 3% of the purchase price, and most of your closing costs and fees can be included in the loan.

The mortgage broker claims he gets 3 out of 4 applications approved. This is the kind of crap that started all this. The FHA is setting people up to fail a few years down the road.
EOM

2008 Mar 27 11:00 PM

[freddie:]

What is this "socialist government" crap that I read here. The government is controlled by business, commercial and financial elites, and we got reduced regulation of everything - far from "socialist". Is George Bush the epitome of "socialist" leadership?!? But we do have socialism for the rich - the rich demand no regulation of profit, but a quick socialization of loss. Your witnessing it right now in action and still obfuscating with lines like "socialist government". Sophomoric!

2008 Mar 28 03:23 PM

[TraderMark:]

Freddie, actually what you wrote is exactly what I meant by socialist - the recent actions of the powers that be to bail out the upper crust. ;)

2008 Mar 28 03:48 PM

[Britishsteel:]

Does not government intervention mean we have central planning? Does not central banks mean central economics? Does not Hillary Clinton want universal health care at taxpayers expense? That seems like socialism to me. Central anything is socialism Central being the KEY word. And if the government is controlled by businesses then is that not central too ? Who is government here to serve The business or the people? Are we here to serve Business or is busines here to serve the consumer? Are we obfuscating or clarifying what people do not wish to see ? When our congressmen do not stand up and protect our rights under the constitution then what does that mean? here let me give you an example or definitiuon of socialism
1: any of various economic and political theories advocating collective or governmental ownership and administration of the means of production and distribution of goods .
Does J P morgan deal not smack of the above ? the federal reserve in backing up J P morgans deal with 30 billion dollars of tax money ,OUR MONEY is wrong and basically says that our government will eat bad debts of private business at the publics expense ILLEGAL. and now after being called out on it trying to create a LLC to obfuscate the situation. LOL

2 a: a system of society or group living in which there is no private property b: a system or condition of society in which the means of production are owned and controlled by the state
To answer a] of the above, have you not heard of emminent domain
being exercised for the GOOD of the state or town the uses this law? At the expense of the homeowner or business that does not wish to sell or relocate? wake up ok.

3: a stage of society in Marxist theory transitional between capitalism and communism and distinguished by unequal distribution of goods and pay according to work done

when the CEO or president of a private business like Bear Sterns dumps most their stock prior to the failing of the business and continues to state that their is nothing wrong with their finacial health?
And they make 100 times the salary or more of their employees? is this not unequal distribution? especially due to the fact that their employees lost all their pensions and stock options being ground to zero basically? And yet they still walk away with plenty of cash?

Before you speak you need to see the forest to see the tree's.
There are so many more parallels I could draw against these stated defintions of socialism. Do you know that George Bush signed the North American Union agreement without congessional approval? Do you know he signed into law without congressional approval the right to declare martial law at will? We all know he went to war without congressional approval. Think freddie ,Think for yourself ,turn off the television stop watching cnbc and read its fundamental.

2008 Mar 28 06:09 PM

[tomc368:]

Though the situation can be involved, there are 2 important issues we need to rememeber. The number of households is increasing every year so the demand for houses will continue to rise. Currently there are a number of potential buyers sitting on the sidelines waiting for the "bottom" before jumping in, but they will eventually jump in. The demand for housing may have temporarily subsided, creating a glut, but it hasn't abated. Also, those that are losing their home thru foreclosure will still need a place to live and will become renters...from somebody. Secondly, every material and commodity used in building new homes, including labor, has gone up. In addition, farmers are now making a profit from farming their land so they will charge more to developers to sell that land for new housing. Once the "glut" of new homes has dissipated, builders will refuse to bring any new homes to market until they can make a profit in doing so, therefore the replacement cost of new housing will increase to profitable levels....and ultimately, the cost of used housing is influenced by the cost of new housing. Our free market society and the laws of supply and demand will drive the housing market if we can get thru this temporary crisis; and solve the problems of the people who need, and want, to refinance their homes but cannot get the appraisal values to justify the loan amounts they need. Maybe if the government would guarentee the mortgage companies the difference between the appraisal value and the refinance value, people could afford to refiance and would want to avoid foreclosure. Then everyone is a winner.

2008 Mar 29 01:35 AM

[allan:]

Tom, Tom, Tom. Where do I begin. All these 'households' you're referring to are making what...$20...40...60K. Hah. Good luck qualifying at these prices with no down payment and severe consumer debt. And good luck to a new investor/landlord attempting positive cash flows at these cap rates. Prices will stabilize when Joe Sixpack can qualify for a 30 year fixed mortgage. Till then he needs to start saving that down payment. Prices will stabilize when Joe Investor can generate positive cash flows. Till then he'll invest in Pork Bellies.
As far as replacement value, that means nothing. Why do you think builders stopped building. I bet construction labor (and eventually materials) is dropping like a rock. Lots of contractors are getting nervous. Will work for food! You're right about one thing. It is temporary. Go Vikings.

2008 Mar 30 02:49 AM

[allan:]

Sorry to keep pounding you Tom, but I forgot the best part. I suppose the lender could 'forgive' the current difference in principle owed, but what about next year if value drops another 10-30%. Will the homeowner default anyway on his failed investment? Will the lender capitulate again? And what about the following year. And I'm not sure how your 'government' guarantee works, but count on anything the 'government' guarantees as a taxpayer bailout. You and I WILL pay for it. Everyone is a winner...NOT.

2008 Mar 30 03:26 AM

[Ames Tiedeman:]

Here is some interesting data on home purchasing in southern California:

The average payment for someone buying a house today in so. California is $1,890.00. This is down from $2,300.00 in 2005. This $1,890 figure, adjusted for inflation, represents a payment that is 19% less than it was in 1989. I found this in a real estate magazine on-line. Now interest rates back in 1989 were about 10%. Today they are 6%.

2008 Mar 30 08:02 AM

[Ames Tiedeman:]

On prices I believe we are no where near the bottom in place like San Diego. It can fall another 20% over the next year or 2.

2008 Mar 30 08:04 AM

[TraderMark:]

Ames, 1890 a week or 1890 a month in So CA? I don't believe that figure unless it includes rents. 1300 sq foot homes in LA/SD are still north of 400K. It is completely out of whack with what people can truly afford. "Inland" areas were priced like coastal areas and there are only so many "upper crust" people to keep it going. And they live in La Jolla, not Riverside. So until I start seeing Riverside, El Cajon and the like priced at $250K instead of $450K I don't think we are at a bottom.

Tom in MN... it doesnt matter what the builders costs are if people cannot afford the mortgage. Think about a scenario where global commodity push from emerging markets with government with cash (as opposed to debt) like ours, uses their trade surpluses or petro dollars to continue to grow their economy - this will continue to push up material costs - so the costs to build a house continue to rise year after year... and builders can't build profitability. Then you are in a real pickle.

The reality is many of these homes built for $350K or $450K have nothing to do with material costs or labor costs - they were priced "at the market". Home builders were happy to sell with huge markup. Homes are built in Texas for $150K, $175K profitability. So there is no reason they cannot be built in Virginia or So Cal or Portland or New Jersey profitably for similar quotes. I do believe labor (contractors) who were in the bird seat 2-4 years ago now will adjust to the new market rates and hence labor costs will go down, but material (ex timber perhaps) will probably stay up. What % of a homes input cost is labor vs material, I don't know. But I don't think its an issue of the builder not able to make a profit. If you buy the land at a reasonable rate you can make a profit. The problem is the gold rush mentality had builders buy land at ridiculous rates. Now they are paying for it. The true worth of land? We've already seen its probably 60% lower than it was bought for...

www.fundmymutualfund.c...

The article above shows "smart money" (investment banks) took land off the books of homebuilders at 60% off. So we have a lot of impaired (ahem) assets all over homebuilders books.

Anyhow it's a moot point. How many Americans have 5-10% cash down for even a $200K home sitting in the bank? You need to walk around and talk to people - we are not a saving culture... $20K down is not something the majority have in the bank. Again, disassociate yourself from the "investor" class who reads sites like this, what I'd call the upper 10-15% of society. We have 65% home ownership in this country so you need to focus on the marginal buyer ... how many in the 60-70% percentile have $20K sitting in the bank?

This is no different than what the auto makers did post 9/11 - they went to 0% financing and pulled in years of demand early. Only cars turnover faster than homes. (or they used to before flipping became a national obsession). Now we've pulled in years of home demand by giving marginal buyers 100% financing at 0% down. Anyone who had a heartbeat could get a home. Now that all those buyers are in, who is left to be in? My point is not many. Most were already pulled in...

Prices need to come down. Then you will increase the pool of new buyers. 10% down on $140K is a lot more doable than 10% down on $280K. The people buying homes now in the high value home markets remind me of those buying tech stocks after the first 30% drop in 2000 - then had to sit for another 3 years losing money.

2008 Mar 30 03:37 PM