How Long Until the Housing Market Recovers?

Cyril Moulle-Berteaux says "the housing market is bottoming right now":

During the 1990s and early 2000s, it took 19% of average monthly income to service a conforming mortgage on the average home purchased. By 2005 and 2006, it was absorbing 25% of monthly income. For first time buyers, it went from 29% of income to 37%. That just proved to be too much.

Prices got so high that people who intended to actually live in the houses they purchased (as opposed to speculators) stopped buying. This caused the bubble to burst.

Since then, house prices have fallen 10%-15%, while incomes have kept growing (albeit more slowly recently) and mortgage rates have come down 70 basis points from their highs. As a result, it now takes 19% of monthly income for the average home buyer, and 31% of monthly income for the first-time home buyer, to purchase a house. In other words, homes on average are back to being as affordable as during the best of times in the 1990s. Numerous households that had been priced out of the market can now afford to get in.

Except, they can't. I will grant Mr Moulle-Berteaux that it's significantly easier to make your monthly mortgage nut on a new purchase now than it was during the height of the bubble. (I will also note, however, that even he thinks prices are going to continue to decline until "sometime in 2009".)

But there were two big changes which took place during the housing bubble, and only one of them was the run-up in prices; the other was the decline and eventual eradication of downpayments. But there are precious few no-money-down mortgages being offered right now: The moral hazard associated with them is simply too great. And simple arithmetic says that if you've got no money down now, it's going to be a long time until you've managed to come up with a down payment:

A two-earner American household has an average disposable income of $70.000/yr. Let's assume they want to buy a $300.000 house and need to put down 15%, i.e. $45.000. Starting from zero, the couple will have to save 5% of their income for 13 years, or 10% for 6.5 years...

Americans haven't consistently saved 5-10% of their income in decades and are currently at 0%, or even negative saving rates. How will they put together the required deposit for a house?

Mr Moulle-Berteaux's prognostications are based on the idea that this housing crunch will resemble previous crunches. But we already know that it won't: It's become a cliché to say that this is the biggest housing crunch since the Depression. Even if prices come back down to where people are willing to buy, those people might well still not be able to buy. And if we have to wait for them to save up their downpayment, it's going to be a long time until there's a housing-market recovery.

Comments

[darcydancer]

These factors coupled with tightened lending standards will lead to even further declines in the velocity of transactions. In areas such as Arizona, it will be long past 09 before the market clears, even in the unlikely event there is no material addition to the foreclosure numbers.

[Wez]

Dual income north of $200k with two kids living in So. Cal. We need to come up with about a $100k down payment minimum. Crappy condos in the good neighborhoods here are still $500k+. This market has a ways to go before it becomes anywhere close to affordable for a 1st time home buyer.

[johnny a]

Welcome to most of Europe. My family home of 600 years is lived in by 3 generations. They have jobs but can not afford to move.

[LtShinySides]

Agreed. An incredibly naive and selective opinion piece by the WSJ. The tightened lending standards will push many low credit buyers out of the ownership market and back into rental, but perhaps most importantly, it will no longer be possible for speculators to make the quick gains as they did in the past with the no-money down, infinite returns that drove prices so high to begin with. The housing crisis is nowhere near over. Do we have a better idea of where it is heading now? Yes, well, I thought we did until reading the WSJ piece.

[VoicoffComonsenz]

Well, Wez, it is possible to l live quite adequately (certainly not richly) in So. Cal. on, say, $120k per year. If you pretend that's your income and live accordingly, then (after taxes) you can save $50k per year, and have your down payment in two years.

[billddrummer]

Another indictment of the 'new' WSJ, that seems to like to sensationalize headlines to sell newspapers.

What's also at work is the inventory glut that's appeared in the high-cost areas. 11.5 months of existing inventory in northern NV based on current sales rates means that housing prices will continue to drop until the inventory is worked off. Add to that the tightened lending criteria that require down payments (unlike in 2005) and you have a long, slow, recovery, but only to the sales levels of pre-2003. Since exotic mortgage products are history, the standard underwriting criteria will now apply in the vast majority of cases.

And through it all, builders continue to build, albeit more slowly than before.

Recovery? Perhaps return to a 2003 baseline by the next election is the best the industry can hope for.

[Wez]

Voicoff,

Your right, if somehow we could live hyper frugally we could save a ton of cash, but our free cash flow doesn't allow for it. Rent is $1750 per month. Daycare is $1600 per month. Car payments on two 4cyl imports are $750 per month. Add in insurance, food, gas, dry cleaning, etc., etc....leaves very little left over to save for the down payment. We both put 15% into our 401(k)s which we can borrow against to help with the down. The cars will be paid off soon, but reality is to buy in a good neighborhood right now for a 2st time home buyer is very very hard. Prices need to, are and will continue to come down.

[Wez]

Also, since we don't currently own, we don't have a huge mortgage interest deduction so taxes eat us up. 1st time home buyers, even with good incomes are struggling big time right now...at least in areas like So. Cal.

[Robert Bragg]

The Texas Market, especially Dallas and Houston, continue to be strong for new home sales, even as coastal regions see a decline in pricing. Ashton Woods (ashtonwoods.com), as a privately held company, specifically builds in areas that hold their value, even in a slowing market. Read more on our Blog at seekingalpha.com/artic...

[Robert Bragg]

Correct: Ashton Woods Blog for more information as ashtonwoods.blogspot.c...

[carlivar]

Wez: what neighborhoods are considered acceptable to you? At my work here in Glendale one family has just bought a house in Rancho Cucamonga and another guy just getting married has bought in Upland. Yeah not real sexy towns but cheap housing (relatively).

I don't know why anyone pays car payments. Buy a 15-25 year old car, set aside some money for the mechanic, and save a ton with just basic liability insurance. The required comprehensive insurance on a financed car is a huge hidden cost no one seems to consider (which is why I decided years ago never to finance a car again, though I'm probably in a better situation to have that luxury).

[adam axler]

There was a time not long ago that you simply could not get a loan for more than 6x your income. Combine the new lending standards with the horrible American consumer debt/refusal to save, and people can't afford a down payment on a $100K home, let alone $300 and higher.

[Wez]

Carlivar,

We know we could go east to find affordable housing, but those areas don't appreciate as fast or hold their value as well. So my bitching about homes being un-affordable really is my own fault because I refuse to move somewhere where I need to commute to work, friends, family, etc. Beach communities are very expensive, so we are willing to wait, save and hopefully hit a bottom next year to buy. Prices hold their value well where we want to live, so it should be a good investment if and when we finally do buy here.

As for financing cars, believe me, your preaching to the choir, when these cars are paid off, thats it for car payments for us for a long time. I shudder when I think about how much money I've wasted on cars over the years.

[carlivar]

Wez: understandable. Short commute is key. In fact I would say, keep happily renting if it keeps your commute down. There's no reason anyone "must" own a house, especially these days.

The hard part is the "bottom" of beach communities. From what I hear they aren't being hit nearly as hard since ocean real estate is still very desirable. I know my friend's place in Hermosa Beach is worth the same amount as he paid for it around 2005-2006.

[icandoitdon]

good god...a texas homebuilder pushing his product here? times are desperate indeed...

[Wez]

Tell me about it, prices are dropping near the beach, but sooooo slowly. A friend of mine only buys beach property and insisted prices never drop...to which I said BS, but now that I'm trying to buy in a beach city, I'm starting to believe him.

[ponchovilla]

Any mortgage comparison to the 1990's and less so in 2000 that speaks to % of income to service a mortgage compared to 2008 misses the "this time it's different" part of the story. Those little details about paying insurance , taxes and household utilities can only be ignored if you're on the sell side. If you're on the buy side it's a different story. Even if you have owned a home since 1990 and paid off the mortgage I would bet your monthly "expenses" are a mortgage by themselves.

[TommyG]

We bought our first home with help from family, suspect there are a lot who do. We're also looking at a huge wealth transfer as parents from "The Greatest Generation" and some "Boomers" pass on and leave funds to familys. Won't help all but a large number. The government should set up tax free home down payment accounts for first time buyers.

[imbabci2]

Wez, on beach property southeast coast...

Last year only 6 properties sold in our tiny community on the GA coast. This year 42 properties are in foreclosure. Only 3 propeties have sold so far this year.

Prices will go down. Deservedly so. The 2004 - 2006 bubble was astronomical bringing my property assessment up 45% in those 3 years. Rediculous!

RE agents are telling owners their properties will hold their 2006 values...yet nothing is selling, except the agent's properties...hmm?

The laws of supply and demand will prevail.

[Rhett]

Housing will be affordable again when homebuilders-homeowner... accept the fact that you can't mark-up house prices like luxury goods anymore.

[sivere]

Before it ends, we need to take the first step:

TakeBackTheFed.com

[misslupin]

Thank you, wez. You said it all. This guy has obviously not looked at the Orange County market here in Southern California. Homes are still WAY overpriced and have a long ways to go towards affordability.

[Nowherebeach]

In other words, the U.S. home loan industry is hooked on subprime mortgages. Without loose lending standards the inventory of unsold homes will stay high for many years, and banks will remain stuck with many of them.

[Paul E.Meisel]

I don't know about anybody else, I just got a 3% down mortgage, 3% seems very reasonable to me. 20% down is nice if you have the cash available, but it didn't make sense to me to borrow against the IRA just to put it in the down when I could borrow from the mortgage company instead.

[billddrummer]

The writer of the article owns several hundred thousand shares of builder stocks within the hedge fund he controls, so it's not surprising that he'd want us to think that the housing crisis is over. It would help his fund, although not immediately. One of his holdings is DRH, that just announced a massive quarterly loss, cut its dividend, chopped values on land and options holdings, and said that pending sales continued to drop.

A change in the wind? Yes, but it sounds more to me like a false spring. More trouble ahead? Most definitely.