How Long Until the Housing Market Recovers?

by: Felix Salmon

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.