The Housing Crisis is NOT Over

Yesterday’s Wall Street Journal features an op-ed by Cyril Moulle-Berteaux (“The Housing Crisis is Over”). The piece is a perfect example of what looks good on paper does not necessarily reflect reality.

Since home sales peaked in July 2005, new home sales have declined 63%. The author’s thinking is that since house prices have fallen 10-15% and mortgage rates are down 70 basis points, homes are as affordable now as during the 1990s. His final argument is that despite falling prices and high inventories, home sales will pick up “because they always do.”

Moulle-Berteaux disagrees with analysts who believe house prices must fall at least 30% further to be back in line to their historical inflation-adjusted average. His reasoning is that most buyers take out a mortgage to purchase real estate, and thus are only concerned with “how much of one’s income is required to be able to make the mortgage payments.” On that basis, today’s mortgage rates are a bargain compared to the high interest rates of the past.

There are so many factors the author left out of his analysis. Despite the decline, home prices are still at record levels historically. More importantly, all the costs associated with owning a home have skyrocketed: taxes, insurance, association fees, repair costs, and utilities. The 5.70% 30 year fixed mortgage cited seems like a low rate to purchase a home, but when all the factors are taken into consideration, how many buyers can make a 20% down payment as required under current lending standards? Additionally, lenders are blacklisting condo mortgages; mortgages issued are becoming “covenant heavy” (as opposed to the LBOs “covenant lite”).

The government and the real estate industrial complex do everything possible to encourage people to buy as much house as they can qualify for. As more and more homeowners are waking up to the folly of that notion, the smart buyer realizes that buying a home for the lowest price possible is the most important consideration. Always buy well below what the calculations determine you can “afford”. You never know what market factors will do, or how your circumstances might change. Carrying costs very rarely decline. As far as mortgage rates are concerned, it is better to have higher mortgage rates and lower housing prices than lower mortgage rates and higher housing prices. Besides benefiting the cash buyer, a high rate is a great motivator to pay off the loan, or refinance as rates decline. Just like buying a stock, it’s the price you pay that determines the profit or loss.

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Comments

[zenalgorithm:]

Median house values have historically been = to 3-4X an individual's yearly, median income.

2008 May 07 06:35 AM

[Steven R. S...:]

We are calculating the bottom of the market by Zip Code, using the Median Household Income, a 32% underwriting ratio and 20% down payment. In my Region, the Inland Empire, we have areas that are 8 to 15 months away from the Bottom. It depends on the Rate of Change. The faster things are going down, the sooner the Bottom.

Some areas are in Free Fall, going down more than 5% Per Month.

2008 May 07 08:34 AM

[cove3:]

The article left out a key point that even after the price declines, rentals are still 20% cheaper than owning. That has to narrow

Ron

2008 May 07 09:07 AM

[Nick Gogerty:]

median household income to house prices is here. 3x is closer 4x is why we are in trouble nickgogerty.typepad.co...

2008 May 07 09:28 AM

[Tom Lindmark:]

You guys forget location. National statistics just blur the picture. Phoenix is ground zero for this debacle but owning is now more affordable than renting at starter housing price points and affordability is improving markedly. There are some forces working in favor of a correction, at least here.

2008 May 07 12:01 PM

[billddrummer:]

To Tom,

Interested to know what a starter home price point is in Phoenix. Here in Northern NV, starter homes are beginning to become available below $200,000, in reasonable neighborhoods. Now, the primary loan product for starter homes has traditionally been FHA financing. FHA loans are still plentiful for most people with reasonable credit (even though FHA says it's not a credit score driven program, it's unlikely poor credit risks could qualify). And since the program only requires 3% down in most cases, the cash out of pocket is something borrowers can afford.

The biggest restriction to FHA qualification is the maximum debt ratio, which in my mind is still 28/36. Many people who used conventional financing with a second loan to cover part of the down could qualify for products with a higher debt ratio, up to 50% in some cases. (Not that that's necessarily a good thing, because the current foreclosure rate is testament to what happens when high debt ratio borrowers get into homes.) As we all know, most of those high debt ratio piggyback products are now gone.

But the problem is, many people have vehicle loans, credit cards and other amortizing debt that disqualifies them for FHA financing, even if everything else is OK.

Wondering if, in your area, FHA loans are becoming a larger percentage of purchase loans, and whether the people getting them are the ones who would have used conventional financing in the past.

2008 May 07 04:18 PM

[Tom Lindmark:]

To Billddrummer,
You can buy a newer home (post 2000 construction) say 1700 sq.ft. from the banks for around $125,000. You can go to my blog and navigate from there to the website and see some listings. Rents have held up well here, so these work well for first time home buyers or investors as they will cash flow nicely.
The FHA lenders in Phoenix are swamped. It's taking at least two weeks just to get a first pass on a loan file by the underwriter. I suspect a lot of the backlog is due to refinances but purchase transactions account for some as well.

2008 May 07 08:24 PM

[Canada:]

Great stategy, lower price, higher mortgage rate. The way to pay it off faster is shorten your amortization and make weekly payments. I had my house paid of in 6 years this way and I was paying 11.25% interest at the time. Why do you think banks and mortgage co's love 40 & 50 year mortgages? (another disaster that is waiting to happen for borrowers) eg. $100K of mortgage 30yr 6% = $595/mo. change to 25yr. 6% = $640/mo. A lousy $45/mo to take 5yrs off your mortgage amortization. duh!

2008 May 08 10:15 AM

[Kiatoa:]

To Tom: We are forced to move (landlord has financial problems and has to sell) so I've been watching rents around ASU and it seems there are some interesting trends. Three or four bedroom rentals are being put on the market at 2k or more per month and then are sitting. I see them reposted and then reposted again to craigslist - each time at a slightly lower rent. Sellers in and around ASU seem to still be sticking to their guns at very high prices and the houses are not moving, spending 8 months to a year on the market. Fortunately for them the fool-pool isn't quite empty yet and some of them still sell for surprisingly good prices, albeit dramatically less than asking. In the areas I'd consider living [most of the Valley is a hell hole for me, I'm here only because my wife has to be here ] renting is still substantially cheaper than buying. Now in some outlying areas you might be able to buy a boring house in an ugly neighborhood for less than what you could rent but then there is that lovely commute, sitting in 115 degF blazing sun for 40 minutes.... I gave up over ten acres of beautiful green trees and a nice babbling brook to be here so I'm a little bitter :-) sorry to let it leak into the discussion. The only thing the valley had going for it - cheap housing - is currently no longer true.

So to sum up; in my opinion, adjusted for quality of life and based on historical prices, housing has a long way to drop in Phoenix.

2008 May 08 10:59 AM

[Hyman:]

We need to factor in the soaring fuel costs, weakening economy, and tightening of mortgage availability. Throw these into the mix, and we have a weak market even if prices correct back down to historical income ratios.

2008 May 08 06:27 PM

[Tom Lindmark:]

Kiatoa,
One man's heaven is another man's hell. I'm not crazy about Phoenix either (I've lived a lot of other places) but I know a lot of people who wouldn't leave for all the money on earth. Go figure.

2008 May 08 08:31 PM

[Karl Burger:]

In my area, we are pretty sure the bottom has been reached on the beaches. Those are more expensive properties. Inland, there may still be a little room for moving downward, but not much. The key is to go and find the motivated sellers and well priced bank-owned properties. They are a very good value right now. I'd say we are almost at the bottom.

2008 May 09 07:49 AM

[niterider:]

User 191176 wrote
"I'd say we are almost at the bottom". "They are a very good value right now".
here you have your typical real estate professional ,telling lies,to benefit his own interests. Dont believe these real estate clowns. We are in a housing crisis that is going to continue to get worse. THE END IS NOT IN SIGHT.

2008 May 14 05:35 PM

[JulieRealtor:]

This article was SO WRONG it made me sick! In my area, home prices have fallen 50%, taxes are lower as a result, and lenders are NOT blacklisting condos. That is illegal. Additionally, prices are stable, buyers are now buying in droves because the realize we have hit bottom, forcing prices to stable, and soon, to increase ever so slightly, but still increase. In 1989 I bought a home for $100k - in 1992 that same home sold for $265k.

The writer of this article obviouslly is not in real estate and doesn't know what he is talking about. He is misinforming the public that could greatly benefit from this market and start building REAL wealth again.

Don't buy this free advice. You get what you pay for.

2008 May 21 03:02 PM