Calculated Risk: New Home Sales Bottom In H2'08? [Housing Tracker]

House Price Sales Data 

Bank Stocks Drop Anew Amid Worry Over Falling Home Prices. “JP Morgan (JPM) expects "a continued decline in U.S. housing prices." The dour assessment included a roughly $1.5 billion trading loss related to the largest U.S. bank's holdings of mortgage-backed securities… JPM has been ahead of the curve over the past year in sounding the alarm about emerging troubles… The steep losses on sales of foreclosed homes are painful for banks and investors in the short run but should help clear the backlog… and clean up the banks' balance sheets… A 1,230-square-foot home in Corona, Calif., was sold by a unit of investment bank Credit Suisse in June for $198,000, down from $450,000 when the property sold in a regular transaction in December 2006.” (WSJ, Aug. 13)

A Few Housing Themes. “There will be two housing bottoms… For existing homes, the most important number is price. So the bottom for a particular area would be defined as when housing prices stop declining in that area. Historically, during housing busts, existing home prices fall for 5-7 years - so I'd expect to start looking for the bottom in the bubble areas in 2010-2012 or so. For new construction, we have several possible measures of a bottom. These include Starts, New Home Sales, and Residential Investment as a percent of GDP. These measures will hit bottom much sooner than for prices for existing home sales, and one or more of these measures might even bottom in H2’08.” (Calculated Risk, Aug. 12)

Freddie Mac Q2’08 Earnings Call Transcript. Patti Cook, EVP, Chief Business Officer: “The second quarter is a quarter that's generally good for house prices. And you saw it, a substantial improvement even on a seasonally adjusted basis. But, I think, given all the uncertainty in the market, the rising population in REOs, the uncertainty around the economy, I think it would be too early at this point to say that house price declines have moderated. As Dick suggested in his remarks, and I, in line, we're considering – continuing to anticipated further declines so that the order of magnitude peak to trough goes from roughly 18% to 20%.” (Seeking Alpha, Aug. 6)

 

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Comments

[ReEconomist:]

In bubble areas prices are falling and will revert to their historical normal of home price to income ratio. In creating the bubble, prices shot up to 10 times income in some areas and are being pushed back to 4 to 1. When you go from 10 to 1 back to 4 to 1 you're looking at a 60% price correction.

Home prices at 4 times local incomes are about the maximum level prices can be supported at. When you do the math, and realize lenders will only permit a borrower to use 28% of his/her income for mortgage payments this ratio pencils out. To see the historical home price to income levels for your area, go to UsHousingMeltdown.org and type in your zip-code. Current prices are either trending up toward the Ceiling or down toward the Floor. Floor is the value as an income producing asset. Bubble areas will settle close to the Ceiling. Economically distressed areas, prices will settle closer to the Floor or below it.

2008 Aug 13 12:16 PM

[billddrummer:]

Hi Judy,

Great stuff, thanks!

I agree with User 235452: Affordability becomes the determinant for housing prices, whether new or existing homes. The disconnect between affordability and price vanished when the exotic mortgage products disappeared.

Now all we have to do (all!) is work off the inventory glut. And the housing market will magically rebalance. The trouble is, it may take 5-7 years.

2008 Aug 13 12:44 PM