dlaw

The WSJ Is Wrong on the Housing Crisis

The WSJ focus on new homes is silly. There's 10 months supply of existing homes out there - officially and that represents 10 times the number of new homes. That number may have peaked but, as this article indicates, we should not expect that inventory to go down steeply.

And most glaring is the WSJ author's failure to either realize or acknowledge that his affordability argument fails to acknowledge that we are arguably in an affordability TROUGH. Mortgage rates may not get back up to the 18% of the 80's the author cites but they are unlikely to go lower any time soon. The author fails to mention that the '91 rate was better than 9%.

But doesn't that make his argument for him?

No, because what house owners want to see is rising LIQUIDITY in the housing market. And that's where the WSJ author's argument falls apart. Since the 80's the US market has not only seen a reduction in interest rates, but also a tremendous increase in total credit available for housing. Thus we have seen home ownership RATES in this country have increase dramatically since '94 and peak in 2004. The WSJ author fails to note that the '91 crash in real estate prices was in the middle of ten years where home ownership rate basically went sideways.

To speak to Vikram's point about household formation, the last time home ownership RATES peaked and fell like this was '80-'81 to '86-87.Banks are lending cheaply, yes, but it is unlikely they will lend more cheaply. During the last fall in home ownership rates, mortgage rates fell about 45% or eight thousand basis points - eight thousand.

Does anyone think we're going to see 3% mortgages? In 2002 the US mortgage security market surpassed the Treasury market in liquidity. Is anyone anticipating that kind of increase in securitization?

The problem is exactly household formation. You can call a two-percent drop in home ownership rates a loss of two million *owner-occupied* households. I would not expect landlords to offer a price subsidy for taking up that slack. If we need two million new landlords then housing prices have to get to a place where it is profitable to rent.