Thomas Phillips

Doomsday Pundits Are Wrong Again

I don't agree that the problems in housing are a simple short-term oversupply problem. The problem is really that in the last few years a lot of people who shouldn't have gotten home mortgages were able to get into them through the subprime lenders via a plethora of exotic loan instruments ( intrest only, negative amortization ARMs, for example). The default rates on these loans has been much higher than expected (hence the HSBC announcement of a couple of weeks ago that they were going to have to set aside a couple of $billion more for defaults than they expected). Since early December something like 22 subprime lenders have gone under. The investors in these shaky MBSs (mortgage backed securities) have gotten the jitters over this and now most lenders are tightening their qualification standards. In 2005-2006 close to 25% of all mortgages were subprime. Now going forward if we start to remove say 20% of the potential buyers from the market because they can no longer qualify for a mortgage it's going to cause more downward pressures on an already slow housing market. Add to that the foreclosures that are coming because $1.2Trillion in ARMs are resetting this year (some percentage of those folks won't be able to refi since they no longer qualify under the tighter lending standards) and I think we're in for a bit of a housing correction. Not a crash, but probably a healthy correction. Since prices rose so much faster than incomes most people are now priced out of the market; a 20 to 25% correction would be quite healthy for the housing market in the longrun.

Now in recent weeks it seems that the subprime jitters are spreading to the next higher teir of loans, the Alt-A category. It's too early yet to know how serious that might be.

The confluence of all of these factors ( ARMs resetting, credit tightening, higher foreclosures) is leading to much slower sales in most of the country and falling prices in many areas with California and Florida being particulary hard hit. The rise in NYC real estate that you mention is really an anomoly at this point and is most likely due to the large year-end bonuses paid out on Wall St. at the end of 2006. Not many markets are seeing that kind of cash infusion.

A Housing Rebound in Los Angeles County

However, foreclosures and notices of foreclosure are rising rapidly in many California markets.
Some analysis here:
piggington.com/guest_c...

Why There's No Such Thing As a Housing Bubble

Alex: thanks for pointing out the conflict of interest.

As someone who lives in an area that has not yet been effected seriously by the bubble-collapse, I was planning on buying this year. However for the last two months I've been looking at homes and talking to mortgage brokers, realtors, etc. and I've determined that I want to wait it out and see what happens. Both the mortgage brokers and realtors seem to be spouting happy-talk. The mortgage brokers that I've talked to have been more than willing to get me into a financial situation which would be very tight to say the least. And the realtors seem to be acting in concert with various brokers which again seems like a conflict of interest - often realtors will recommend mortage brokers which makes me think there is in some kind of collusion. Perhaps there needs to be some kind of wall of separation between the two groups?

The last time I bought a home was in 1990. Things seem to have changed a lot since then. Various mortgage lenders seem quite willing (and even encouraging) to let me get into a situation where 33% of my gross income goes for mortgage payments, property tax and insurance. They'll tell me that I can easily afford a home in the $330K range, but when I look into the details they're pushing ARMs, interest only and other exotic mortgages. If I do the traditional fixed 6% 30 year mortgage and use the traditional 25% limit for housing it looks more like the homes I can afford are in the $250K range - that's a big difference. I'm not finding any homes in the area where I want to buy that are in that range (and I think I make a pretty decent salary - definitely above the average for my area).

The other thing that bothers me about the current prices is that when I bought in 1990 the ratio of house price to my income was around 1.6. Now if I were to buy my same house again today that ratio would be more like 3. In the area of town where I'd like to buy now it would be more like 3.5. That's telling me that there are less buyers able to afford to buy a home at these levels. A 10 to 20% price decline would actually be very healthy for the housing market at this point: it would allow more buyers back into the market. Realtors should be the first people to realize this. Of course it means that the next year or so will be lean for them, but certainly most of them should have saved up during the boom years since there's no way those growth levels were sustainable (?)

Given that something like 18 subprime mortgage companies have gone under in the last couple of months I expect that qualification standards are (hopefully) tightening. That will weed some people out of the market (probably about 25-30% if we consider the levels of subprime lending in the last couple of years). I'm hoping that will lead to some moderation of prices over the next year or so.

Bottom Line: as a potential real estate buyer it seems to me that it pays to wait at this point and not to jump into a market that's been overheated by lax lending standards over the last few years. I want to wait for more of the corruption to be shaken out of the whole process. Given that less potential buyers will be available due to tightening standards and the rising foreclosure rate it seems to me that next year will be a much better time to buy. I'm in no hurry. Bring on a 20% correction (and I say that as a homeowner).