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jspoto
Posts:95
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| 05/13/2008 10:58 AM |
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this was just published in the Wall Street Journal. If your think prices will continue to drop forever, you are wrong!
The Housing Crisis Is Over
By CYRIL MOULLE-BERTEAUX
May 6, 2008; Page A23
The dire headlines coming fast and furious in the financial and popular press suggest that the housing crisis is intensifying. Yet it is very likely that April 2008 will mark the bottom of the U.S. housing market. Yes, the housing market is bottoming right now.
How can this be? For starters, a bottom does not mean that prices are about to return to the heady days of 2005. That probably won't happen for another 15 years. It just means that the trend is no longer getting worse, which is the critical factor.
Most people forget that the current housing bust is nearly three years old. Home sales peaked in July 2005. New home sales are down a staggering 63% from peak levels of 1.4 million. Housing starts have fallen more than 50% and, adjusted for population growth, are back to the trough levels of 1982.
Furthermore, residential construction is close to 15-year lows at 3.8% of GDP; by the fourth quarter of this year, it will probably hit the lowest level ever. So what's going to stop the housing decline? Very simply, the same thing that caused the bust: affordability.
The boom made housing unaffordable for many American families, especially first-time home buyers. 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.
The next question is: Even if home sales pick up, how can home prices stop falling with so many houses vacant and unsold? The flip but true answer: because they always do.
In the past five major housing market corrections (and there were some big ones, such as in the early 1980s when home sales also fell by 50%-60% and prices fell 12%-15% in real terms), every time home sales bottomed, the pace of house-price declines halved within one or two months.
The explanation is that by the time home sales stop declining, inventories of unsold homes have usually already started falling in absolute terms and begin to peak out in "months of supply" terms. That's the case right now: New home inventories peaked at 598,000 homes in July 2006, and stand at 482,000 homes as of the end of March. This inventory is equivalent to 11 months of supply, a 25-year high – but it is similar to 1974, 1982 and 1991 levels, which saw a subsequent slowing in home-price declines within the next six months.
Inventories are declining because construction activity has been falling for such a long time that home completions are now just about undershooting new home sales. In a few months, completions of new homes for sale could be undershooting new home sales by 50,000-100,000 annually.
Inventories will drop even faster to 400,000 – or seven months of supply – by the end of 2008. This shift in inventories will have a significant impact on prices, although house prices won't stop falling entirely until inventories reach five months of supply sometime in 2009. A five-month supply has historically signaled tightness in the housing market.
Many pundits claim that house prices need to fall another 30% to bring them back in line with where they've been historically. This is usually based on an analysis of house prices adjusted for inflation: Real house prices are 30% above their 40-year, inflation-adjusted average, so they must fall 30%. This simplistic analysis is appealing on the surface, but is flawed for a variety of reasons.
Most importantly, it neglects the fact that a great majority of Americans buy their houses with mortgages. And if one buys a house with a mortgage, the most important factor in deciding what to pay for the house is how much of one's income is required to be able to make the mortgage payments on the house. Today the rate on a 30-year, fixed-rate mortgage is 5.7%. Back in 1981, the rate hit 18.5%. Comparing today's house prices to the 1970s or 1980s, when mortgage rates were stratospheric, is misguided and misleading.
This is all good news for the broader economy. The housing bust has been subtracting a full percentage point from GDP for almost two years now, which is very large for a sector that represents less than 5% of economic activity.
When the rate of house-price declines halves, there will be a wholesale shift in markets' perceptions. All of a sudden, the expected value of the collateral (i.e. houses) for much of the lending that went on for the past decade will change. Right now, when valuing the collateral, market participants including banks are extrapolating the current pace of house price declines for another two to three years; this has a significant impact on the amount of delinquencies, foreclosures and credit losses that lenders are expected to face.
More home sales and smaller price declines means fewer homeowners will be underwater on their mortgages. They will thus have less incentive to walk away and opt for foreclosure.
A milder house-price decline scenario could lead to increases in the market value of a lot of the securitized mortgages that have been responsible for $300 billion of write-downs in the past year. Even if write-backs do not occur, stabilizing collateral values will have a huge impact on the markets' perception of risk related to housing, the financial system, and the economy.
We are of course experiencing a serious housing bust, with serious economic consequences that are still unfolding. The odds are that the reverberations will lead to subtrend growth for a couple of years. Nonetheless, housing led us into this credit crisis and this recession. It is likely to lead us out. And that process is underway, right now. |
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ScottSD
Posts:139
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| 05/13/2008 11:11 AM |
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| in markets where the housing "bubble" meant that an average home price rose from $150k to $250k, this makes some sense. |
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binkyman
Posts:7
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| 05/13/2008 11:40 AM |
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My assesment of the situation is that there are many opinions of what the housing market will be doing in the near future (cristal ball anyone?!)
In reality, the housing market will be defined by how well the economy recovers and WHEN it does. No doubt the majority of inventory out there right now are properties in default...So how is the housing crisis over when tons of people keep defaulting everyday and lenders keep losing millions? Call me crazy, but that IS a crisis and as long as there are people out there with ARM-type loans, the end isn't that near. |
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jpinpb
Posts:820
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| 05/13/2008 11:43 AM |
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Right off the bat, "Since then, house prices have fallen 10%-15%, while incomes have kept growing (albeit more slowly recently) "
With unemployment rising, I had no idea incomes were rising.
"although house prices won't stop falling entirely until inventories reach five months of supply sometime in 2009"
Are they ruling out baby boomers that will start to sell?
What a bullish article. And BS, too. |
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ElPato
Posts:175
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| 05/13/2008 11:53 AM |
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Blah blah blah. For an alternative viewpoint, please see this link:
http://mrmortgage.ml-implode.com/2008/05/13/84/
"The real data are in stark contrast to the bullish nature of a popular recent Wall St Journal story by Cyril Moulle-Berteaux, managing partner at Traxis Partners in New York"
Don't believe everything you read, especially from hedge funds. This guy looks to have a vested interest in pumping up the happy talk, |
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jspoto
Posts:95
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| 05/13/2008 11:54 AM |
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| I think the most important paragraph to me was - "For starters, a bottom does not mean that prices are about to return to the heady days of 2005. That probably won't happen for another 15 years. It just means that the trend is no longer getting worse, which is the critical factor." 15 years to return to 2005 prices is not bullish! maybe too bearish. I just think that if you can buy a property of around the prices of 2002 than you are safer than most. |
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Brian
Posts:1085
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SD_Coastal
Posts:13
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| 05/13/2008 11:58 AM |
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Is this the same CYRIL MOULLE-BERTEAUX that was a Managing director at Morgan Stanley, and is currently a managing partner of Traxis Partners LP, a hedge fund firm based in New York?
Ya don't suppose he is a wee bit biased on his observations? And these are simply anecdotal observations, I don't see a whole lot of hard core analysis here.
I particularly like this quote:
" Most importantly, it neglects the fact that a great majority of Americans buy their houses with mortgages." Ah Cyril, tried to get a Jumbo Mortgage lately? Ya, just as I figured, "no". He is right, most Americans do buy houses with mortgages, and you can't get one today for that $1M "starter home".
At the end of the day, it doesn't make a bit of difference how far prices went up, they have to come down and get in line with income ... and we aren't even close to being there yet.
Also, I personally don't think the supply and demand model holds up real well in this current market. We aren't buying and selling widgets, you need to qualify for a real mortgage to buy a house and if people don't (can't) qualify I don't care how much demand there is.
Every single adult male I know would like to own a high performance sports car, so there is a high demand. There are many factors that prevent the high demand from stripping the supply ... the price (or availability of money) being one of the many things. |
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ScottSD
Posts:139
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| 05/13/2008 12:01 PM |
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| for every default on the market, that's another person who won't have the credit score to get another mortgage. who is going to swoop in and buy all of this inventory? |
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jpinpb
Posts:820
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| 05/13/2008 12:19 PM |
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Hey - there's girls that want high performance sports cars too !
Agreed. Demand is there. The ability to buy is questionable.
ElPato - give us a better link |
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jpinpb
Posts:820
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| 05/13/2008 12:20 PM |
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| Nevermind. The link works now. I like MrMortgage. |
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SD_Coastal
Posts:13
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| 05/13/2008 12:40 PM |
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This whole mess is really pretty simple. I don't care how many millions of dollars the NAR spends in advertising telling you now is a good time to buy, or that all markets are local. I don't care how many PHd's try and massage the numbers to point to a bottom, or how many realtor's say that the market has bottomed ("they can feel it").
Cheap and easy money led us into this bubble, and unless cheap and easy money comes back the bubble has burst for a good long time. Hyper Inflation could make real estate more expensive, but then again everything would be more expensive and your dollars would be worth pennies.
Once the market decided that easy money had way too much risk, the whole pyramid started to crumble. Unless the government decides to come out and back no money down mortgages for up to $2M, I just don't see any way the market comes back any time soon.
What percentage of mortgages that were written in 2005 do you think would qualify today? I bet the number would horrify you. |
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frelow
Posts:9
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| 05/13/2008 1:14 PM |
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"if you think prices will sontinue to drop forever, you are wrong!"
Wow JSpoto, you're some kind of genius. No one here thinks that prices will drop forever retard. People on this board have been claiming that prices will continue to fall and haven't reached a bottom yet. They have been saying this for the past few years and have been consistently right......so far. As opposed to people like yourself.......
Eventually prices will bottom out when there is compelling value, but I doubt that today is the day. Be sure you keep posting so we can laugh at what kind of a loser you are, are you looking to buy right now? Let us know. |
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jspoto
Posts:95
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| 05/13/2008 1:14 PM |
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| I agree that cheap money caused the bubble. I know that first-hand. The article says it will take 15 years to get back to 2005 levels. All that it states is that there might not be any more huge declines. 30yr fixed loans up to 729k are now apx. 5.75%. Sounds like pretty cheap money to me..... |
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frelow
Posts:9
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| 05/13/2008 1:19 PM |
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"if you think prices will continue to drop forever, you are wrong!"
JSpotos thesis from grad school |
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jpinpb
Posts:820
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| 05/13/2008 1:27 PM |
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| Hey - Maybe that article is right. Since I've seen some prices down to 2004 levels, by the time we hit bottom and go back up, it might very well be 15 years before we see 2005 prices again. |
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frelow
Posts:9
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| 05/13/2008 1:40 PM |
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"if you think prices will continue to drop forever, you are wrong!"
Yes, maybe the article is right. But so far the best argument for housing I can make is that the price decreases may have slowed down, that is still not a reason to buy at this moment. Other people differ with me and I hope they can make a good argument to help me see the great value in housing when the time comes. However, there is NO ONE who has said or implied that housing will continue to drop forever. If I am mistaken, please lead me to your info. |
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jspoto
Posts:95
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| 05/13/2008 2:10 PM |
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| frelow - am I really supposed to respond to your insults ? was I claiming to write a grad school theses ? Yes, I am buying properties downtown. I recently closed on one and was just outbid on another at aqua vista. I am out looking a properties 2-3 times a week and can tell you that the good deals are getting in escrow. Your grad school training must be quite extensive with your eloquent use of vocabulary words like "loser" and "retard" . |
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Sparky
Posts:55
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| 05/13/2008 3:04 PM |
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| The posters on here that monitor and reply to nearly every thread on this real estate forum have one goal in mind it seems....to claim that the sky is falling and that everyone should wait to buy. What is their motivation? If everyone heeds their warning, then eventually they can buy the cheapest distressed properties for a song as prices tumble. If more people buy today, it slows (and maybe even stops) the downturn...irritating those who are fixated on cost only. The truth is that people have many reasons to buy and different timetables for purchasing homes. People who buy now do it because they feel its the best time for them. Most people don't spend nearly every waking hour obsessing over these forums before they buy a home. Some people (GASP!) don't care as much about the cost of a home, but rather have different priorities, such as seeing other values in the property and how well it suits their lifestyle now. Both types of buyers, those fixated on cost and those valuing other priorities, have a place in today's housing market. That being said, this forum is no place for name-calling, including the continued use of derogatory terms for today's buyers, often referred to as "knife-catchers" and "fools". Can't we all just get along? |
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Sparky
Posts:55
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| 05/13/2008 3:04 PM |
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| The posters on here that monitor and reply to nearly every thread on this real estate forum have one goal in mind it seems....to claim that the sky is falling and that everyone should wait to buy. What is their motivation? If everyone heeds their warning, then eventually they can buy the cheapest distressed properties for a song as prices tumble. If more people buy today, it slows (and maybe even stops) the downturn...irritating those who are fixated on cost only. The truth is that people have many reasons to buy and different timetables for purchasing homes. People who buy now do it because they feel its the best time for them. Most people don't spend nearly every waking hour obsessing over these forums before they buy a home. Some people (GASP!) don't care as much about the cost of a home, but rather have different priorities, such as seeing other values in the property and how well it suits their lifestyle now. Both types of buyers, those fixated on cost and those valuing other priorities, have a place in today's housing market. That being said, this forum is no place for name-calling, including the continued use of derogatory terms for today's buyers, often referred to as "knife-catchers" and "fools". Can't we all just get along? |
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