End of the down market according to the Wall Street Journal......
Posted by Brian Pakulla at 5/11/2008 1:40 PM and is filed under uncategorized 
It sounds like some in the press may start writing some positive stories. In order for the market to swing around we'll need the press to start "looking at the glass half full vs half empty". It is amazing how much the press and psychology has to do with buying a home.
The Housing Crisis Is Over
By Cyril Moulle-Berteaux
6 May 2008
The Wall Street Journal
(Copyright (c) 2008, Dow Jones & Company, Inc.)
By Cyril Moulle-Berteaux
6 May 2008
The Wall Street Journal
(Copyright (c) 2008, Dow Jones & Company, Inc.)
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 sub-trend 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.
Comments