Is the Housing Market Leveling Off?

Alan Greenspan says the worst part of the housing market decline may be over:

Greenspan Says 'Worst' May Be Past in U.S. Housing, by Greg Quinn and Scott Lanman, Bloomberg: Former Federal Reserve Chairman Alan Greenspan said the ''worst may well be over'' for the U.S. housing industry that's suffering its worst downturn in more than a decade.

Greenspan ... pointed to a ''flattening out'' of weekly mortgage applications after they went down ''very dramatically.'' ...

Greenspan's comments may represent a more sanguine view than his successor, Ben S. Bernanke, who said two days ago in Washington that the market is in a ''substantial correction'' that will lop about a percentage point off economic growth in the second half and restrain the expansion next year. ...

Calculated Risk says:

The graph shows the MBA Purchase Index since it's inception in 1990. On a long term scale, I don't see any significant "flattening out".

The graph is here.

Comments

[Don Robertson]

This one is a laugher.

One need look at two factors, 1) who owns housing (specifically who's going to sell) and 2) what IS the real value of housing?

The first question is complex, who owns housing? And the investigators here have not had all the data before them. There certainly are many who bought housing recently that they cannot afford, especially with rising interest rates, ARM mortgages and the doubled risk of a calmitous income loss due to two income families.

The second factor in who owns housing, too often overlooked, is that the parents of Baby-Boomers still own a very significant percentage of the housing stock in the country. This housing is ALL coming on the market over the next ten years simply because the parents of BabyBoomers are now of advanced age.

Now, concerning the real value of housing, this is perhaps a more complex question, one affected by many factors, but let me begin with marketing and consumer
savvy.

For a number of years now the market has been driven by the misconception that real estate is an investment, and even an investment at any price. This simply isn't true.

A wholly specious shift in market pricing took place with lower interest rates, when buyers gullibly assessed their leveraged purchasing power (what they mistook for real value) acording to what mortgage payments they might be able to afford. This was wrong-headed concerning real value because real value isn't what you can afford, real value in real estate is determined by the price you might be able to resell your home. (This is a very different number from what your local real estate broker who works on six percent commission might list your home at. It's also a value far from that number because there are these little incidental intrusions called "closing costs" for most.)

That resell or real value is now precipitously falling in part because interest rates are on the rise. We're seeing a housing price drop commensurate with the difference in how much less a much less the now less typically ill-informed consumer of housing can leverage his/her purchase. The days of everyone-is-doing-it (jumping off the cliff) are pretty much over, and buyers are generally much more savvy. The stories circulating today aren't about someone who bought at X dollars and sold for 2X dollars. The stories in general circulation today are about someone buying at 1/2X what the seller was asking for his/her property because they had to sell.

Similarly, many who recently came into the housing market based upon what mortgage payments they thought their two-income resourses could afford, well... They're finding out about the real value of real estate in a big way as property taxes rise beyond the rent they used to pay, heating and maintenance costs escalate into the stratosphere and neighborhoods start to wear on them, and if not the neighborhood, then their spouses begin to wear on them, which in this day and age is apparently occurring at a rate of two out of every three over every five year period. The overwhelming instability in the who-owns-real-estate factor should not be underestimated in a declining marketplace that makes ownership instability contribute to the instability of owners.

In assessing real estate markets it used to be location, location, location, but until everything gets back towards reality, the psychology of cold, hard cash is going to be everything.

We're no where near the bottom on real estate. It's a big enough problem it's caused some in Congress to want to introduce government-backed housing mortgages (like student loans) to continue the folly a little while longer.

Everyone with any sense knows the housing equity problem is going to cause an economic tizzy of not heartburn proportions, but of passing a kidney stone proportions.

My best advice is, if you can sell, sell, and then move into a tent. It'll be better than working the next forty years of your life just to pretend you can still afford to live in that old shack.

Such a choice may even save your marriage and allow you some reasonable retirement together.

Don Robertson, The American Philosopher
Limestone, Maine

An Illustrated Philosophy Primer for Young Readers
Precious Life - Empirical Knowledge
The Grand Unifying Theory & The Theory of Time
http://www.geocities.com/donaldwrobertson/index.html
Art Auctions:
http://www.artbyus.com/auctions.php?a=6&b=4807

[calmo]

Good morning Don
I wonder whether you are in a tent on that 50 acres:
Such a choice may even save your marriage and allow you some reasonable retirement together.
Not really.
No, I wonder whether you think the rest of us are all too concise, too blunt, too humorless... seriously in need of redirection to come up to your more elaborate, and not merely labored, (some say 'nearly sophisticated' others more reserved) standards.
The format is not dissertation style Don --not that length, not that centric, not that formal, not that impersonal...not on your side.

Do make the switch and get the interaction you are looking for...interaction we all need, no matter what the American Philosopher expounds.

[Don Robertson]

Cal-Mo,

"Do make the switch and get the interaction you are looking for..."

I'm not looking for interaction. Nothing is being said here. I'm looking for everyone to shut up, read my book and become post-enlightenment civilized, or as is much more likely, to hand me my bottle of hemlock.

I'll not drink it, but instead use it as a metaphor to the sordid morality so prevalent in our world.

I'm out to conquer the world from pole to pole, and, I'm well on my way to doing it. Letterman is still out though.

Don Robertson, The Only Philosopher
Limestone, Maine

An Illustrated Philosophy Primer for Young Readers
Precious Life - Empirical Knowledge
The Grand Unifying Theory & The Theory of Time
http://www.geocities.com/donaldwrobertson/index.html
Art Auctions:
http://www.artbyus.com/auctions.php?a=6&b=4807

[calmo's analyst]

This is not the interaction you are looking for and any semblence this might have to a response is merely a coincidence.

Any appearance of order, redirection (eg slightly shorter length) or progress is similarly coincidental.

And now back to my other non-interactive client.

[Bruce Webb]

Deja vu all over again. I already did my strafing run on Limestone on another thread but it is astonishing that someone can include the words "And the investigators here have not had all the data before them" and not in fact include any.

The plural of anecdote is still not data.

I could go on all day but you will never understand housing finance until you firmly get a grip on "discount for rent". Whether housing markets are rising or falling owner occupied is always discounted for equivalent rent, the tax savings for interest and property tax, and the capital gains exemption.

As I never tire of pointing out over at CR the Black Angel of Death of the Housing Bubble may indeed be coming to a market near you, but flat to falling values don't necessarily represent a direct hit to your finances. Everything depends on you income to morgage ratio as opposed to your risk for having to relocate.

I hope Don enjoys his time in the tent. Meanwhile I have two bathrooms for one person and am paying less than 25% of my takehome for ownership. And strangely enough lots and lots of Americans are in the situation that a downdraft in housing prices means little or nothing. If you have a job, no reason to relocate, and a mortgage that is anywhere close to equivalent rent you are cruising. Over the long term you will rarely lose and meanwhile you have a roof and control over the keys to the front door.

[Don Robertson]

Bruce Webb-

"I hope Don enjoys his time in the tent. Meanwhile I have two bathrooms for one person and am paying less than 25% of my takehome for ownership."

What you don't seem to understand is interest rates work two ways. (Incidently, it seems impossible to piss in two bathrooms at the same time, so what's your point?)

With higher interest any possible new mortgage payment derivatives depreciate the value of your home, and, those of us with cash in the bank get an interest dividend every month.

In my case, that interest more than pays the rent, which relieves me of sundry other blind whacks in the darkened and darkening alley of home ownership. Why would I throw 25% of my income towards owning something that is declining in value every day? I get compounded interest in the bank for that cash.

You're not talking about a great investment. You're talking about fooling yourself into thinking you're saving money on rent by paying two-to-three-to-four times as much just to keep up with interest payments on an investment that is never going to pay out, and with the new bankruptcy rules is also going to chase and haunt the fools who took the homeownership-bite the rest of their lives exactly like interminable indentured servitude with interest compounding every month.

You know, if you miss one payment, they whack you with late fees and higher interest rates, and miss two payments, you're not just out in the street, they get your home, and they also keep after you for the money plus interest and fees YOU still owe them after they auction off your little palace.

It's not an investment. It's a mouse trap and you're the mouse.

Now, the municipality has a literally open-ended lein against your home for skyrocketing property taxes assessed and re-mil-rated year after year, which if you miss those payments, you're in worse shape than if you miss the bank's demands because they get and keep every penny your home might bring when it is auctioned.

Bruce, you've apparently never heard of Zeno?

You apparently never heard of the miracle of compound interest either, at least you haven't heard of it from the right side of that collection plate.

Don Robertson, Philosopher
Limestone, Maine

An Illustrated Philosophy Primer for Young Readers
Precious Life - Empirical Knowledge
The Grand Unifying Theory & The Theory of Time
http://www.geocities.com/donaldwrobertson/index.html
Art Auctions:
http://www.artbyus.com/auctions.php?a=6&b=4807

[wcw]

Here are some data.

Household financial obligation ratios, renters vs owners
New homes sales, YoY
NAR decline
Philly Fed diffusion indexes
For-sale housing inventory
Mortgage payments and incomes

I could see a levelling, sure, but I think the numbers still point down.

[nedlink]

Well housing inventory is at 7.5 months which is about 60% higher than a year ago. And the inventory seemingly is increasing. What Greenspan is smoking, I have no idea.

[Nihilist]

The better question is: "What's Don smoking in his tent?"

"You know, if you miss one payment, they whack you with late fees and higher interest rates, and miss two payments, you're not just out in the street, they get your home, and they also keep after you for the money plus interest and fees YOU still owe them after they auction off your little palace."

You clearly have no understanding of the foreclosure business Don. I've had many clients that haven't made any regular payment in over a year. The lenders won't touch them with a ten-foot pole because the hope that the homeowner might eventually pay them something is far higher than the prospect that the lender will ever recover anything near what they've loaned out on the property through the foreclosure process.

Don's work here does demonstrate why most Philosophy Departments and Business Schools are housed in separate buildings around the nation.

And by the way Don, I have a Hemlock growing in my front yard if you're interested.

[Benning Wentworth]

Early in the year, Mr. Greenspan stated that the worst was probably behind us for real estate price declines. Since then, however, price declines have actually gained momentum due in part to record numbers of homes for sale, and to lenders approving fewer mortgages since the beginning of the subprime meltdown. In New England, streets are choked with for sale signs, and many other parts of the country are the same. In the Miami condo market, price slides resemble an avalanche, with panicked investors hiring lawyers to get back deposits, abandoning unfinished highrises to an uncertain future. And every day, staggering numbers of ATMs reset, swelling mortgage bills higher. Homeowners, already struggling with post-boom property taxes and $3.00 gasoline, have no choice but sell their homes before foreclosure, swelling inventory higher. Only Manhattan bucks the trend.

Perhaps Mr. Greenspan's mistaken prediction is a signal to give greater heed to Mr. Bernacke, the present Federal Reserve chief with access to the department's formidable computers and statistics, and leave the retired chief to his tea leaves.